Studies on the shadow economy

Only 1.3% of associations that received discretionary government grants in 2023 had neglected their statutory obligations to the authorities. However, nearly EUR 3 million in discretionary government grants were paid to these associations in 2023. Of the associations in the target group included in the review, 40% had not filed any tax returns between 2020 and 2022, and no financial data that could be used to assess their financial reliability is available on the associations. For this reason, it would be important to investigate whether the persons managing associations fulfil their obligations.  

Negligence of management of official obligations common among persons responsible for associations

An investigation of the financial reliability of the persons responsible for associations could have affected the grants received by approximately 350 associations and the refusal to pay grants amounting to EUR 23 million. This would correspond to around ten per cent of all government grants paid to associations. The responsible persons of the associations also included individual persons subject to a ban on business operations. The associations managed by these individuals received more than half a million euros in government grants. A review of the obligations of the responsible associated companies would have affected the receiving of grants of 800 associations, and the amount of refused grants would be as much as EUR 65 million. 

Other companies of persons responsible for foundations have failed to meet their obligations

In 2023, only five foundations had shortcomings in managing their financial obligations. These foundations were paid little less than one million euros in discretionary government grants. If, in addition to the financial reliability of the foundations, the negligence of the persons responsible for the foundations and their associated companies had been investigated, the restrictions would have applied to as much as about half of the foundations that received grants. In 2023, nearly EUR 60 million in discretionary government grants were paid to these foundations, amounting to around two thirds of the total assistance paid to the foundations. 

The requirement for the financial reliability of operators applying for government grants would promote the efforts to combat the shadow economy. As a party failing to comply with the obligations governed by public law may also neglect other provisions or requirements related to grants, the efforts to combat the shadow economy would prevent possible fraudulent actions. 

Register of Associations data is partly incomplete

The reliability of persons involved in the management of approximately six per cent of the associations that received discretionary government grants in 2023 could not be assessed at all, as the personal data recorded on the associations in the Register of Associations was incomplete. In 2023, approximately EUR 19 million had been paid to these 242 associations, which is more than 8% of all grants paid to associations. The associations should be obligated to report information on the responsible persons and any recent changes to the Register of Associations on pain of a fine or negligence penalty. This would also improve the obligation laid down in the Act on Preventing Money Laundering and Terrorist Financing regarding knowing and identifying the actual beneficial owners of corporate entities. An obligation for associations to submit their annual financial statements to the Finnish Patent and Registration Office would also improve the transparency of their activities.     

Read the full review in Finnish (PDF 395 kb)

Neglecting the reporting requirement results in removal from the Trade Register 

10.2.2025

Each year, the Finnish Patent and Registration Office (PRH) removes many companies from the Trade Register for neglecting their requirement to submit reports or not having a quorate board of directors. In 2019–2023, the PRH removed nearly 50,000 companies from the Trade Register due to a failure to submit their financial statements.

The Grey Economy Information Unit examined companies that were removed from the Trade Register in 2019–2022 for having neglected the requirement to submit reports on financial statements. In tax audits, it has been found that some companies continue to engage in business activities despite their removal from the Trade Register. A company that continues its activity outside the registers may be an instrument of shadow economy.

An amendment to the Trade Register Act makes it possible to re-enter a company to the Trade Register after removal due to negligence 

In October 2024, the PRH suspended the removal of companies from the Trade Register while the legislative amendment was being processed. The PRH had re-entered companies based on applications if they had been removed from the Trade Register by the end of 2022, but companies removed after 1 January 2023 were no longer re-entered. The aim of the rapidly progressing legislative amendment was to enable, under certain conditions, the re-entering of companies removed from the Trade Register. The amendments to the Trade Register Act in accordance with the legislative proposal were adopted on 30 December 2024, and the act entered into force on 1 January 2025.

The procedure for removing and re-entering companies to the Trade Register incurs costs and inconvenience for both the companies and the authorities. In the view of the Grey Economy Information Unit, removing active companies from the Trade Register should be the last step after a comprehensive reminder process and sanctions.

Investigation project with the collaboration of multiple authorities is being planned

The legal effects of a company being entered in the Trade Register are regulated comprehensively, but the legal effects of being removed from the register have not been unambiguously regulated. This leads to various interpretation problems with regard to the obligations, responsibilities and rights of companies removed from the register. The action plan for tackling the shadow economy and economic crime (2024–2027) contains an investigation project aimed at identifying the challenges, legal provisions and public authorities’ actions that cause the main problems related to companies removed from the Trade Register. The purpose of the investigation project is to prepare concrete proposals for eliminating those problems.

Read the full report in Finnish (PDF 143 kB) 

Up to EUR 250 million of government grants paid annually to companies neglecting their obligations

14 January 2025

The grey economy is not always an obstacle to getting discretionary government grants, and millions of euros in government grants are paid to companies that neglect their public obligations. The Act on Discretionary Government Grants does not currently include enough provisions for combating the grey economy. From the perspective combating grey economy, it is essential that the recipient of a discretionary government grant has fulfilled its statutory obligations. A report published by the Grey Economy Information Unit examined the tax reliability of limited liability companies that received government grants in 2023, the government grants received by companies at high risk of grey economy, the impact of tax audits on applying for grants and the impact of possible legislative amendments on granting government grants.

Reforming the Act on Discretionary Government Grants would combat the grey economy

The Grey Economy Information Unit has assessed how reforming the Act on Discretionary Government Grants to combat the grey economy would affect the payment of discretionary government grants. In the proposed amendment, discretionary government grants could only be paid to financially reliable parties that have fulfilled their official statutory obligations and are not undergoing measures such as enforcement or bankruptcy. Based on the results of the report, EUR 255 million of discretionary government grants would not have been paid to limited liability companies in 2023 if financial reliability had been a criterion for the payment of the grants.

The examination for the report separated limited liability companies into two categories: ones that had received individual subsidies of over EUR 100,000 and ones that had received individual subsidies of over EUR 10,000. Based on the findings of the report, some EUR 145 million of individual government grants exceeding EUR 100,000 and some EUR 230 million of individual government grants exceeding EUR 10,000 million had been paid to companies where the company, a responsible person at the company or associated company had significantly neglected their statutory obligations. When the financial reliability was examined solely based on the limited liability company´s management of its obligations, approximately EUR 40 million would not have been paid even then. Some EUR 13 million would not have been paid to limited liability companies that received individual subsidies of over EUR 100,000.

The examination found that the responsible persons of limited liability companies that received discretionary government grants included members of management who were subject to a ban on business operations; their companies received more than EUR 300,000 in discretionary government grants. In addition to fulfilling statutory obligations, another factor in granting discretionary government grants could be more extensive information on criminal background. To implement reliability regulation, the option to use the compliance reports produced by the Grey Economy Information Unit should be extended to several government grant authorities to support the prevention of grey economy.

Tens of millions of euros of discretionary government grants to operators in the grey economy

The findings of the report indicate that the recipients of discretionary government grants in 2023 included companies that were assessed to be grey economy companies based on tax audits carried out on limited liability companies. In 2023, some 200 limited liability companies in the grey economy received discretionary government grants, and the total sum of the grants was approximately EUR 29 million. The most common contribution paid to companies defined as grey was pay subsidy.

Issues with companies’ fulfilment of obligations subject to public law may also reflect their risk of involvement in the grey economy. As a rule, discretionary government grants should only be granted to parties that manage their obligations and have the prerequisites for profitable business activities. Based on the results of the report, the business subsidy system seems to be only a minor factor in improving companies’ fulfilment of their obligations. Even a tax audit revealing significant grey economy did not interrupt ongoing companies’ participation in the business subsidy system. Companies would probably be more motivated to fulfil their statutory obligations if doing so was a statutory requirement for receiving grants.

Read the full report in Finnish (PDF 662 kB)

Organised crime is gaining ground in the business world

9.12.2024

There are individuals involved in organised crime activities holding responsible positions in thousands of Finnish companies. This is one of the findings presented in the first report on business activities carried out by organised criminal groups in Finland. The report utilised, for example, the observation and monitoring data of the National Bureau of Investigation.

