Prepayment registration and liability to income tax of foreign businesses

1. Introduction

This memorandum includes instructions for foreign businesses selling services in Finland.
 
By definition, a foreign business is set up under the national legislation of its country of residence, and it has been registered in that country. From the Finnish point of view, its legal form does not have to be a business company in the home country, because it may, depending on various national legislations, be characterized as another form of legal entity than a 'company'. The foreign company has limited liability to tax in Finland, and is thus liable to pay tax on the income derived from Finland-based sources only. The relevant types of tax are income tax and tax at source (lähdevero; källskatt).

If most of the business is conducted in other countries, and the business in Finland only consists of separate, isolated jobs or assignments, the situation does not give rise to a permanent establishment in Finland. Consequently, the foreign business will not be liable to income tax. Nevertheless, it may be liable to tax at source, payable on the income from Finnish sources.

If the business has the characteristics of a stable, ongoing operation, which is not small in scale, the authorities can consider a permanent establishment in Finland to be constituted. In this case, the foreign business will be liable to income tax on all the income attributable to the permanent establishment.

In January 2007, new rules entered into force governing entry in the prepayment register , maintained by the Finnish Tax Administration. Contrary to earlier practice, companies doing business in Finland on a temporary basis, and self-employed individuals being active in Finland on a temporary basis, are now entitled to request for entry in the prepayment register. The advantage of registration is that receipts of invoiced amounts will not be subject to withholding of tax at source (lähdevero; källskatt).

Furthermore, a foreign business may have obligations in Finland regarding value-added tax or employer's contributions.  

Foreign employee-leasing companies assigning workers to Finland as leased employees are discussed in more detail in page . The same page also includes instructions to Finnish service recipient corporations, who have the leased employees working for them. These instructions include payment and refund situations of tax at source.

2. Small-scale or periodic business operations in Finland

2.1. Remuneration to independent contractors, subject to tax at source

If no permanent establishment is formed, the foreign business will not be liable to income tax to Finnish tax authorities. Nevertheless, the Finnish customer, client or service recipient may have the obligation to withhold tax at source on payment of the foreign businesses's invoice, if work has been performed in Finland. This is the case especially when the foreign business pursues its main business activities outside Finland, and only performs small-scale, periodic and short assignments in Finland.

In the case of independent contractors, the payment of remuneration is considered a nonwage compensation for work.  It is payable for a job, assignment or service that the independent contractor has performed.  And even if the independent contractor's invoice also includes selling of tangible goods, the customer should withhold tax at source on the total amount of the invoice.

However, the customer will not have to withhold tax at source if the foreign business
(a) Has a prepayment registration;
(b) Has a tax-at-source card with a zero rate of withholding, or
(c) Is able to present another explanation showing that no grounds exist for withholding source tax in Finland. This explanation would usually be a statement demonstrating that no permanent establishment can be formed, with a list of facts and circumstances to that effect.

However, it should be noted that any invoices in the construction industry, relating to a building site or construction, assembly or installation project or supervisory activities connected therewith, and furthermore, in shipbuilding, transportation services, and for work related to cleaning, nurse services or treatment; of compensation for work, remuneration, fees, etc. are always subject to withholding of tax by the payer, unless the party presenting the invoice is prepayment registered, or a holder of a tax card showing a zero rate.

If the party presenting the invoice is not prepayment registered or it does not give a tax card showing a zero rate, the payer must withhold 13% (of pay to business company) or 35% (of pay to nonresident self-employed individual) on the amount of the invoice.

To avoid receiving payments of invoices net of withholding 13% or 35% tax at source, foreign businesses are recommended to either become prepayment registered or to request a 0% tax-at-source card.

2.2. Prepayment registration or tax-at-source card?

If the foreign business only performs isolated assignments without the characteristics of ongoing business operations in Finland, so that these assignments can be identified and listed, and so that copies of client contracts can be shown to the authorities, it is a good idea to request a 0% tax-at-source card. It will be issued on a temporary basis, and with specific reference to the job or assignment being performed.

If the foreign company has several jobs in Finland, and it is not possible to draw a complete list of them, we recommend the company to apply for prepayment registration. The registration will be valid for a limited period.

To not only avoid receiving payments of invoices net of withholding 13% or 35% tax at source, but also to avoid requesting for refunds at a later stage, foreign companies are recommended to either become prepayment registered or to request for a 0% tax-at-source card.

