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Taxation
In Finland, the State, the Municipalities, the Evangelic Lutheran
Church and the Orthodox Church all have the power to levy taxes.
Payable taxes are either indirect or direct. Direct taxes include
state income tax, wealth tax, inheritance and gift tax, and asset
transfer tax - which are payable to the State - municipal tax payable
to the appropriate Municipality and church tax payable to the Church.
Indirect taxes are levied and accounted to the State by taxpayers.
The final tax burden is transferred to the buyer in the prices of
products. Indirect taxes include value added tax, excise and customs
duties.
Corporate Income Tax
Companies resident in Finland are liable to tax
on their worldwide income. Nonresident companies are taxed on their
income derived from Finland, and if they have a permanent establishment
in Finland, on all income related with the permanent establishment.
In principle, a company from a non-tax treaty country is almost
always liable to tax and the existence of a permanent establishment
is of no importance.
There is no definition for corporate residence in the tax laws.
The general rule is that if a company is registered in Finland,
it is also considered a tax resident of Finland.
The concept of income is rather broad because it
covers several income types such as proceeds from selling merchandise,
rental income, fees and compensation for work or services and the
profits from investing financial assets.
The common liability to tax of almost all types
of income has one important exception. As of 2005, a company can
make a tax-exempt profit from selling off shares recorded as fixed
intangible assets in its balance sheet (not as investment assets
or financial assets) if the buyer is a company belonging to the
same consolidated group of companies (profits from such selling
are exempt, and losses are non-deductible).
Another exception is the fact that if a corporate
entity -- not an individual -- is the beneficiary of dividends,
the receipt of dividend is usually not taxed. Nevertheless, if the
company paying out dividend is a resident of a non-tax treaty country
outside the European Union, the dividend is considered taxable income.
According to Finnish accounting rules, income is
chargeable in the year of delivery (not payment) of goods or services.
The expenses incurred in acquiring or maintaining
a business are deductible. Entertainment costs are deductible to
50 percent of the actual amount.
Expenses are recorded in the accounting system on an accrual basis.
Expenses that generate income over a period of at least three years
are divided equally to the corresponding tax years.
Cost of goods sold is deductible as the goods are
sold. An additional deduction can be made if the actual costs exceed
the fair market value of the inventory.
Costs for acquiring fixed assets are deducted by depreciation. Depreciation
of machinery is computed on the total value of all machinery using
the declining balance method with a maximum rate of 25 percent.
Proceeds from selling machinery are taxed indirectly by deducting
the sales proceeds from the book value of the machinery in the balance
sheet.
The declining balance method applies to the depreciation of buildings
and other structures. Depreciation for each building is computed
separately with a maximum rate varying from 4 percent up to 25 percent
depending on the type of building or structure. Different depreciation
methods apply to the depreciation of other types of assets that
are expected to generate income over a longer period of time.
Losses may be carried forward and set off in the
tax years following the year of the loss. But carry-forward will
no longer be permitted if more than 50 percent of the shares of
the company are sold, i.e. the company no longer belongs to its
original owners.
Companies belonging to the same consolidated group
of companies sometimes offer financial support to one another. The
company offering financial support cannot deduct the costs incurred,
if the financial support is given in the form of relief from loan
repayment or in the form of one group company paying the expenses
of another etc.
However, under the definition of group subsidy – konserniavustus
/ koncernbidrag -- according to the special law governing payments
between affiliated companies, certain financial support between
two Finnish resident companies is deductible. Tax treaties may extend
the scope of application of this rule to resident subsidiaries of
a nonresident parent company.
Finland applied the imputation system of dividends
during the tax years 1990 to 2004. This system is reformed as of
2005. Starting 2005, dividend income is partially doubly taxed.
The new system of dividend taxation no longer includes the requirement
that the company must have paid the corporate income tax for the
distributed profit amount.
The tax consequences of paying dividend to individuals depend on
the type of the company that pays the dividend. The taxes are different
in the case of a public, stock-exchange listed company compared
to a non-listed company.
