The national income tax rates in Finland in 2010 for the earned income are progressive up to 30% as follows. An additional municipal income
tax varies between 16.5% to 21%.
Taxable income (EUR) Tax on lower amount (EUR) Rate on excess (%)
15,200 - 22,600 8 8.5
22,601 - 36,800 489 17.5
36,801 - 66,400 2,974 21.5
66,401 and over 9,338 30.0
National tax on investment income is a proportional tax of 28%. Municipal income tax varies among municipalities from 16.5% to 21%. The church tax on income is between 1% and 2%.
Finnish resident individuals are subject to tax in respect of their worldwide income. Nonresidents are taxed on their income derived from Finland. Wages of seconded employees will be subject to Finnish income tax if these employees have arrived from certain countries and stay in Finland for a period of time not exceeding six months. Furthermore, seconded employees' wages will be subject to Finnish income tax if the employees have arrived from a country that does not have a tax treaty with Finland. Wage income will be subject to income tax from the first day onwards, regardless of length of stay.
The tax year for individuals is the calendar year. Married persons are taxed separately both on earned income and investment income. Interest and insurance deductions are dependent, in certain circumstances, on the marital status of the taxpayer. In general, married persons will have their own deductions.
Individuals are entitled to deduct from their investment income and earned income all expenses incurred in acquiring and maintaining such income. Individuals have a right to deduct interest expenses from investment income.
Interest expenses are deductible if the debt is related to the acquisition of taxable incomeor the acquisition or repair of the taxpayer's or his family's permanent dwelling.
An individual is deemed to be a resident in Finland if he has his main place of abode in Finland or if he is continuously present in Finland for a period of more than six months. A presence is deemed continuous irrespective of temporary absence.
Finnish nationals are, in addition, subject to the three-year rule. According to this rule, a Finnish national is considered to remain resident in Finland for three years after the end of the year in which he left the country, unless he shows that he has not maintained essential ties in Finland during the tax years concerned. However, under the terms of tax treaties, the three-year rule may be negated if the individual is deemed resident in another country.
An individual is taxed separately on earned income and on investment income.
Earned income is subject to national income tax, municipal income tax and church tax. Earned income includes salaries, wages and benefits in kind. Investment income includes dividend income, capital gains, certain interest income and income from rental activities.
Finland imposes both inheritance and gift tax.. The minimum taxable amount for inheritance taxation is EUR 20,000 and for gift tax EUR 4,000. Tax rates for both inheritance and gift tax will vary from 10% to 32%, depending on who is the receiver of the inheritance or gift.
Wages and salaries paid by an employer are subject to a withholding tax. The amount withheld is based on the amount of wages or salary as well as on the individual circumstances of the employee.
Finnish corporate income tax rate is 26% of the taxable income.
Finnish resident companies are liable to corporate income tax on their worldwide income. Non-resident companies are taxed on their Finnish-sourced income only. Corporate residence is not defined in the tax legislation but residency is usually associated with registration.
The tax year consists of the financial period (or periods) that end during the calendar year. The final tax assessment for the tax year is determined based on the tax return. Corporate bodies must file the tax return within four months of the end of their accounting period. Tax returns are processed within ten months of the end of the accounting period.
CAPITAL GAINS TAX
Capital gains are normally taxed as ordinary income. Where shares or land have been held for business purposes, the disposal is subject to normal income tax. In specific circumstances, capital gains from the disposal of shares of a subsidiary are tax exempt.
The shares need to be owned for at least one year prior to disposal and the seller has to have owned at least 10% of the company whose shares are being disposed of.
BRANCH PROFITS TAX
There is no specific branch profits tax in Finland. The taxable income for branches of foreign companies in Finland is calculated on the same basis as for Finnish resident companies.
FRINGE BENEFITS TAX (FBT)
There is no specific fringe benefits tax in Finland. However, the employer has a legal responsibility to withhold income taxes and social security contributions from salaries and benefits paid to their employees.
Basically, there are no local taxes imposed on companies. However, municipal real estate tax is levied on properties owned by companies. It is normally 0.22% to 0.5% of the taxation value of the immovable property, depending on the municipality where the property is situated, and is deductible, up to certain limits, for income tax purposes.
Employers must make social security contributions to cover the costs of health insurance and, up to 31 December 2009, the national old-age pension. From 1 January to 31 March 2009, the total contributions were 2.801%, 5.001% or 5.901% of gross remuneration paid to employees. The rate is dependent on the amount of depreciation deduction taken and the amount of salaries paid during the last year for which the income tax assessment is final. From 1 April to 31 December 2009, the rates were reduced to 2%, 4.2% and 5.1%.
In 2009 employers paid employment pension insurance contributions of 16.8% (on average), and unemployment insurance contribution of 0.65% on the first EUR 1,788,000 and 2.7% on the excess. They also pay an accidental injury insurance contribution (including group life insurance) of approximately 1% of the employee's annual gross wages and salaries.
