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Foreign employees' employment relationships disguised as entrepreneurship – the growing phenomenon seeks financial benefit

Tax Administration Bulletin, 4/18/2023

Authorities controlling the shadow economy increasingly encounter a phenomenon where employers disguise their foreign employees’ employment relationships as entrepreneurship. This is particularly common in the construction and cleaning sectors. The findings come out from the control results published today on the authorities' shared Shadow economy and economic crime website.

According to the authorities' findings, employers blur the boundary between the employment relationship and the assignment relationship and increasingly transfer their obligations to employees. The authorities often have to draw a line between employment and entrepreneurship: the State Regional Administrative Agencies’ occupational safety and health authority alone found over 400 ‘light entrepreneurs’ during its 71 control visits last year. Other authorities that carry out control activities – the ELY Centre, for example – have also discovered employment relationships that employers have attempted to disguise as entrepreneurship.

Some employers also misuse the residence permit system: an employee's residence permit may be applied for when an employee arrives in Finland, and yet in practice the employee may soon be made to work as a self-employed person or a light entrepreneur and their ‘employment relationship’ is either very short or does not materialise at all.

Even in employment relationships, employers often do not comply with the minimum requirements in the case of foreign employees. When performing enforcements, the occupational safety and health authority found shortcomings especially in the pay system. The biggest shortcomings had to do with the basic pay and various compensations. The largest number of shortcomings were discovered in the construction and restaurant sectors: in the construction sector, nearly 60 per cent of the enforcements revealed shortcomings, and in the hotel and catering sector, over 54 per cent.

Hundreds of millions lost every year

Economic crime and the shadow economy cause significant damage to society. Last year, criminal cases completed by the police caused crime damage worth nearly €200 million. The Tax Administration, in turn, found a total of €235 million in unreported taxes in its shadow economy control measures. The social impact of the prevention of economic crime carried out by Customs was €18 million, and based on tax audits, over €4 million were collected through realisation of recovery.

The current action plan for tackling the shadow economy and economic crime is the eighth in a row. Janne Marttinen, Director of the Tax Administration’s Grey Economy Information Unit, says that the projects of the action plan have developed the cooperation between multiple authorities and the exchange of information between authorities. This helps uncover the shadow economy, address abuse, and thereby prevent losses caused to society.

“Securing society's assets is particularly important in the current economic situation. When we combat the shadow economy and economic crime, we improve more efficient use of shared assets. However, money is not the only issue. Compliance with shared rules and effective cooperation between authorities benefit society as a whole,” says Marttinen.

The current action plan will end at the end of this year. Marttinen hopes that the new Government will continue combating the shadow economy and economic crime.
“The shadow economy is becoming more and more complex, and especially in an economic downturn, the shadow economy and the tax gap typically increase. The action plan for tackling the shadow economy and economic crime provides an opportunity for close cooperation between authorities and helps address changes in the operating environment,” says Janne Marttinen.

Statistics on the prevention of the shadow economy and economic crime are published on the authorities’ shared Shadow economy and economic crime website. Control results are published, for example, by the occupational safety and health authorities (Regional State Administrative Agencies), the Tax Administration, the Social Insurance Institution (Kela), Finnish Customs, the Police, the Public Prosecutor’s Office, the Bankruptcy Ombudsman, the Enforcement Authority, the Finnish Centre for Pensions, the Accident Insurance Centre, the Employment Fund, Centres for Economic Development, Transport and the Environment (ELY Centres), the Supervisory Authority for Welfare and Health (Valvira), and the Finnish Food Authority.

Highlights from authorities’ control activities in 2022:

  • A total of 2,085 economic crime cases were recorded by the police. This is 6 per cent more than in 2021.
  • Extortionate work discrimination grew for the fourth year in a row. A total of 74 cases were recorded by the police last year.
  • Violations of sanctions against Russia brought regulation offences to a peak: last year, Customs launched nearly 300 preliminary investigations on sanction violations.
  • The number of bankruptcy petitions is on the rise. In 2022, bankruptcy proceedings were launched nearly 13per cent more often than the year before.
  • The Tax Administration’s tax control discovered a total of €235 million in unreported taxes.
  • 60per cent of the Uusimaa ELY Centre’s interim decisions on foreign employees seeking to become entrepreneurs were acceptances. The number of acceptance decisions rose by 5 per cent from the previous year.

Read more:

Strategy and action plan for tackling the shadow economy and economic crime

Impact assessment of the action plan for tackling the shadow economy and economic crime

Page last updated 4/18/2023