Lines of business familiar from the grey economy

Companies involved in organised crime operate especially in the fields of construction, real estate and car sales. These are traditional risk sectors of the grey economy, where there is also a lot of undeclared work.

The Government has defined certain lines of business as critical for society. Nearly 130 companies linked to organised crime were found to operate in critical lines of business. These companies represented such fields as cleaning services and security services.

Tax liabilities were fulfilled poorly, and the key business figures were weak

The tax debt of companies involved in organised crime totalled more than EUR 16 million at the end of 2022. The number of assessments based on estimated income carried out in these companies was also many times higher than in other companies.

Compared to the rest of the company population, these companies were smaller and less profitable and often had negative equity. Their financial statements were also often incomplete.

The damage caused to society by organised crime is significant

Because of the grey economy activities practised by organised crime, society loses more than EUR 40 million every year. The estimate does not cover all losses caused by organised crime, such as damage resulting from money laundering.

In Finland, the situation is still manageable, and by preventing it, we avoid any greater damage. When comparing the situation in Finland to Sweden, in Finland, the number of active operators is only one tenth of that in Sweden, and the damage caused by crime is only a fraction of that in Sweden. In Sweden, the criminal proceeds of organised crime are estimated to amount to up to EUR 15 billion and the additional costs incurred by the business sector to EUR 9 billion.

Combating organised crime is one of the priorities of Petteri Orpo’s government. The strategy against organised crime currently being prepared will provide a holistic approach to tackling this phenomenon. The strategy will be completed by the end of 2024.

Read the full report in Finnish (PDF 1.1 MB)

Link to the Finnish Tax Administration’s media release 10.12.2024 [.fi]›

One fifth of Finnish limited liability companies would not meet reliability requirements

18.11.2024

The purpose of reliability requirements is to ensure that a company is economically viable and meets its societal obligations. Reliability requirements allow the public authority to deny a registration, licence or subsidy from an applicant who neglects their obligations. Regulations on companies’ reliability have been especially introduced in sectors that are societally significant or involve a higher-than-usual risk of the grey economy. Similar regulations are also included in legislation on contractor liability and procurements.

What does reliability assessment involve?

Assessing a company’s reliability by examining its past activity enables drawing conclusions on its future activity. If a company has been able to fulfil its obligations related to taxes and other payments, it is likely able to fulfil its other social obligations as well. The company also needs to be solvent. It cannot be undergoing enforcement or bankruptcy. Reliability regulations often also make it possible to perform similar checks on companies’ responsible persons and any other linked companies.

Reliability assessment

The likelihood of grey economy in a company is increased most by responsible persons’ tax and enforcement debts. Changes in individual income taxation and assessment by estimation also significantly increase the risk of grey economy in a company. There is a strong link between a responsible person being convicted of economic crime and neglect of corporate tax liability.

Tax debt and errors in tax returns of other linked companies increase the risk of the assessed company neglecting its obligations. In addition, the likelihood of grey economy in linked companies has been found to be associated with the likelihood of grey economy in the assessed company.

How would Finnish limited liability companies meet reliability requirements?

When reliability is examined from the data of Finnish limited liability companies, some 16,500 companies would not meet the reliability requirements due to neglected obligations or financial problems. Including the negligence of responsible persons’ private finances would increase the number to nearly 52,000 limited liability companies, or one fifth of all limited liability companies in operation. Examining the corresponding data of linked companies would only increase that number by 2,000.

This article is based on a report by the Grey Economy Information Unit (in Finnish):

One fifth of Finnish limited liability companies would not meet reliability requirements, 2024 (PDF 320 kB)

How to identify the responsible person of a grey economy company, 2024 (PDF 822 kB)

Impact of high-risk links on the activities of a limited liability company, 2024 (PDF 885 kB)

Significance of criminal record data on the negligence of obligations, 2022 (PDF 907 kB)

Combating the grey economy need sufficient resources and up-to-date powers

21 October 2024

In its report, the Grey Economy Information Unit examined tax audits of the grey economy, some of which were carried out at the same time as pre-trial investigations by the police. Tax audits on grey economy operators reveal a high number of cases of aggravated tax fraud. The police’s financial crime investigation resources are not sufficient to deal with the ever-increasing number of reports of crime. Updating the Tax Administration's powers and tax auditing rights to modern standards and increasing the resources of the police in the fight against financial crime would improve both tax collection and the detection of crimes. 

Number of tax audits in the grey economy on the rise

Every year, tax audits are detecting more and more serious tax offences that lead to the filing of a report to the police. Tax audits on the grey economy are also being carried out in cooperation with the police’s pre-trial investigations, so called real-time tax audits. The number of real-time tax audits has decreased significantly in recent years.

Around 8,800 tax audits were carried out between 2019 and 2023, only about 3% of which were carried out as real-time tax audits. An increasing number of tax audits are leading to the consideration of a report of an offence. In 2019, a quarter (26%) of all tax audits were in the grey economy, i.e., they were either carried out at the same time with police’s pre-trial investigation or led to the consideration of a report of an offence. In 2023, almost half (45%) of tax audits were in the grey economy.

Financial crime investigations are severely backlogged

The Tax Administration is often a partner of the police in financial crime investigations. Cases of tax fraud can be large and complex, often involving a large amount of documentary material. The complexity of criminal investigations and court proceedings often means long processing times and considerable costs. Digitalisation has enormously increased the amount of data to be investigated, challenging both the criminal investigation and the tax audit. Increased internationalisation often requires extensive inquiries about administrative assistance.

Data from the resource monitoring tool on the Grey Economy and Economic Crime website shows that the number of financial crime reports and open cases reported to the police has increased significantly over the last five years. From 2019 to 2023, the number of reported offences increased by around 20% and the number of open cases by about 40%. According to prevention statistics, almost half the cases investigated by the police in financial crime investigations are tax and accounting offences.

Cooperation improves the imposition of criminal liability in tax offences

The study collected the experiences and views of real-time tax audits through interviews. A small group of experts in the fight against the grey economy from the police and the Tax Administration were interviewed. Stopping the activities of the grey economy and removing the proceeds of crime from the offenders are effective deterrents to further criminal activity. The key to tackling the grey economy is to hold offenders criminally accountable for their actions. It is clear, that simultaneous tax audits and criminal investigations allow the authorities to use their monitoring tools effectively. Coercive police measures usually provide more comprehensive material to be investigated, as well as evidence of the facts and the perpetrators. The collection of digital material often requires the seizing of computers and other smart devices, and this is effectively done through coercive police measures. 

What do the experts think about the current situation?

Tax auditing rights are not up to date

According to tax law, the taxpayer's duty to disclose information and material for the purposes of a tax audit is extensive. In the case of tax audits in the grey economy, even more extensive research is often needed, both to reach the operators and to obtain the material to audit. In real-time tax audits, it has been possible to search for and seize accounting materials using coercive means by the police. However, police financial crime investigations are no longer providing enough help because there are simply not enough resources.

It is not possible to increase police resources for financial crime investigations to make real-time tax audits sufficiently comprehensive for tax audits of serious grey economy. In order to ensure that the Tax Administration can continue to combat the grey economy also in the future, legislation and tax auditing rights need to be updated and developed. The Tax Administration lacks the explicit right to carry out tax audits, secure evidence and verify identity. 

What can be done about this situation? 

The number of tax audits in the grey economy, the number of offences referred to the police for investigation and the number of cases of financial crime are on the rise. Could the ratio of resources to workload be eased, for example through legislative changes or the fine tuning of policies?

• For example, could the necessity of carrying out a criminal investigation be changed, or could the investigation be speeded up?
• Would a tax increase be a sufficient punishment more often?
• Is the line drawn between basic and aggravated tax fraud correctly positioned?

There is no single cure-all remedy to the situation. 