2.3. Prepayment registration

Foreign entities conducting business in Finland can be registered. It is required that the tax domicile of the foreign business is located in a country with a tax treaty with Finland.

Foreign companies or other corporate bodies use Start-up form no Y1, and foreign self-employed individuals use Start-up form Y3, available at http://www.ytj.fi/english/services/Notification-forms. No more than one form is necessary for entry in the registers of taxpayers, prepayment, taxable persons liable to VAT, and employers. Special forms 6149e, Prepayment Registration Notice and 6149, Prepayment Registration Notice / Foreign Leasing Corporation have been designed for foreign employee-leasing businesses.

In addition to the form, applicants should fill out the enclosure 6204e, Explanation of business in Finland conducted by foreign company/self-employed individual, or 6206e, Explanation of business conducted in Finland by self-employed individual and enclose a certificate issued by a foreign Trade Register with a translation into English, Finnish or Swedish as necessary. The authorities will process the application quicker if the applicant also encloses copies of contracts with customers and some explanation of the facts and circumstances of business.

Completed forms should be sent to: PRH-verohallinto, Business Information System, PO Box 2000, FI-00231 Helsinki. It is our recommendation that foreign businesses request for prepayment registration as early as possible; before they start performing services in Finland, or as a minimum, before they send off their first invoices.

The fact of prepayment registration is public information. Publicly disclosed facts are part of the system that prior to paying out money, payers are expected to check up whether their contractors, suppliers and other providers of services are prepayment registered. Thus, the information is freely available at the BIS website www.ytj.fi > BIS service. Visitors to the website can look up prepayment registrations if they know their counterpart's Business ID or business name. Furthermore, any local tax office is ready to supply the information.

2.4. Deregistration

The Finnish Tax Administration will remove a business from the prepayment register if it no longer pursues income-producing activities in Finland. If the foreign company ever goes out of business, it should submit a completed Y form to notify the authorities.

In addition, the regional tax office can remove a taxpayer from the prepayment register if negligence of taxpayer obligations has been observed. This sanction can be directed to taxpayers who have grossly neglected the payment of VAT, or the obligation to submit declarations and tax returns, or accounting and recordkeeping requirements. 

Furthermore, the regional tax office can also refuse entry in the prepayment register, or renewal of prepayment registration, if the applicant is a physical person with a history of setting up companies that have previously not fulfilled their taxpayer obligations. Similarly, if the manager or director of a company has a history of neglecting taxpayer obligations, the regional tax office can refuse entry or refuse to renew the business's prepayment registration.

2.5. Tax-at-source card

The tax office can issue a tax-at-source card for a limited time period, and a specified client contract only. It is required that there is no permanent establishment in Finland. With a valid tax-at-source card, the foreign company or self-employed individual can show their customers that withholding tax at zero rate will be applicable.

Foreign businesses should submit form 6202e, Application for Tax-at-source card, available for downloading at the Tax Administration website. They should enclose a certificate issued by a foreign Trade Register with a translation into English, Finnish or Swedish as necessary. The authorities will process the application quicker if the applicant also encloses copies of contracts with customers and some explanation of the facts and circumstances of business.

2.6 Refunds of too much tax withheld

We recommend businesses to request for prepayment registration or the 0% tax-at-source card as early as possible. Businesses should take care of it before they start performing services in Finland, or at least, before they send off their first invoices. If customers are not shown a 0% tax-at-source card or prepayment registration, the customers will usually have to withhold a tax-at-source.  If money has been paid to a foreign business, and the customer has withheld tax, the amounts can still be refunded in case Finland does not have a taxing right regarding the income concerned.  Thus, if the foreign business is not liable to Finnish income tax, an application for refund can be submitted to the tax office.

Two alternative procedures of refund are possible:

(a) Refund paid by Finnish customer who withheld tax
This alternative requires that the foreign business deliver the Finnish customer a written explanation, showing that no withholding of tax at source was necessary. It does not qualify as a valid explanation that the foreign company has later been entered in the prepayment register. In practice, a valid written explanation is a retroactive tax-at-source card issued by a regional tax office. Then the Finnish customer can refund the tax to the foreign business, and subtract the refunded amount from the upcoming payments of withheld tax at source. But if no upcoming payments are scheduled for the current year, this procedure will no longer be possible, and procedure (b) must be used.

