Financial aid and subsidies paid to companies in the coronavirus situation
Public-sector bodies, such as municipalities, help companies and entrepreneurs in the coronavirus situation with financial aid and subsidies. How do these affect tax assessment?
Financial aid or subsidies paid to cover the expenses of business operations are taxable income for the recipient, i.e. the company or entrepreneur (§ 4, act on the taxation of business income (Laki elinkeinotulon verottamisesta 360/1968)). The companies and entrepreneurs must record the received amounts in their accounting.
The aid or subsidy can be taxed in one of two ways based on how the company’s accounting is conducted. The first option is to treat it as profit for the tax year when it was received as money, receivables or other benefits of monetary value (§ 19, act on the taxation of business income). Any general government aid or subsidies received by companies are usually periodised according to the date when the aid decision was made. If the company receives special corona aid for increased expenses, the aid is periodised according to the dates when the new expenses became apparent.
The second option for periodisation of income is to record the aid or subsidy as income for the tax year during which it was paid (§ 27 a, act on the taxation of business income).
The payor reports the aid or subsidy to the Tax Administration on the annual information return on public support for business operations (available in Finnish and Swedish, link to Finnish). Annual information returns for 2020 must be filed by 31 January 2021. These payments are not reported to the Incomes Register and no tax is withheld on them.
Financial aid or subsidies are not included in the basis for VAT if they are not directly connected to the price of the product or service (§ 79, subsection 1, Value Added Tax Act).
What if aid or subsidy was first received, then reported as part of taxable income — and then reclaimed?
It may be that a business enterprise must pay back some of the various forms of public financial support discussed above. Some businesses can have paid the money back voluntarily, too.
It is treated as a tax-deductible expense to pay back an amount of aid/subsidy that had been part of the company’s taxable income when received. If your company follows the accrual basis for taxation and accounting, the year when deduction is available is the tax year indicated by your accounting books as the year when your company pays the amount back. This way, if the public body first sent you a reclaim letter and an official decision demanding repayment, and then you paid the amount back accordingly, the tax-deduction year is the year when the official decision is dated. On the other hand, if your company follows the cash basis in its accounting and taxes, the tax-deduction year is simply the year when you send the money back.