Attributing profits to a permanent establishment – planned changes to tax rules

The government puts forth a proposal for introducing more detailed rules on how profits should be attributed to permanent establishments. The government proposal also involves plans to change the provisions of the Act on the taxation of business income so as to make internal payments, effected in the form of dealings with other parts of the enterprise, included in the calculations for determining the company’s taxable income for the year. In addition, the government proposal indicates that some provisions of the Act on the elimination of international double taxation should be changed, to allow for determining the amounts of foreign tax credits by taking account of the company's dealings with other parts of the enterprise, including a permanent establishment located in a foreign country. 

The proposed changes aim for adoption of more detailed tax rules and for making it possible to apply the “Business profits” article of the 2010 OECD Model Tax Convention on the tax treaties in force between Finland and foreign countries. At present, Finland's tax treaties with other countries contain no equivalent to the “Business profits” article of the 2010 Model Tax Convention. After adoption of the proposed changes, the treaties in force today could be updated, and any new treaties to be signed in the future would always contain a “Business profits” article based on the 2010 Model Tax Convention.

What is the impact of the 2010 Model Tax Convention on the way business profits are taxed? 

The 2010 OECD Model Tax Convention’s article on business profits allows tax administrations to apply the arm's length principle and the separate entity method without the restrictions present in the earlier versions of the Model Tax Convention.  

Under the arm's length principle, parties in an associated relationship should only enter into commercial agreements between one another if the terms and conditions are similar to those that would be agreed between two distinct companies that are unassociated. Following the separate entity method, the profits attributable to a permanent establishment are those which it might be expected to make, under arm's length conditions, if it were a distinct and separate enterprise in relation to the other parts of the enterprise.  

The planned changes to the Finnish legal provisions will make the profits attributable to a permanent establishment as agreed by the tax treaty between Finland and the country concerned. If this treaty has a “Business profits” article based on the 2010 Model, the profits attributable to a permanent establishment are those governed by the “Business profits” article itself. Alternatively, if the treaty between Finland and the country concerned has a “Business profits” article different from the 2010 version of the Model, the profits attributable to a permanent establishment are determined as required by the treaty. In circumstances where there is no tax treaty between Finland and the country concerned, the profit attribution rules to be applied would be those of the 2008 version of the OECD Model Tax Convention’s article on business profits. 

The proposed new tax rules' impact on corporate taxation

The changes would concern  

• foreign business enterprises with a permanent establishment in Finland. The profits these companies will receive from Finnish sources will be attributed to their permanent establishment according to the new rules. This may have an impact on how the taxable income of their permanent establishment will be assessed.
• Finnish business enterprises with a permanent establishment in a foreign country. 
  The changes proposed by the government would affect the way a tax paid to a foreign country would be credited when a Finnish company's taxes are assessed. The new rules would the allow the Tax Administration to determine the amount of a foreign-tax credit by taking account of the company's dealings with other parts of the enterprise, including a permanent establishment located in a foreign country. 

The proposed new rules' actual impact would not become visible until the fiscal authorities have updated the provisions of the tax treaties between Finland and other countries.

After that, each company will first have to examine whether the applicable treaty has a “Business profits” article based on the 2010 Model Tax Convention or on an earlier version, and then process the profits of its permanent establishment accordingly. 

Planned timetable 

The changes will enter into force on 1 January 2027 and be applied, for the first time, on the income-tax assessments for the 2027 tax year. 

Read more: 

Hallituksen esitys HE 164/2025 vp (in Finnish and Swedish, link to Finnish)