DETERMINATION OF TAXABLE INCOME
Taxable income is determined based on financial accounting income adjusted for nontaxable and non-deductible items. In practice, the determination of taxable income is closely connected to the determination of net income for financial statement purposes.
Generally, all expenses incurred in acquiring or maintaining business income are deductible. One exception is entertainment expenses of which only 50% are deductible.
Buildings and other constructions are depreciated by using the declining balance method. Depreciation for each building is calculated separately, with the maximum percentage varying from 4% to 20%, depending on the type of the construction. Depreciation of machinery and equipment is calculated using the declining balance method with a maximum rate of 30%.
Patents and other intangible rights, such as goodwill, are amortised on a straight-line basis for ten years for tax purposes, unless the taxpayer demonstrates that the asset has a shorter useful life.
Assets with a useful life of less than three years may be written off using the free depreciation method, i.e. deduct up to 100% of the costs of assets in a single tax year.
In principle, the acquisition costs of inventories are deducted when assets are sold, consumed or lost. Inventories on hand at the end of the tax year are valued at an amount not exceeding the lower of acquisition cost or market value. Acquisition cost is calculated on a FIFO basis. Certain overhead costs can be included in the acquisition cost of products.
CAPITAL GAINS AND LOSSES
As discussed above, capital gains are usually taxable as ordinary income. In specific circumstances, capital losses arising on the disposal of shares of a subsidiary may only be offset against the capital gains from the sale of shares during the tax year and the next five years. If capital gains from the disposal of shares of a subsidiary are tax exempted, then capital losses are also not tax deductible.
70% of dividends between a quoted Finnish company and a resident private individual are counted as taxable capital income for the beneficiary.
Dividends distributed by non-quoted companies representing a yield of less than 9% of the mathematical value of the shares are exempt from tax up to EUR 90,000 per private individual shareholder per year.
Where the yield exceeds 9% of the net value, 70% of the dividend will be taxed as earned income for the beneficiary with the remaining 30% treated as exempt. Similarly, where the dividend exceeds the EUR 90,000 threshold but is below the 9% yield, 70% of the dividend is taxable and 30% is exempt.
When dividends are paid to a non-resident, a withholding tax rate of 28% is applied unless a lower treaty rate applies.
Inter-company dividends are tax exempt in most cases.
Tax agreements may entitle non-residents either to benefit from a lower withholding tax rate or to receive an imputation credit. Dividends are exempt from withholding tax when paid to a company resident in a European Union country if the company pays national corporate tax and holds at least 10% of the share capital in the distributing company. Tax exemption does not apply if the recipient is entitled to imputation credit.
Normally, interest on loans obtained for business purposes are deductible in full on an accruals basis. Interest paid by a company to its shareholders at a higher rate than is customary may be partially disallowed and treated as a deemed dividend distribution.
Losses may be carried forward and set off in the subsequent ten tax years. If more than 50% of the shares of the company are sold during a loss year or thereafter, losses from previous years cannot usually be deducted. The buyer of the shares can apply for exception to this rule from the tax office.
Major incentives are available on equal terms to Finnish and foreign enterprises for investment in areas that need development (e.g. investment grants and start-up subsidies). Free depreciation is available for some types of investments in certain districts within the development areas.
FOREIGN TAX RELIEF
Under tax treaties, foreign tax is most frequently relieved by an exemption or by a tax credit. If a tax treaty does not apply, Finnish domestic law grants a credit for foreign tax paid. The credit is granted only if the foreign tax is final. If the amount of the credit exceeds the Finnish tax due, the excess may be carried forward to the following year only.
Corporations are taxed separately in Finland. There is no concept of consolidated tax returns. However, it is possible to make group contributions if the parent company owns at least 90% of the subsidiary during the whole financial year. The payments will be tax deductible to the payer and taxable on the recipient.
RELATED PARTY TRANSACTIONS
Related party transactions are generally accepted if they are at arm's lenght. Arm's length pricing applies to transactions of all types including the purchasing of inventory and the provision of services and financial facilities.
New documentation requirements apply to foreign-owned subsidiaries and branches in Finland and Finnish Groups with more than 250 employees and an annual turnover of above EUR 50m or a balance sheet of more than EUR 43m.
Withholding tax is not imposed on dividends paid to resident companies. Dividends paid to non-resident companies are generally subject to a final withholding tax of 28% which may be reduced or eliminated under tax treaties. Non-resident shareholders are not entitled to an imputation credit unless a tax treaty provides otherwise. Interest paid to resident companies is not subject to withholding tax. Interest paid to non-residents is generally exempt from tax.
Withholding tax is not imposed on royalties paid to resident companies. Royalties paid to non-resident companies are generally subject to a final withholding tax of 28% which may be reduced or eliminated under a tax treaty. Royalties are, in certain cases, exempted from withholding tax when paid to a company resident in a European Union country. In certain circumstances, tax must be withheld on payments for work carried on by non-residents.
In principle, there is no exchange control in Finland.
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Last Update: Nov 2010
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