Read the full report in Finnish (PDF, 652 kB)

Only companies that fulfil their public obligations and are economically reliable can take responsibility for their environmental obligations

The Tax Administration, Grey Economy Information Unit 21 October 2024 

An environmental permit must be applied for activities that may cause environmental damage or pose a related risk.  Such activities include forestry, metal and chemical industries, energy production, large animal shelters and fish farming. The environmental permit may issue provisions on aspects such as the scope of the activity and its emissions and their reduction. The preconditions for granting the permit include that the activity must not cause health hazards or significant environmental damage or related risks.

The environmental permit gives the permit holder the right to put a strain on the environment, and a legal requirement to restore the sites after the completion of the company’s activity. Only an economically sound and financially viable undertaking can fulfil the obligations imposed by the permit. After the bankruptcy of a permit holder, restoration work remains the responsibility of society. Legislation on environmental permits does not set requirements for the financial reliability of the applicant and holder of an environmental permit or for the management of public obligations related to business activities. 

We examined how approximately 6,500 permit-holding companies engaged in business activities have fulfilled their tax obligations as well as the permit holders’ financial situation and capability to fulfil their tax obligations and other responsibilities related to business. There were no agricultural producers in the data set.

Key statistical observations on permit holder companies: 

Companies’ tax debt indicates a long-term internal financing problem. Weak key figures on profitability, indebtedness and liquidity predict a reduced capacity to manage business-related payment obligations.  Loss of equity means that the company does not have any assets in the balance sheet to meet its payment obligations related to its business activities. A lack of means established by enforcement means that the company does not have the funds to manage its public obligations or other liabilities arising from the business activity.

Reliability requirements – the example of the prerequisites for entry into the waste management register

Up to 400 (6%) environmental permit holders would probably not meet the requirements for economic reliability and the management of public obligations if they were active in a line of business requiring waste management registration. Reliability provisions corresponding to the Waste Act are also required in numerous other Finnish sectors requiring a permit or registration. Similar provisions could also be well-suited as prerequisites for environmental permits.

A view to the foundations: Corporate governance and financial administration also affect the management of tax obligations

24 September 2024

A building condition assessment is not focused on surfaces; instead, attention should be paid to the structures of the building. As a result, the assessment involves exploring issues such as the condition of the building’s foundation. The same applies to business activities: the foundations of the company are built on governance and financial administration. If these processes are out of order, the legality of the business and the reliability of the financial data obtained on this are at stake.

A report published by the Grey Economy Information Unit shows the importance of governance and financial administration also from the perspective of the fulfilment of tax obligations. The examination included micro-sized limited liability companies whose size exceeded the size limits of the audit obligation.

Shortcomings in the company’s Trade Register information indicate a greater likelihood of neglecting tax obligations

Based on the findings of the report, the likelihood of neglecting tax obligations is higher for companies that have deficiencies in their Trade Register information concerning their board of directors, financial statements or financial audit. Neglecting tax obligations was the most common in companies with the above shortcomings in Trade Register information and which are at the end of their life cycle.​

These results are unsurprising as in micro-enterprises in particular, the business tax return is derived fairly straightforwardly from the company’s accounting and financial statements. The shortcomings in the company’s governance or financial administration process are inevitably also reflected in the fulfilment of tax obligations. The results also indicate that the shortcomings in notifications submitted to various authorities accumulate in certain companies. The company’s board of directors and management nonetheless bear the overall responsibility for reporting the information to various authorities in a timely manner and with the correct content. This responsibility also remains in situations where the company is about to cease its operations.

Based on our experience, we know that compliance with payment obligations related to business activities declines situations where the company is facing financial difficulties, says Johanna Miettinen, Senior Adviser at the Grey Economy Information Unit. At the same time, invoices for services related to accounting and auditing are also at risk of being left unpaid. Due to the end of customer relationships, reliable financial information is no longer obtained on the company’s business activities. In this situation, one of the cornerstones supporting business operations has collapsed and there is a risk that the company will be unable to submit tax returns with accurate content to the Tax Administration.

Several developments affecting the financial reporting of micro-enterprises are ongoing in Finland 

The report examined the impact of the selection of an auditor and the method of submitting the financial statements and tax returns on the fulfilment of tax obligations. Based on the results, micro-enterprises utilise the flexibility offered by legislation in their arrangements for governance and financial administration. To some extent, these choices are also reflected in the management of tax obligations.

For example, the likelihood of neglecting tax obligations was found to be lower for companies that had selected a large auditing firm as their auditor than for those that had selected some other party as their service provider. Similarly, minor differences in quality were observed between authorised accounting firms and other financial administration service providers.

The financial administration sector has been undergoing significant changes due to the polarisation of the market. Accounting firms and auditors are increasingly specialised in serving certain types of clients. Meanwhile, legislation aimed at combating money laundering and terrorist financing has become stricter in recent years. Larger operators are better equipped to manage their client risks also from this perspective.   In the future, there is a need to pay attention to whether the financial administration and auditing market is becoming increasingly differentiated based on customer risk. This factor should also be taken into account in combating the shadow economy.

The size limits for the auditing obligation also arise in discussions at regular intervals. For example, the exclusion of all micro-sized companies from the statutory audit obligation has been repeatedly proposed. Based on the results of the study, this trend is not desirable. Based on the findings, the audit reports contain information that can also be used to assess the fulfilment of the company’s tax obligations.

Digitalisation creates new opportunities but also raises concerns related to combating the shadow economy

The report also provided indicative evidence that the manner in which the tax return and financial statements are submitted is relevant to the fulfilment of tax obligations. In general, the use of online notification channels promotes the appropriate fulfilment of tax obligations.

As digitalisation increases, access to information and the development of information exchange between the authorities will also open up new opportunities for combating the shadow economy. A broader knowledge base enables a more comprehensive examination of companies. From the perspective of companies, this also reduces overlap in the notifications submitted to the authorities.

On the other hand, the authorities have expressed their concerns (survey of changes in the operating environment) about the challenges created by increasing digitalisation and artificial intelligence in combating the shadow economy and financial crime. For example, it may be difficult to identify fictitious information generated by artificial intelligence, such as images and receipts, from the data mass associated with real business.

In other words, the winds of change are also blowing in the financial administration sector. In this change, business needs to be supported by an appropriate foundation. Those working to combat the shadow economy should continue to pay attention to the arrangements companies make for their governance and financial administration. Behind these arrangements, there are individuals who set the level for the fulfilment of the company’s business-related obligations.

Read the full report in Finnish (PDF, 1.36 MB)

Does missing association register information increase the shadow economy risk?

19 August 2024

Only around half of the associations registered in the Register of Associations are in the Finnish Tax Administration’s customer register. Can the missing information increase associations’ business activities outside registers and the shadow economy risk?  Associations must submit a tax return if they receive taxable income, for example. The taxability of activities and income is assessed separately in conjunction with taxation.

Business activities outside registers found in tax audits

The Grey Economy Information Unit used taxation information to examine the shadow economy risks of non-profit associations. Tax audit reports from the tax audits of 40 associations were used in the study. Based on the restricted tax audit information, associations engage in business activities outside the Finnish Tax Administration’s VAT Register, for example. In the tax audits, more than €5 million was proposed to be added to the business income taxation of non-profit associations alone, for example.

No other shadow economy activities of the responsible persons of associations were found in the tax audits. Similarly, in earlier studies, business activities outside registers (report in Finnish) have been found as has misuse of associations for shadow economy activities. Undeclared sales income of self-employed persons was directed into the bank account of an association administered by the self-employed person, for example.