(b) Refund application submitted to Finnish regional tax office by foreign company
The procedure is to fill out form 6203e, Application for refund of Finnish withholding tax and send it to the regional tax office. Form 6203 should be complete with the following enclosures: Proof of payment issued by the customer, including proof of taxes withheld, and a statement by the customer that confirms that no withheld amounts have been refunded to the applicant. If the foreign business has been given a tax-at-source card, the application should also include an explanation as to when and by which Finnish regional tax office the tax-at-source card has been issued. Applicants should also enclose copies of contracts with customers and some explanation of the facts and circumstances of their business.

3. Permanent establishment in Finland

3.1. General remarks on 'permanent establishments'

The Finnish national legislation defines the concept of 'permanent establishment' in § 13a, Income Tax Act (Tuloverolaki; Inkomstskattelagen 1535/1992). Tax treaties for the avoidance of double taxation between Finland and other countries include further information and more precise, country-specific provisions. Links to tax treaties can be found at the Tax Administration website www.tax.fi.

The permanent establishment is generally defined as a place of business, through which the entire business or a part of the business is carried on. The term "place of business" covers any premises at the disposal of the enterprise, such as an office, place of management, industrial or production plant, workshop or installation. Nevertheless, a permanent establishment should be consistent, not temporary or short-lived in terms of its geographical location and in terms of time. If business is being conducted for a temporary period only, it will not in general constitute a permanent establishment. In addition, the presence of a dependent agent in Finland may constitute a permanent establishment.

The presence of a building site, or a construction, installation or assembly project, or supervisory activities in connection with that building site or project, constitutes a permanent establishment only if it lasts for a certain period of time defined in the tax treaties. While most of Finland's tax treaties set the time limit at 'more than 12 months', some tax treaties and projects have different time limits. For instance, Finland and Estonia have agreed on a shorter time limit, namely 6 instead of 12 months in the tax treaty between Finland and Estonia.

Regarding the question of whether or not a permanent establishment in Finland is deemed to be constituted, the authorities decide each case separately. Foreign business may apply for an advance ruling on the issue upon a separate application subject to an administrative fee.

3.2 Starting up business

All foreigners who conduct business in Finland are registered by Uusimaa Regional Tax Office.

Foreign companies or other corporate bodies use Start-up form no Y1, and foreign self-employed individuals use Start-up form Y3, available at www.ytj.fi/english/services/forms-and-instructions. No more than one form is necessary for entry in the registers of taxpayers, prepayment, taxable persons liable to VAT, and employers.

In addition to the form, applicants should fill out the enclosure 6204e, Explanation of business in Finland conducted by foreign company/self-employed individual or 6206e, Explanation of business conducted in Finland by self-employed individual and enclose a certificate issued by a foreign Trade Register, and its translation into English, Finnish or Swedish as necessary.

The applicant is also expected to inform the tax office of their projected amounts of income and deductible expenses. The tax office will then hand down a decision on amounts to be prepaid. We point out that the essential meaning of prepayment registration is that the registered company indeed has assumed responsibility for advance payments of income tax.

It is important that the completed forms be duly signed by the person(s) in charge and authorized to sign their names. Completed forms should be sent to: PRH-verohallinto, Business Information System, PO Box 2000, FI-00231 Helsinki.

If any substantial changes in the information were to take place or if the company were ever to go out of business, the authorities should be notified. Companies should use form Y4 and self-employed individuals should use form Y6 to report changes or termination. Both forms are available at www.ytj.fi/english/services/forms-and-instructions.

3.3 Income tax on income attributable to permanent establishment

The legal basis for the taxation of a permanent establishment is Act on the Taxation of Business Profits and Income from Professional Activity (of 24 June 1968/360). The deadlines for filing income tax returns are the same for foreign and Finnish businesses alike. The deadline is four months after the closing date of the accounting year. The accounting period of the Finnish permanent establishment will be the same as that of the foreign principal company. The permanent establishment has the obligation to maintain its own, separate bookkeeping and accounting.

The tax forms to be used by foreign businesses are the same as those of Finnish businesses. Available at all local tax offices, the corporate forms are centrally approved by the National Board of Taxes, and issued in English, Finnish and Swedish versions.

