Prior to 2021 only companies incorporated in accordance with the Finnish Companies’ Act were deemed to be liable to corporate income tax in Finland. Foreign companies with a Finnish permanent establishment (PE) are also liable to pay Finnish income tax, but only concerning income attributable to the PE only. Foreign companies’ Finnish-sourced income is also subject to tax in Finland, but only on a limited basis. Under the new legislation also foreign companies with a place of effective management in Finland are deemed to be liable to tax in Finland and this liability would concern world-wide income of such a foreign company.
As a matter of principle, the new legislation broadens the potential Finnish tax liability of foreign companies. The new tax legislation applies to foreign companies which will be deemed as corporations for Finnish tax purposes i.e., which legal characteristics are comparable to a Finnish limited liability company. Under the new legislation, the starting point upon deciding whether the place of effective management is deemed to be in Finland is the physical location of the key decision-making body. However, such assessment is made taking all relevant factors into account including e.g. organization of the business of a foreign company based on actual control over the business in question. The new legislation also covers a number of practical points to take into account when assessing the potential taxation of a foreign company in Finland.
From a practical point of view, the proposed legislation should not result in material changes to the taxation of foreign companies in Finland. The same end result as achieved by the new legislation is already being achieved through the system of PE taxation in Finland. The key difference is that a foreign corporation would be deemed to be taxed on its world-wide income whereas a Finnish PE is subject to tax in Finland on its Finnish-related income only. This change may turn out to be irrelevant in practice, given that, in accordance with Finnish tax treaties, Finland has agreed to credit foreign tax. The establishment criteria for a place of effective management is largely already applied in Finland as regards PE taxation, but the new legislation lays down a somewhat more distinct set of rules. Finnish tax treaties also include tiebreaker rules, based on which, if challenged by another country, Finland may not be able to successfully defend its position as to the effective place of management being located in Finland (although Finnish internal legislation would solely allow Finland to do so). Overall, the new legislation should not impact the Finnish taxation of current Finnish-related structures of multinational groups, but it raises the profile of the place of effective management from a tax perspective and, accordingly, it may be worthwhile to revisit existing structures and take the new legislation into account in future corporate and tax planning.
For more detailed info please contact HPP’s tax team.
Jaakko Klemettilä
Special Counsel
+358 40 536 0963
jaakko.klemettila@hpp.fi
Marko Koski
Senior Advisor
+358 44 758 2475
marko.koski@hpp.fi