Hundreds of persons are responsible for associations

Those responsible persons between 30 and 65 years old, meaning chairpersons, persons entitled to sign for an association and reported members of boards, of associations in the Finnish Tax Administration’s customer register were examined in the study. The responsible persons included persons with tax debt or subject to enforcement, but no conclusions on any increase to the shadow economy risk of this group could be made based on the data. Responsible persons with a low income of less than €10,000 annually were paid tax-exempt reimbursements of expenses for a total of €1.6 million during the three years examined (€660–€900/person/year). No misuse was found in the data related to the tax-exempt reimbursements paid to responsible persons. Of the responsible persons, 40 had a valid ban on business operations, which prohibits a person from engaging in business activities but does not prevent a person from engaging in the activities of a non-profit association.

Based on the statistical analysis carried out in the study, of the approximately 55,000 associations in the Finnish Tax Administration’s registers, 1,334 owned real estate units and 2,925 owned apartments in 2017–2022. Of the associations that owned real estate units or apartments, nearly 40% reported rental income from real estate units or apartments renter out. 

How could the monitoring of the shadow economy related to associations be improved?

More than 100,000 associations are registered in the Register of Associations maintained by the Finnish Patent and Registration Office, and these associations have nearly 300,000 responsible persons entered. Of the associations in the Finnish Patent and Registration Office register, only around half are registered in the Finnish Tax Administration’s register. This means that the Finnish Tax Administration does not receive information on the activities and responsible persons of all registered associations. The responsible persons in the Register of Associations even include people aged 117 years, which shows that not all of the register data is up to date. Around 700 of the responsible persons do not have a Finnish personal identity code entered in the Register of Associations.

The reporting, publicity and currency of the financial information and responsible person details of associations are vital considering the shadow economy risk related to their activities. Most associations do not submit a tax return to the Finnish Tax Administration or financial statements to the Finnish Patent and Registration Office. Because information is not required to be reported in some cases, the authorities do not have sufficient information on the activities of associations for targeting risk-based monitoring.

Monitoring the shadow economy activities of associations and the transparency of activities could be improved if associations were obliged to submit their annual financial statements to the Finnish Patent and Registration Office. Changes to the board members of associations should be reported to the Register of Associations in addition to any changes to the chairperson of the board or persons entitled to sign for the association.

Short lifecycle companies carry a high shadow economy risk

10 June 2024

According to a recent report, roughly a third of companies with a short lifecycle carry a high shadow economy risk. These companies are involved in the shadow economy much more frequently than limited liability companies on average. Tax audits especially revealed VAT abuse, undeclared wages and unfounded benefits received by shareholders in the shadow economy activities of short lifecycle companies. The rapid changing of companies, the use of straw men and companies not engaged in actual business activities are signs of the exploitation of short lifecycle companies.

Up to a third of short lifecycle companies carry a high risk

Based on the report’s results, some 4,300 of companies with a short lifecycle carried a high risk from the perspective of the shadow economy in 2018–2022. This was more than a third of all short lifecycle companies operated during the same period. The shadow economy risk was slightly higher in short lifecycle companies that had operated for less than a year than in companies that had already been in business for two or three years. The annual tax gap caused by the shadow economy activities of short lifecycle companies was estimated at roughly €40 million in 2019–2021. In addition, the abuse of short lifecycle companies have an indirect impact on tax revenue from companies operated in the long term, which was not taken into account in the estimate.

Short lifecycle companies are used as shadow economy tools

Based on tax audits, short lifecycle companies are exploited in the shadow economy in the form of systematic arrangements of several companies and as individual companies. VAT abuse, undeclared wages and unfounded benefits received by shareholders were especially highlighted in the shadow economy activities of short lifecycle companies. Some short lifecycle companies were not engaged in any external business activities, as their only purpose was to forward funds, enabling unfounded tax benefits for other companies in the same arrangement. The rapid changing of companies one after the other is another form of the exploitation of companies. Based on tax audit findings, companies often continued the activities of a previous company in the same projects, and using the same equipment, subcontractors and employees.

Various straw men were discovered in roughly a third of all audited short lifecycle companies. More than 70 per cent of all recipients of disguised dividends were other than shareholders entered in official registers. Straw men acting as official responsible persons in companies were often relatives of actual shareholders such as a marital or cohabitant spouse, mother, father, stepmother, child or other relative. In addition to abuse related to registrations, nearly 90 per cent of shadow economy companies with a short lifecycle had neglected their accounting obligations. 

Short lifecycle companies are often financially unprofitable   

The restaurant sector and retail had the largest number of short lifecycle companies, but many of them also operated in business consulting, house construction, IT services and wholesale. The line of business reported to the authorities did not always match the actual business activities. Based on the report’s results, only less than a fifth of short lifecycle companies were engaged in financially profitable activities, while most of them did not accumulate practically any tax revenue for the state. Dormant companies with a short lifecycle accounted for a considerable part of the tax debt of short lifecycle companies, and they naturally cannot repay their tax debt.  

Read the full report in Finnish (PDF, 1.33 MB)

Trading with receipts and invoices costs millions for the state

18 March 2024

Buying and selling receipts and fictitious or false invoices is used to evade taxes for the worth of millions of euros. Today, tax evasion with buying and selling receipts and falsified documents is becoming increasingly global. In more than half of the cases involving buying and selling receipts, a company has hidden money for undeclared wages or assets have been transferred to a shareholder without paying taxes. This type of fraud is usually discovered in tax audits.

Falsified receipts and invoices are a significant phenomenon of the shadow economy and economic crime

The Grey Economy Information Unit has examined the falsified receipts and invoices discovered during tax audits. A falsified document is a document included in a company’s accounts whose content or amounts do not correspond to real life events. Sometimes the entire document is falsified.

According to the Finnish Tax Administration’s information, a total of 30,000 falsified documents were found during tax audits in 2017–2022. These findings amounted to a total of more than €182 million and involved some 500 companies. Around 85% of the cases were forwarded for the consideration of a crime report.

Falsified documents are still bought and sold

The report identified three themes to which the falsified documents often related based on the analysed tax audit reports. These were buying and selling receipts and invoices, unjustified VAT refunds, and misconduct between related parties and associated companies.

Of the falsified documents, some 60% were related to buying and selling receipts. ‘Buying and selling receipts’ refers to a situation where two companies engage in trade with falsified documents for a commission. By including falsified documents in their accounts, businesses can avoid paying taxes and other statutory contributions such as pension insurance contributions.

What kind of company typically engages in buying and selling receipts?

Typically, a company that engages in buying and selling receipts is a one-man limited liability company in the construction industry. Most of these companies were founded less than three years ago and their turnover was less than €1 million. 

Increasing internationality brings challenges

The report included findings of the increasing internationality of companies and responsible persons. In addition, the use of non-Finnish bank accounts and payment methods has increased. Findings related to internationality were made both in cases involving falsified documents and especially buying and selling receipts and invoices.

Cases involving buying and selling receipts and invoices have become more international in the recent years. The number of cases with an international aspect has doubled in the past five years. The number of cases of buying and selling receipts and invoices with international connections has also increased each year when examined through the amount of euros involved.

Read the full report in Finnish (PDF, 440 kB)

Up to 7,400 Finnish companies operate outside the Finnish Tax Administration’s registers

15 January 2024

The number of Finnish companies engaged in business activities outside the Finnish Tax Administration’s registers and the resulting losses of income for the state were now estimated for the first time in Finland. It is estimated that there are 5,300–7,400 Finnish companies carrying out business activities outside registers. The tax gap resulting from the business activities carried out by these Finnish companies outside registers is estimated to have been roughly €90–120 million in 2021. The report of the Grey Economy Information Unit describes the types of business activities that have been discovered outside registers in Finland based on tax audits and assesses the reasons that have led to activities outside registers. 

A tax gap of a hundred million from non-registration

Based on tax audit findings, Finnish companies often carry out business activities outside registers through shell companies that, based on registered data, had discontinued their activities or had not even started to operate. Some 15% of all companies carried out business activities wholly non-registered without any business ID. According even to the highest estimate, Finnish companies carrying out business activities outside registers account for some 1–2% of all companies in Finland. According to the estimates made in the report, not many companies operate in the unofficial sector in Finland relative to all companies, but the fiscal impact of this phenomenon on the public economy is still quite significant. As the estimates were made in the report using machine learning methods, they offer indicative information about the size of the phenomenon due to its nature.