If a listed company pays dividends, then 70% of the amount is considered
capital income in the hands of the individual and 30% of the amount
is exempt from tax.
For non-listed companies, receipts of dividend
are exempt in the hands of the individual up to the amount equaling
9% of net corporate assets owned by the individual. This amount
corresponds to a 9-percent yield of his share of the company. The
maximum exemption is €90,000 per year. If more than €90,000
is distributed as dividends, then 70% of the excess is taxable capital
income and 30% of the excess is exempt from tax.
Furthermore, if the amount of dividend exceeds
the limit of 9% of corporate assets, then 70% of the amount in excess
of the 9%-limit is considered taxable earned income and 30% of the
amount in excess of the 9%-limit is exempt. The transition rule
for 2005 will bring down the taxable portion of the individual’s
dividend income to 57% from 70%.
If dividends are being paid out to a corporate
entity, they are almost always exempt. In this way, no effective
double taxation should take place. However, if the distributing
company is a listed company and the beneficiary is a non-listed
company, special tax rules apply.
If the beneficiary owns less than 10% of the company
distributing dividend, 75% of the dividend is considered taxable
income and only 25% of the dividend is exempt.
Similarly, if the beneficiary is a financial institution,
an insurance company or a pension institution, and the shares on
which dividends are being received are recorded as investment assets
in the beneficiary’s balance sheet, 75% of the dividends will
be taxable and 25% exempt.
Dividends from companies resident in the EU member
states are treated the same way as dividends from Finnish companies.
However, dividends are exempt from tax if the beneficiary company
has recorded the shares on which dividends are received as investment
assets in the balance sheet, the Parent-Subsidiary Directive is
applicable and the beneficiary company is the owner of at least
10% of the share capital of the distributing company. Receipts of
dividends from outside the EU are fully taxable. Nevertheless, tax
treaties between Finland and the state where the dividend is coming
from are in force regardless of whether this state is an EU member
state or not.
Finland levies a tax withheld at source for payouts
of dividend. This concerns shares within investment portfolios.
The typical withholding rate is 15 percent. Payouts of dividend
to non-EU and non-tax treaty countries are taxed at the 28-percent
rate. If the shares fall in the category of direct investment (i.e.
not portfolio investment -- participation in the corporate capital
must be at least 20%), and the beneficiary company fulfils the requirements
of the Parent-Subsidiary Directive, no tax at source will be levied.
For receipts of dividend from foreign countries,
the foreign tax withheld at source will be fully credited -- if
it turns out that the receipt of dividend is taxable income in Finland.
The maximum credit amount corresponds to the Finnish tax amount
of the same income in Finland. If the receipt of dividend is exempt
from tax, the foreign tax at source will be considered final.
Corporate entities must file their income tax return within four
(4) months from the end of their accounting period. The Tax Administration
processes the returns within ten months from the end of the accounting
period.
If a company’s prepaid tax does not cover the amount of the
final tax, the difference will be invoiced later with interest.
To avoid paying this interest, the company can make a supplementary
payment of tax within four months after the end of the accounting
period.
Corporation Tax Rates
Corporations are subject to a proportional tax
rate. In 2006 the tax rate of corporations (limited companies and
cooperatives) is a flat 26 per cent on the global profits after
allowable deductions.
VAT
Value-added tax (VAT) applies to most transactions.
Businesses with annual turnover above € 8,500 must register,
and voluntary registration is possible. The standard rate is 22%
and a lower rate of 17% applies to basic foodstuffs and animal feed.
The 8% rate applies to passenger transport, books, medicine, hotel
services and cultural events. Reduced rates are also expected to
be introduced in certain services (barbers, hairdresser and minor
repairs). Exports are zero-rated. Exemptions include selling or
renting immovable property, financial and bank services, insurance,
healthcare and education.