If comparable to a Finnish limited-liability company, the permanent establishment will be taxed according to the usual corporate income tax rate (26% for 2008). If business of professional activity is being pursued under a different form of legal entity, such as a partnership or a limited partnership, the income attributable to the permanent establishment will be subject to the partners' personal income tax, because they will be taxed as physical persons receiving income. In this case, the income will be apportioned as earned income and capital income according to the provisions of Income Tax Act. Thus, the portion regarded as capital income will be assessed at the flat 28-percent rate, and the portion regarded as earned income will be assessed by the progressive scale.

3.4. Tax at source

Customers do not have to withhold tax at source on payments to a prepayment-registered business.

However, any customer must withhold tax at source who starts paying compensation for work, fees, remuneration etc. before the foreign business's prepayment registration.

Direct refunding of paid-in taxes is not always possible. If the foreign business has a permanent establishment in Finland, the paid-in taxes will be credited in conjunction with the final tax assessment. In this case, the foreign business should declare the amounts of tax on its tax return form and enclose any receipts (given by the original customer) showing withholding of tax.

3.5. Eliminating double taxation

If a foreign business generates income in Finland it can be subject to taxation not only in Finland but also in its original country of residence. To eliminate double taxation, the usual procedure is to lighten the tax burden at the country of residence. The procedure will either follow the rules derived from the tax treaty or the internal legislation of the country. The country of residence can either credit the Finnish tax or proclaim the Finland-sourced income as tax-exempt.

4. VAT register and Register of employers

Foreign businesses use the 'Y' forms discussed above in section 3.2. to register for VAT, and to enter the register of employers.

(a) Registration for VAT:
Foreigners who conduct business selling goods or services are VAT liable in Finland in the usual way; they are entered in the VAT register like Finnish taxable persons and the rights, obligations and other regulations pertaining to Finnish taxable persons apply to them as well. The general rate of VAT is 23 %.

Any foreign business with a fixed establishment in Finland is under the obligation to pay VAT and to register for VAT. Nevertheless, in itself, an existing fixed establishment in Finland does not make the foreigner liable to VAT.  To become VAT liable, the company should also carry out its VAT taxable operations from such an establishment. Correspondingly, in itself, VAT registration does not constitute a fixed or permanent establishment for the purposes of income tax. For the purposes of VAT, a fixed establishment can develop even if no permanent establishment for the purposes of income tax has developed.  Example : Construction, building and installation projects are considered fixed establishments if they last longer than nine months, either in the form of a single project or as several successive projects. Furthermore, the foreign company will be VAT liable, if the buyer of goods and services is a private individual or a foreigner with no fixed establishment and no VAT registration in Finland.

Buyers of goods and services are liable to pay VAT (reverse tax liability) when the seller is a foreign business with no fixed establishment in Finland and no obligation for VAT registration in Finland.

For more information about value-added tax, read page VAT registration of foreigners in Finland.

(b) Registration in the Tax Administration's register of employers:

Foreign business with no permanent establishment in Finland for purposes of income tax
The general rule is that a foreign business with no permanent establishment does not need registration as an employer. In this case, the employees will themselves be responsible for making the necessary prepayments of income tax on their wages.

By way of exception, registration in employer register may in some cases apply to a foreign company paying out wages for work performed in Finland, even if no permanent establishment is formed.

Foreign business with a permanent establishment for income tax purposes
If a foreign business has a permanent establishment in Finland, and is paying out wages attributable to the business of the permanent establishment, it should apply for registration in the Tax Administration's register of employers. In the same way as Finnish registered employers, the foreign company will then have the same employer obligations, including information reporting, payroll reporting and other requirements.

For more information about employment and the role of employers, read page Obligations of a foreign employer.

Anneli Kukkonen
Head of unit

Iisa Väänänen
Office Adviser

Further information:

Addresses of Uusimaa Corporate Tax Office:
Street address: Opastinsilta 12 C (7th floor) Helsinki-Pasila
Mailing address: PO Box 30 FI-00052 VERO
Telephone: +358 20 698 119

Addresses of Helsinki Area Tax Office:
Street address: Rajatorpantie 8 A Vantaa-Myyrmäki
Mailing address: PL 400, 00052  Vero
Telephone: +358 20 612 000