_{Estimate of the tax gap in 2021 calculated using various methods.}

The debt background of individuals reduces registrations with the Finnish Tax Administration

Prior neglects of payment obligations by responsible persons of companies have an impact on registrations with the Finnish Tax Administration. As much as 58% of responsible persons of Finnish companies operating outside the Finnish Tax Administration’s registers were in enforcement proceedings and 16% were subject to a business ban. Responsible persons of Finnish companies carried out business activities outside registers full-time and in addition to other work or another source of income. Some self-employed individuals regarded business activities rather as a non-professional activity, even though their activities were extensive, systematic and continuous and generated taxable business income.  

Increasing public information would help discover companies operating outside registers

The efficient use of information obtained from third parties reduces business activities outside registers in Finland. The report showed that roughly a third of all companies carrying out business activities outside registers had concealed cash sales income. The issuance of a prohibition on cash payments would make it easier to discover business activities outside the Finnish Tax Administration’s registers, at least in certain sectors, as payment transactions regarding business activities would have to pass through bank accounts. Expanding the data content of VAT returns to the transaction level would improve the accuracy of registered data when up-to-date data about companies operating outside registers would be obtained based on their business partners’ reports submitted to the Finnish Tax Administration. Moreover, the addition of information about business bans and information about insolvency verified during enforcement proceedings, publicly available and free of charge, to the Finnish Business Information System would improve the transparency of company information. Transparency steers companies to fulfil their obligations and therefore helps combat the shadow economy. 

Read the full report in Finnish (PDF, 1.33 MB)

Read more: Business activities outside registers

Register data alone cannot reveal shadow economy companies unwilling to pay taxes

13 November 2023

The Grey Economy Information Unit studied whether companies unwilling to pay their taxes could be found solely based on tax debt and business tax return data. A total of 700 companies were selected for the study whose assets were greater than their debt (positive net assets) and who had accumulated tax debt within a longer time span. This group was examined to determine whether the reason for the accumulation of debt was a temporary payment default or some other, more serious issue with the company’s finances. If neither could be found, the reason could be unwillingness to pay. 

Authorities successful in reaching companies with tax debt

The results of the study indicate that the actions of the Finnish Tax Administration and the National Enforcement Authority Finland support companies with tax debt in their work to pay off the debt. Nearly all the companies included were subject to measures related to insolvency taken by the authorities.

The measures of the Finnish Tax Administration support temporarily insolvent companies in their work to pay off their tax debt by dividing the tax debt into several instalments. Temporary insolvency is caused by both weak profitability and liquidity. Of the companies studied, 80% had established a payment arrangement with the Finnish Tax Administration. Of these companies, most had succeeded in reducing their tax debt during the payment arrangement. In addition, 17% had initiated restructuring proceedings. Of the companies studied, only 2% were not subject to any measures by the authorities, but these companies could not be deemed to be unwilling to pay either.

^{Figure. Temporary insolvency and payment arrangements}

Deeming a company unwilling to pay requires closer examination of business transactions

Deeming a company unwilling to pay requires more intense supervision from the authorities, and these companies are often only discovered during a tax audit or a special audit. Even if a company seems insolvent based on register data, it can still engage in shadow economy activities. These can be cases of dishonesty by a debtor, in which the debtor infringes or endangers the rights of its creditors with its actions and causes its own insolvency or worsens it. Debtors usually transfer their assets somewhere where they are “safe” from the creditors when they realise that the preconditions for running their business are in danger.

Read the full report in Finnish (PDF 410 kB)

The Coronavirus pandemic and recent changes in alcohol legislation had an impact on licence holders

21 August 2023

The Pandemic pushed heavily indebted companies out of business.  The changes in alcohol legislation have made licence supervision more difficult and companies’ tax debts are on the increase again following the pandemic.

The Coronavirus pandemic helped to clean up the market

Companies were able to strengthen their financial position following the pandemic: their balance sheets and solvency positions improved, and turnover increased. At the same time, there was a decrease in the number of loss-making companies and companies with negative equity.

More than €20 million in tax debts are still unpaid

Companies that went bankrupt and stopped serving alcohol during the coronavirus pandemic left more than €20 million in tax debts behind. The tax debts of the companies that have continued to serve alcohol decreased by about €10 million each year during the period in review (2020–2021).

Following a brief improvement, tax debts are on the increase again. In December 2021, tax debts totalled €12.8 million, and in June 2023, they had reached €20.4 million.

Supervising compliance with licensing laws has become more difficult

With the introduction of the new Alcohol Act in 2018, the authorities are no longer able to combat the shadow economy in the alcohol-serving sector as effectively as before.  The changes in the supervision of serving licences contained in the new act have led to a situation where few licences granted by the Regional State Administrative Agencies are revoked. Licensing authorities now prefer milder sanctions.

Changes in the periodic reporting to alcohol administration may also have complicated tax control of the sector as less comparison data is now available.

Read the full report in Finnish (PDF 622 kB)

Obligations regarding the audit are neglected

12 June 2023

Compliance with the audit obligation is not monitored systematically in Finland. Neglecting obligations regarding the audit is fairly common.

Most deficiencies are seen in Trade Register information. Deficiencies can also be seen in auditor registrations and tax return information. Negligence is more common in companies that also carry other tax risks.

The monitoring of audits is distributed between several authorities – an overview is lacking

Companies with an audit obligation have certain reporting and registration obligations related to auditing. This means that companies have an obligation to provide auditing information through tax returns, register their auditor in the Trade Register, and submit the auditor’s report to the Trade Register attached to their financial statements.

No overview of the level of fulfilling obligations regarding the audit has been available in Finland. In part, this can be explained by reporting and registration obligations being distributed between several authorities.

Auditing plays a central role in verifying the accuracy of accounting and financial reporting

Auditors verify that companies’ managers act lawfully. As financial statements form the basis of companies’ tax returns, auditors verifying the accuracy of information is also important from the perspective of taxation. Errors in taxation and the grey economy risk may increase if auditing is not conducted.

According to the results, it is necessary to verify more extensively that all companies within the scope of the audit obligation fulfil their obligation

From the perspective of users of financial statements information, the data content of the Trade Register should be developed so that information about companies’ audit obligation and its fulfilment is made public. As a result, users of financial statements information would be better able to assess the reliability of financial information and the lawfulness of the activities of managers. 

Read the full report in Finnish (PDF 1,09 MB)

Tax Administration Bulletin, 6/14/2023, New study: Nearly four out of ten limited liability companies neglect their audit obligations [.fi]›

Tax credit for household expenses combats the shadow economy – however, with limited impact

23 May 2023

Companies that carry out large amounts of work subject to the tax credit for household expenses are at a smaller shadow economy risk than their reference group. However, the tax credit for household expenses does not reduce the shadow economy in sectors as a whole. The tax credit system is also susceptible to various abuses. The Grey Economy Information Unit’s publication discusses the impact of the tax credit for household expenses and offers alternatives to develop the system. 

Tax credit for household expenses encourages companies to fulfil their obligations and improves the efficiency of tax control

The tax credit for household expenses promotes the combating of the shadow economy by targeting consumers’ demand at companies listed in the prepayment register. The system also provides companies with an additional incentive to fulfil their tax obligations appropriately to remain registered. Nevertheless, the study shows that companies with a similar risk level and in a similar financial position have fulfilled their reporting and tax payment obligations in the same way, regardless of whether they carry out work subject to the tax credit for household expenses.

The information obtained from tax credit returns is useful in tax control in various ways. For example, it helps target tax control and identify any unreported sales, and it can also be used as the basis of assessments by estimation.

Impact on the shadow economy risk is only limited to companies carrying out high amounts of work subject to the tax credit

Based on a statistical analysis, the existence of the system of tax credit for household expenses does not reduce the shadow economy in the industry as a whole. This can be identified by comparing a sector with similar businesses operating in sectors in which services subject to the tax credit for household expenses cannot be provided.

