New tax treaty between Finland and France to be applied starting 2027

The new treaty for the avoidance of double taxation signed between Finland and France in 2023 entered into force on 28 August 2026 and will be applicable from 1 January 2027. The new tax treaty replaces the current tax treaty.

The changes concern the taxing rights of the Contracting States with regard to pensions, the agreed definition of a permanent establishment, and the allocation of taxing rights with regard to dividends.

Finland can levy tax on pensions based on past employment in the private sector

Under the provisions of the new treaty, a Finnish-source pension from past employment in the private sector, received by an individual who is a resident of France, may be taxed in Finland. Finland may also tax a pension based on a voluntary pension insurance contract. Under the provisions of the old treaty, Finland could levy tax only on public service pensions received by a resident of France.

In the same way, a pension from a French source based on past employment in the private sector, and a pension based on a voluntary contract may be taxed by France when a Finnish resident receives these pensions.

In general, the country that should eliminate double taxation is the individual taxpayer’s country of residence. However, the new treaty contains provisions that exceptionally eliminate double taxation of private-sector pensions and voluntary pensions in the country where the pension is paid. This is called ‘reverse crediting’.

The change does not concern individuals who resided in France and received pension income from working in the private sector or based on voluntary pension insurance from Finland on 4 April 2023, when the tax treaty was signed. Similarly, the change does not concern individuals who resided in Finland and received such pension income from France on 4 April 2023. As for these individuals, the country of residence will continue to have the exclusive right to collect tax on the said pensions.

For example, if an individual taxpayer was a resident of France on 4 April 2023 and received a pension from Finland based on past employment in the private sector, the pension will continue to be taxed only in France.

In an alternative scenario, if the French resident started receiving – on 5 April 2023 or later – a pension from Finland based on past employment in the private sector, the pension will be taxed only in France up to the end of 2026. From 1 January 2027, the French resident will also pay tax on their pension to Finland, but the tax paid to France will be subtracted from the tax payable to Finland. This also applies to a person who moved to France on 5 April 2023 or later. 

Double taxation eliminated by the credit method

The new treaty will affect how the taxpayer’s country of residence will eliminate double taxation. Whereas the old treaty has provided for the exemption method, the new treaty will switch to the credit method. This may have effects on the assessments of income tax on dividends, employment income, rental income from apartments and real estate, and on the assessment of capital gains tax.

Dividends to be subject to taxes at source

Under the new treaty, the source country from where dividends are paid out can normally withhold 15 percent as a source tax. The old treaty has set out a general withholding rate of 0% on dividends.

However, the withholding at source will continue to be 0% under the new treaty, too, if the beneficiary is a company that has held, for a continuous period of at least 365 days, five percent or more of the dividend-distributing company’s capital. For detailed information about the calculation rules for the 365-day period in this regard, please refer to the updated provisions in the new treaty.

The new treaty provides for eliminating any double taxation of dividends using the credit method. As a consequence that if the Contracting State of source had withheld tax on the dividend, the Contracting State where the beneficiary is resident would take this into account in its own tax assessment, and provide a credit for the tax paid.

The definition of permanent establishment will change

The way a permanent establishment is defined is now broadly in line with the latest OECD Model Tax Convention. The new definition differs from the old treaty’s definition making it more extensive.

The entire perspective of the business operation of companies in a group enterprise must be examined. If there are activities being pursued among the group companies, making up complementary functions that are part of a cohesive business operation, a permanent establishment may arise. As a result, the change is likely to cause an increase in occurrences of a Finnish company having a permanent establishment in France, and likewise, in occurrences of a French company becoming treated as having a permanent establishment in Finland.

Under the old treaty, a person acting solely on behalf of group companies could in some situations be considered an independent agent, which would not give rise to a permanent establishment. However, under the new treaty, a person is not an independent agent if he or she acts exclusively or almost exclusively on behalf of group companies. This means that the tax authorities can consider a group-member company to have a permanent establishment more frequently than so far.

The fact that a permanent establishment has arisen often causes various obligations to emerge for the company at the local level, including the duty to file an income tax return or reports and documentation on transfer pricing, etc.

Further information: 

Government decree no 34/26 (available on the Finlex website in Finnish and Swedish)