Whenever a company operates overseas, there are a lot to things to consider. Among all other compliance matters, taxation is one issue that directly affects the feasibility of expanding business operations. Local tax authorities are usually keen to contact the company and investigate what possible tax liabilities the company has. Finland is no exception to this rule.
If the company’s country of residence does not have a tax treaty with your country, Finland’s right to tax is determined solely by national tax laws. In most cases, however, the foreign company is a tax resident of a country which Finland has a valid tax treaty with. Tax treaties can only restrict Finland’s right to tax and can never expand those rights. The tax treaties, among other things, determine what is calculated as taxable income to which country, and what the applicable tax rate may be.
What is a Permanent Establishment?
According to the Finnish Income Tax Act, a permanent establishment means a distinct place for conducting business of a permanent nature, or a place where special arrangements have been made. Special arrangements include having business management, branch, office, facilities, workshops or other premises in Finland.
In most cases, one of the most important questions you should know is whether your operations constitute a permanent establishment (PE). The term is familiar in most countries, but permanent establishment is usually interpreted differently between local tax authorities in different countries – despite the source usually being the same OECD Model Tax Convention and Commentary.
A PE has different meanings in income taxation and value-added taxation (VAT). If a company has a permanent establishment in regards of income taxation, Finland has the right to tax all income generated from that permanent establishment. In VAT, a PE affects the rules of where a product or service is sold and what VAT rate is applied.
Read also: Finnish VAT rate increase 2024 -checklist
What does this mean in practice?
Permanent establishment is assessed on a case-by-case basis. Situations vary, but usually personnel, management, offices and other premises or assets may lead to a company having a PE in Finland. Even if employees are working from a home office, a PE may be constituted at the employee’s home office, if they work from there on a permanent basis. Sometimes even just one employee can cause the company to have a PE in Finland.
Companies that have very small business operations and connections to Finland usually want to avoid a PE to avoid extra administration and expenses. A permanent establishment could mean statutory employer obligations in Finland, own separate accounting and higher expenses due to reporting obligations. Also, the discussion of what income should be directed towards the Finnish PE can be a tricky one.
Despite Finland having an attractive 20 % corporate tax, it is usually wise to determine the possible tax liabilities before the tax decision is given to a company. Surprises are rarely happy when it comes to income taxation or VAT as they directly affect the revenue and profitability of expansion. It may also affect taxation in your country of residence. In the most difficult cases, the company can apply for a preliminary ruling on the matter from the Finnish tax administration.
Azets is at your service
Azets has experience in helping companies expand into Finland and meet all compliance requirements. Our experienced consultants and lawyers can help you every step of the way to ensure statutory requirements.