However, the system of tax credit for household expenses reduces the shadow economy risk of individual companies in situations where a significant part of a company’s revenue comes from work subject to the tax credit. The provision of occasional and small-scale activities subject to the tax credit was not found to similarly reduce the shadow economy risks of companies.

Abusing The tax credit system causes significant annual tax losses

The system is also abused using unfounded tax credit applications and artificial arrangements. Incorrect returns submitted unintentionally or intentionally are estimated to generate annual tax losses of roughly €20–30 million for the Government. This accounts for some five to seven per cent of total tax credits, as the tax credit for household expenses has reduced the tax revenue obtained from individual income tax by more than €400 million annually.

No simple solutions exist to improve the efficiency of the system

Based on an international comparison, other countries’ systems offer elements that can be used to develop the criteria applied to the tax credit for household expenses. However, many reforms would require investments and increase administrative work. Based on the study’s results, eliminating the deductible or expanding the tax credit system are not well-justified measures from the perspective of more effective combating of the shadow economy. 

Private individuals have access to the tax credit for household expenses in their taxation if they purchase services carried out at their regular or holiday home. Services entitling private individuals to this tax credit include regular housekeeping and care services, as well as building maintenance and repairs. The purpose of the tax credit system is to improve employment and combat the shadow economy.

Read the full report in Finnish (PDF 1,33 MB)

Tax Administration Bulletin, 5/24/2023, New study: Limited impact of the tax credit for household expenses on the shadow economy among businesses [.fi]›

Organised crime exploits legitimate business activities

23 January 2023

For organised crime, business activities offer a way to support crime and acquire influence and assets. When organised, criminal groups are more effective and can cause more damage to society and the justice system. Business activities carried out by organised criminal groups can cover the shadow economy or financial or other crime.

Organised criminal groups exploit legitimate business structures to maximise financial profit and other benefits. In addition to profit, legitimate business activities are used to hide the origin of assets obtained from crime, carry out various types of fraud and financial crime, and maintain and conceal illegal activities. Benefits other than directly financial gain include the establishment of a social position or control in a certain sector or area.

Networks, straw men and front companies set challenges for supervisory authorities

Organised criminal groups both establish new companies and acquire long-standing companies that have a good reputation or are near bankruptcy, depending on the purpose of their activities. Establishing or buying a company is not subject to any strict legal requirements, which makes it easy to engage in business activities. Organised criminal groups prefer company forms that enable them to conceal their criminal identity. This sets challenges for supervisory authorities. Organised criminal groups have large networks and are engaged in cooperation with other companies and interest groups, also through bribery, coercion, threats or extortion. Their activities often involve the inner circle and relatives of organised criminal groups’ members, as well as professional assistants who help organised criminal groups acquire and carry out legitimate business activities.

Research and studies increase knowledge of organised criminal groups’ activities

In combating organised crime, it is important to reduce demand for criminal activities, i.e. cooperation with criminals. Operating conditions can be reduced by increasing knowledge of criminal activities and their consequences.

The exploitation of legitimate business activities and the use of networks can be explored using the financial records of companies controlled by criminal groups. The shadow economy risk of companies can be measured using various data analysis methods and statistical models. It is important to study and research organised crime to identify the power, financial capacity and regional activities of criminal groups.

Read the full report in Finnish (PDF 268 kB)

How is tax debt linked to the shadow economy?

26 September 2022

The tax debt of shadow economy companies often results from intentional misreporting. At least part of the tax debt associated with taxes imposed based on tax audits and assessments by estimation is linked to the shadow economy. Other tax debt linked to the shadow economy is related to intentional non-payment. Tax debt offers important information for various authorities, and its existence may prevent companies from obtaining permits, for example.

Based on investigation results, tax debt does not apparently result in any significantly increased shadow economy risks. Any non-payment of taxes leads to deregistration, which makes it more difficult to continue operations. As a result, companies that also intend to be engaged in business activities in the future seek to pay their tax debt in one or more instalments.

Of limited liability companies’ tax debt, €200 million comes from the shadow economy

In the investigation, limited liability companies with tax debt were divided into three categories based on the probability of the shadow economy: 1) white; 2) grey; and 3) borderline cases. The division into these three categories allows part of the limited liability companies that operated during each investigated year to be fairly certainly classified as white or grey.

The investigation used machine learning to evaluate companies’ shadow economy activities.
The white category includes companies whose modelled probability of inappropriate activities is less than 50%.
The category of borderline cases includes companies whose modelled probability of inappropriate activities is 51–80%.
The grey category includes companies whose modelled probability of inappropriate activities is more than 80%.

Euro-denominated breakdown of tax debt in 2017–2020

The coronavirus pandemic broke out in 2020, which can be seen as a temporary increase in tax debt among white companies.

40–50 per cent of limited liability companies engaged in the shadow economy have tax debt

An average of 40 per cent of shadow economy companies had tax debt in 2017–2019. The corresponding figure was almost 50 per cent during the exceptional year of 2020 alone. Among white companies, the proportion of companies with tax debt was roughly 15 per cent. In the category of borderline cases, a quarter of all companies had annual tax debt.

Financial problems are the most significant cause of tax debt – not shadow economy activities

Tax debt was also investigated based on their root causes. Clearly the largest part – 40 per cent – of companies with tax debt have faced financial difficulties, with these financial difficulties being the reason why these companies cannot pay their tax debt. The second largest category consists of delayed payments (roughly 15 per cent). The category of companies subject to assessments by estimation is almost as large.

Read the full report in Finnish (PDF 713 kB)

Having people with a prior criminal conviction in positions of responsibility increases shadow economy risk

13 June 2022

Companies with persons in a position of responsibility who have been convicted of economic crime have double the risk of making reporting errors compared with companies whose responsible persons have no criminal convictions. The Grey Economy Information Unit has investigated whether a prior criminal conviction of a responsible person increases the risk of neglected tax liabilities in companies that have applied for coronavirus subsidies. The investigation identified a strong link especially between responsible persons convicted of economic crime and neglected tax liabilities.

Millions of euros allocated in coronavirus subsidies to companies with persons convicted of crime

In the companies that applied for coronavirus subsidies, three per cent of responsible persons had criminal convictions. This is equivalent to the criminal convictions of all responsible persons in Finnish companies. Companies with responsible persons convicted of crime received a total of €15 million in coronavirus subsidies in 2020, representing one per cent of the total amount of subsidies.

Five most significant offences

Certain offences among responsible persons seem to have a more significant negative impact on the fulfilment of companies’ obligations. According to the investigation, the five most significant offences were: 

1. Aggravated dishonesty by a debtor
2. Aggravated fraud
3. Fraud
4. Aggravated money laundering
5. Unlicensed provision of taxi services

For example, the negative impact of aggravated dishonesty by a debtor on the fulfilment of obligations was more than ten times higher compared to assault. 

The task of the Grey Economy Information Unit is to produce and disseminate information on the shadow economy and how to combat it. The purpose of investigations is to produce information to support decision making.

Read the full report in Finnish (PDF 582 kB)

Shadow economy risks in foreign unit-linked life insurance – a new monitoring project about to start

21 March 2022

Billions of euros of Finnish assets are tied up in foreign unit-linked life insurance. The insurance products have been used not only in investment activities, but also as instruments of the shadow economy. The Finnish Tax Administration started to obtain information about foreign insurance products a few years ago, but the use of the information continues to involve various challenges. The Grey Economy Information Unit has investigated options to improve access to information and intensify tax control.

Insurance products used in both tax planning and tax evasion

Finnish assets in foreign investment-linked insurance products have increased significantly during the 2000s. In 2020, foreign insurance companies reported some 42,000 investment-linked endowment insurance products and capitalisation contracts held in the name of Finnish customers. The total assets in these unit-linked life insurance products were reported to be more than six billion euros.