Personal Income Tax
Resident individuals pay tax on worldwide income;
non-residents pay tax on Finnish-source income only. An individual
who has a main home in Finland or is continuously present in the
country for more than six months is considered to be resident. Individual
income tax is charged at progressive rates to 33.5% on taxable income
over €56,900. A municipal income tax also applies to earned
income, and is charged at rates varying from 16% to 21%, depending
on the municipality. In addition, members of certain churches pay
a church tax of between 1% and 2.25%, depending on the municipality.
Tax on income from capital, including capital gains, is charged
at 28%. The amount of national and local taxes, wealth tax and health
insurance payable is limited to a maximum of 60% of taxable income.
The wealth tax is to be abolished in 2006. Capital gains on the
sale of an individual's permanent residence are exempt after two
years of ownership.
Inheritance and Gift
Tax
Tax is payable in Finland on both an inheritance
and on gifts on the application of fairly similar tax principles.
When either the donor of the gift/the testator or the recipient
of the gift/the heir is a Finnish resident, the tax is also applicable
to overseas assets. When neither the donor of the gift/the testator
or the recipient of the gift/the heir is a Finnish resident, the
tax applies only to real estate in Finland or shares in a company
of which 50% of its assets are real estate inside Finland. When
the tax is applicable in a foreign country, the overseas tax will
be credited against the tax due in Finland unless it refers to real
estate in Finland.
As a general rule, recipients of gifts / heirs are divided into
three groups:
- Group 1 - a spouse, parents.
- Group 2 - a brother, sister and children.
- Group 3 - all others.
In general, the rate of tax for Group 2 is double that of Group
1, and the rate for Group 3 is three times that of Group 1.
The rates of tax fir Group 1 are:
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0
- 3,400 |
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0 |
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0 |
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3,401-
17,000 |
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85 |
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10% |
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17,001-50,000 |
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1,445 |
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13% |
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50,001
and over |
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5,735 |
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16% |
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Real Estate Taxes
The tax is imposed on real estate located in Finland.
The taxes are transferred to the local authority in which the property
is located.
Ground that is used for agriculture or forestry is exempt from tax.
The rate of tax varies among the local authorities and fluctuates
between 0.5% and 1%.
For real estate that is used as a permanent residence, the rate
of tax is 0.22% - 0.5%.
Transfer Tax
This tax is payable on the transfer of real estate
and securities.
| The rate of tax |
- transfer of real estate: 4% |
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- transfer of securities: 1.6%. |
The tax is payable by the purchaser.
There is an exemption on the transfer of real estate when the purchaser
is between 18 and 39 in age and the real estate serves as his or
her first permanent place of residence.
The transfer of securities traded on the Stock Exchange is exempt
from tax.
There is an exemption when both the purchaser and the vendor are
non-residents.
Other Tax issues
In common with other EU countries, Finland has
transfer pricing rules requiring trade between Finnish companies
and foreign affiliates on an arm’s length basis.
Presently, there are no formal thin capitalisation
rules, although it is anticipated that some rules could be imposed
in the future.
Finland has strict anti-avoidance and CFC rules:
An individual resident in Finland or a domestic corporation may
be subject to income tax for their share of the profit of a controlled
foreign corporation (CFC) regardless of whether these profits are
distributed by the CFC to its shareholders or not. A CFC is defined
as a foreign corporation that pays income tax in its domicile at
a rate less than 60% of the Finnish corporate income tax rate. Generally
this means that the tax rate applicable to a CFC is 15.6% or less.
These rules only apply if a) A shareholder, resident in Finland,
together with closely related parties or entities belonging to the
same sphere of interest, own at least 10% of the CFC’s share
capital or are beneficiaries entitled to a position of at least
10% of the profit of the CFC or b) One or more shareholders resident
in Finland, directly or indirectly, owns shares representing at
least 50% of the voting power or capital of the CFC, or are entitled
to a share of at least 50% of the profits of the CFC. As an exception
CFC rules do not apply to the income of a CFC originating mainly
from, for example, industrial production, mining, or shipping, if
that activity occurred in the country of origin of the CFC.
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