Until 2020, unit-linked life insurance benefited from a tax benefit, in which taxation on income and value increases was postponed until assets were withdrawn from the product in excess of the amount of invested capital. However, the popularity of foreign insurance products can largely be explained by the fact that they can often be customised to meet the needs of individual investors. This means that they may have been used to exploit certain tax planning measures permitted by law and any gaps in legislation. Insurance products have also been used to hide income and cash out undeclared income.

Legislators have intervened in artificial arrangements

At the beginning of 2020, Finland introduced regulations to intensify the tax treatment of unit-linked life insurance. In addition, legislators aimed to especially intervene in artificial arrangements carried out using foreign insurance products. Before the new legislation entered into force, it was discovered that insurance surrenders by taxpayers had increased.

The monitoring of insurance products involves highly significant tax interests, and the new legislation helps to intervene more effectively in tax evasion than before. However, deadlines set for tax adjustments present a problem, as they make it more difficult to use information obtained through the automatic exchange of information (AEOI).  

The Finnish Tax Administration responds to challenges with its new monitoring project

Information obtained automatically from other countries cannot as such be used as the basis for taxation, and monitoring nearly always requires requests for clarification and foreign administrative assistance requests. This means that monitoring is laborious, while risk-based monitoring can only be targeted at part of potential fraudsters. The Finnish Tax Administration will, however, launch a monitoring project for unit-linked life insurance in the spring of 2022 with the goal of ensuring the correct taxation on unit-linked life insurance and gathering first-hand information on the impact of legal amendments on these insurance products. The report was part of the programme for combating the shadow economy, and the new project will also be funded from appropriations allocated to the programme.

Read the full report in Finnish (PDF 768 kt)

Finland at an average level internationally in preventing profit shifting to tax havens

20 December 2021

Regulations on tax evasion have increased considerably since the early 2010s based on OECD and EU projects, for example. At the same time, legal provisions have been harmonised internationally. As part of this trend, regulations on controlled foreign companies (CFC) have been introduced more broadly to prevent profit shifting to tax havens. An examination based on the comparison of dozens of countries shows that, despite its few special characteristics, the Finnish CFC regime does not differ significantly from the regime of key countries included in the comparison. 

Key elements of legislation are fairly similar everywhere 

CFC regulations that tackle the avoidance of taxes by using tax havens are surprisingly similar practically everywhere. Before EU and OECD measures, CFC regulations were already built on the same principles, first and foremost due to the impact of the US law and the simultaneous introduction of the regulations in countries with similar tax systems. This was also the case in the Nordic countries in the 1990s. In the EU Member States, the Anti-Tax Avoidance Directive and the Court of Justice’s decisions have later set fairly strict frameworks for legislation. In practice, this has led to the harmonisation of CFC regimes and to a situation where regulations that prevent tax evasion can only rarely apply to companies operating in the EEA.

The purposes of the CFC legislation vary from one country to the next according to other tax law and the business structure. Certainly, regimes have different positions in countries where income received from abroad is primarily tax-exempt compared with such countries as Finland where global income is taxed more broadly. Then again, the significance of special regulations is emphasised in Finland because the tax residency was only determined, before 2021, based on the country in which each company was registered, meaning that not even a foreign company run from Finland can have become a resident taxpayer in Finland. 

The effectiveness of legislation can be assessed based on various criteria

Finnish regulations largely correspond to similar key countries in the EU that protect their tax bases fairly comprehensively and are not engaged in any active tax competition. Of the EU Member States, certain smaller economies and states engaged in an active tax competition, however, apply very light regulations to prevent tax evasion. As a result, the Finnish CFC regime can even be considered to be stricter than on average in the EU. Due to extensive exemptions, however, the scope of application of the Finnish CFC regime does not extend to many arrangements that have been prevented more actively in Austria, Denmark and Portugal, to name a few.

The purpose of the CFC regime is that, when the conditions for its application are met, the income of a low-tax foreign company can be levied from shareholders in Finland, even if the company has not distributed any profit through dividends, for example. The application of the regulation is not subject to the purpose of tax evasion – the fulfilment of its criteria is sufficient. Key differences between the CFC regulations of different countries consist, first and foremost, of their potential application to organisations acting as shareholders only, or also to private individuals, like in Finland. In addition, certain states only collect taxes on passive income, whereas in Finland all income of low-tax foreign companies is subject to tax. Then again, foreign companies engaged actively in business have largely been exempted from the scope of application of the Finnish CFC regime. Other significant differences consist of the definition of the low-tax level.  

A study presented perspectives to develop the regime

In its study published at the beginning of 2021, the Grey Economy Information Unit studied whether the Finnish CFC regime effectively prevents the shifting of profit to foreign low-tax companies. One of the key findings presented in the report was the opportunity to develop Finland’s CFC regulations in the direction of the Danish legislation. In Denmark, regulations prevent situations where taxes are avoided in the EEA exploiting structures related to holding companies and funding more effectively than in Finland. Two texts have previously been published on this website regarding the study 15.3.2021 and 17.5.2021. They firstly discussed the minor impact of the most recent legal amendment and secondly the challenges caused by the exemptions included in the regime. 

Read the full report in Finnish (PDF 2,68 MB)

Risks associated with the use of foreign workforce investigated

25 October 2021

The survey investigated foreign employees who are regarded as resident and non-resident taxpayers in Finland, and the fulfilment of obligations and the taxation behaviour of the more than 13,000 companies that employed them. The majority of wage payers were Finnish companies.

Inconsistencies in work permits and earnings payment data

A tenth of all companies that employed foreign employees holding a work permit did not report their earnings payment data or turnover in 2019. In some companies, the payment of wages could not be connected to hourly wages or data about hourly wages was unavailable.

Figure 1. The Finnish Immigration Service’s decision types for permit applications in 2015–2019. Source: Finnish Immigration Service 3/2020

Official information should be coordinated

The survey was based on information obtained from the Finnish Immigration Service and the Finnish Tax Administration regarding 2015–2019. Some individuals and companies remained unidentified due to incomplete names, misspelling, and inaccurate characters and identifiers.

A higher interoperability of databases would enable better monitoring, and ensure any cases of underpayment, exploitation and work discrimination to be discovered. The merger of data could ensure the start of an employment relationship and the payment of wages, and identify the fulfilment of statutory obligations by wage paying companies.

Improvements expected in information exchange between the authorities

The prevention of the shadow economy and economic crime has for long focused on problems in information exchange between the authorities. Project 3.1 of the current action plan aims to develop regulations on information exchange between the authorities to identify shadow economy actors and improve the efficiency of prevention.

The law has already been amended

The high availability of information about business activities and electronic services in information exchange between the authorities, in particular, make the identification and monitoring of shadow economy actors easier and more effective. Relating to the action plan’s project, the act on the processing of personal data by migration authorities (Laki henkilötietojen käsittelystä maahanmuuttohallinnossa) entered into force on 1 September 2020. The amendment provides the migration authorities with the right to use extensive official information in their activities. From 1 March 2021, they were also provided with the right to use the VHS service of the Grey Economy Information Unit for identifying the fulfilment of obligations.

Read the full report in Finnish (PDF 1,35 Mt)

How have crowdfunded companies fulfilled their obligations?

20 September 2021

The Grey Economy Information Unit investigated how companies that have received crowdfunding have fulfilled their obligations and whether there are any signs of the grey economy. Business financed through venture capital involves a higher risk of loss-producing operations and bankruptcy than start-up businesses. Financial difficulties have also been seen to present the risk of the grey economy. Financial difficulties or inabilities to pay are not part of the grey economy as such, while they increase the risk of companies intentionally neglecting their obligations related to taxes and other statutory fees.

The Finnish Financial Supervisory Authority is also aware of these risks, and it has advised companies seeking crowdfunding and crowdfunding intermediaries to focus on how to provide investors with information about the financial standing of the companies being invested in.

The investigation covered companies whose operations were funded by investments made through three Finnish crowdfunding platforms between 2012 and 2018.  In total, 121 limited liability companies were investigated.

Many companies afflicted with weak finances

In 2020, nearly 70 per cent of the investigated companies produced a loss. More than 40 per cent were in a weak situation in terms of solvency. Furthermore, one quarter of the companies had negative capital.

Overdue tax liabilities presented the largest problem in the fulfilment of obligations. One third of the companies had tax liabilities, with their total amount being nearly EUR 4 million. Of the total tax liabilities, EUR 2.5 million had no valid payment arrangement. An assessment by estimation was carried out for two companies in 2019.

Only a small part of the companies were subject to enforcement proceedings, despite the companies’ generally weak financial standing and their tax liabilities. Of the companies, 14 had been declared bankrupt and three were in restructuring proceedings. As stated above, a company’s insolvency does not directly hint at the grey economy or economic crime.

No findings of the grey economy

If any signs of the grey economy are discovered, uncovering it often requires a tax or special audit targeted at the company in question. In the worst case, the company’s managers may attempt to cover the company’s weak financial standing by committing accounting crime and taking legal action to violate creditors’ rights. This often takes place before the company seeks bankruptcy proceedings.

Eleven of the companies receiving crowdfunding had been tax audited in 2017–2020. No signs of the grey economy were found in any of the tax audits. Furthermore, no business prohibitions were in effect.

No significant differences in the fulfilment of obligations compared with other small and growing companies

The operations of companies that had received crowdfunding were compared with those of leading companies without any crowdfunding. No clear or significant differences were found in the fulfilment of obligations between the company groups. It is safe to say that, in general, the early operations of small and growing companies carry a high risk. However, most companies aim to stabilise their operations and continue their business activities.

Read the full report in Finnish (PDF 491 kt)

Harmful tax competition and loopholes in legislation enable tax avoidance

17 May 2021

Foreign companies can be used to attempt to avoid taxes in Finland. These arrangements have partly been enabled by harmful tax competition, in which countries attract income accumulated in another country by using various tax incentives. Finland has taken steps to prevent the shifting of profit to tax havens through several regulatory solutions. Key instruments include the Finnish controlled foreign company (CFC) regime, whose exemptions, however, still leave room for the use of tax incentives for wealth management.

The CFC regime effectively prevents simple arrangements

By virtue of the CFC regime, the undistributed profit of a low-tax foreign company can be levied from shareholders in Finland. The regime does a fairly good job of preventing many simple tax avoidance structures that make use of companies registered outside the EEA. Based on the report of the Grey Economy Information Unit, the CFC regime broadly covers different taxpayers and legal forms, and its scope of application does not include any gaps in this respect. Actual problems are associated with exemptions to the scope of application of the regime that can be potentially exploited in many ways in arrangements aimed to avoid taxes in Finland (see Section 6 of the report).

Exemptions to the scope of application of the regime as key challenges

The CFC regime does not apply if any separately defined exemption applies to a company. The most important of these is the substance carve-out applied to entities resident in the EEA. Based on the substance carve-out, units are exempted from the scope of application of the CFC regime if they are placed in their country of residence and are actually engaged in financial activities in any line of business there. Furthermore, companies outside the EEA may be exempted from the scope of application if they receive the majority of their income from industrial production or services, for example. Exemptions can be attempted to be exploited in various ways in tax avoidance.

Drawing the line in situations where the substance carve-out applies to companies registered in the EEA may involve holding companies whose business operations are small. In practice, fairly small business operations may prevent the regime from being applicable. In the case of purely dormant companies, the application of the carve-out is often subject to interpretation. The carve-out largely requires a similar assessment as the application of the general tax evasion standard, whose limited scope of application and poor predictability were the reasons why the CFC regime was originally prescribed. Being subject to interpretation may also lead to a situation where a private person’s neglected obligation to report profit in a controlled foreign company cannot be considered to be intentional. This is problematic from the perspectives of shadow economy prevention and the preventive nature of the regime.

Exemptions can be exploited in various ways

If the CFC regime is applicable, tax on a unit’s entire income will be levied in Finland. This structure based on the taxation or exemption of all income is also open to exploitation. First of all, assets that accumulate passive income can be shifted to a company engaged in exempted activities. Correspondingly, a sufficient amount of financial activities can also be attempted to be shifted to a low-tax company to have an exemption applied to it. In the example cases presented in the report, the use of tax incentives regarding intangible rights or financing has typically been combined with evasion based on tax treaties and the exploitation of the CFC regime’s exemptions. However, whether an arrangement concerns aggressive tax planning or tax evasion and the shadow economy depends largely on the case.

The Grey Economy Information Unit studied whether the Finnish CFC regime effectively prevents the shifting of profit to foreign low-tax companies. As stated in the first article on this theme, the regime does not achieve all of its goals, and the most recent amendment to the regime has not been found to have any significant impact.

The third article to be published at the end of the year will discuss in more detail what types of solutions certain other countries have decided on to prevent the problems presented in this text.

Read the full report in Finnish (PDF 2,68 MB)

Problems remain in the Finnish CFC regime – law amendments appear to have only a minor impact

15 March 2021

Foreign entities, such as companies and trusts, are still being exploited in many ways to avoid taxes in Finland. Some 50 countries use regulations on controlled foreign companies (CFCs) to prevent the shifting of profit to foreign low-tax entities. A new comparative legal study shows that arrangements that are attempted to be prevented in other countries by means of different regulatory solutions still remain outside the scope of application of the Finnish CFC regime.

The Grey Economy Information Unit investigated whether the Finnish CFC regime effectively prevents the shifting of profit to low-tax entities. The broad topic has been divided into three online texts. This first discusses the Finnish CFC regime in general and briefly examines the impact of the most recent legal amendment. The second to be published in May will focus more on any problems in the CFC regime. The third will discuss how the Finnish CFC regime differs from CFC rules worldwide and assess whether CFC structures have been prevented more effectively in other countries than in Finland.

The purpose of the Finnish CFC regime is to prevent the avoidance of taxes via CFCs

When the CFC regime is applied, corporate income tax can be levied from shareholders in CFCs, even if the company has not distributed any corporate income to its shareholders. A company whose income tax effective corporate income tax rate is significantly lower than in Finland and which is controlled by a taxpayer in Finland can be regarded as a CFC. However, the CFC regime does not apply if any separately defined exemption applies to the company.

The aim of the CFC regime is to prevent private individuals from avoiding taxes and groups of companies from shifting profit to low-tax countries. Preventing these two highly different phenomena also sets challenges to the structure of the law. When the CFC regime was enacted in the 1990s, it reduced the supply and use of services related to CFCs. However, defects in the international exchange of tax information prevented undeclared shareholdings in CFCs from being detected in tax control until the 2010s.

Nearly all declared CFCs outside the EEA

The number of CFCs declared voluntarily in taxation seems to have remained at a few dozen for several years now. In these situations, a shareholder in a CFC does not receive any tax benefits; instead, a company is established in a low-tax country, for example, due to raw materials or customers. There are practically no declared CFCs owned by private individuals, even though undeclared CFCs detected during tax audits have, in fact, been primarily owned by private individuals. Individual tax audits have revealed undeclared CFC profits ranging from hundreds of thousands to millions of euros. Nearly all audited and declared CFCs are located outside the EEA, largely due to the restricted scope of application of the CFC regime in the EEA.

Legal amendments in the right direction, but with a minor impact

Several amendments were made to the CFC regime in 2019 as a result of the EU Anti-Tax Avoidance Directive. However, the majority of the amendments have had a minor impact, at least in the light of statistics. Currently, the CFC regime could, for example, be more easily applicable to entities located in tax treaty countries, while the amendments have not increased the number of voluntarily declared CFCs. Nevertheless, amendments concerning exemptions would appear to have an impact on companies operating in developing countries instead of companies registered in tax havens (see Section 4 of the report for more information).

Read the full report in Finnish (PDF 2,68 MB)