Permanent establishments in income taxation

A foreign company’s Finnish operations may give rise to a permanent establishment in income taxation in Finland. This means that the foreign company must pay income tax within the Finnish tax system on its operations.

Permanent establishment for purposes of income taxation

Permanent establishment means a fixed place of businessthrough which the company conducts some or all of its operations. If the company has a place of business that falls into one of the following categories, it is treated as having a permanent establishment:

  • management offices
  • branches
  • local offices
  • factories, production plants
  • workshops
  • mines, quarries, oil wells, natural gas wells, other sites for extraction of natural resources
  • operations in the construction and installation sectors lasting longer than 6, 12 or 18 months (the time limits are different in each bilateral tax treaty)
  • locations where a 'dependent agent' works.

To be held as a permanent establishment, the place of business must be fixed, not temporary or short-lived in terms of its geographical location and duration. It may be located in the premises of another company, e.g. if there is a certain space or part of a space to be used on a regular basis. If an employee works from home, the situation may give rise to a permanent establishment.

The place of business management always constitutes a permanent establishment

A company is invariably treated as having a permanent establishment in Finland if the fixed place in Finland is where its management and business administration are. Management is an essential part of the business operation, not a preparatory or an auxiliary activity.

Time limits applicable to construction and installation sectors

Sites where a construction, installation or assembly operation is performed may also be regarded as 'permanent establishments'. The duration of the site must be 6, 12 or 18 months, depending on the provisions of the bilateral tax treaty to be applied. - For example, under the treaty between Estonia and Finland, any construction job that lasts longer than 6 months gives rise to a permanent establishment.

The start date of the operation is normally the date when the preparatory work begins for the construction, installation or assembly job in the target country. Its end date is the date when the job is completed or entirely abandoned. The duration of such a job is normally regarded as inclusive of any periods when temporary interruptions have caused some inactivity.

If a company has several projects in Finland, each one of them should be treated separately from the perspective of the time limit. However, if the projects are strongly connected and amount to a single commercial and geographic whole, their durations may be summed up. Similarly, if a certain project is artificially divided up into several parts, the projects will be considered as a single unit.

Representatives of a business may constitute a permanent establishment

A company may have a permanent establishment in Finland by virtue of a representative or agent, even if no place of business is at its disposal. Specifically, a dependent agent may constitute a permanent establishment, if they have been given the authority to enter into contracts and to receive and fulfil orders. In addition, it is required that they exercise their authorisation regularly. Dependent agents may be individuals as well as corporate entities.

An independent representative is not treated as having a permanent establishment. A representative is independent when they are both financially and legally free from the enterprise for which they conduct their business. Examples of independent representatives include various intermediaries, brokers and commission merchants.

Preparatory and auxiliary activities

Preparatory and auxiliary activities do not give rise to a permanent establishment.<0} Examples of such activities:

  • advertising
  • data collection
  • opening an information service
  • scientific research.

For example, it does not constitute a permanent establishment for the foreign company when a place of business has only been set up for storage, commercial display, or delivery of goods belonging to that company. However, the actual circumstances of each case must be reviewed in order to judge whether the activities are of preparatory and auxiliary character.

If such activities make up an important part of the business of the company, or if they amount to a product being offered to outside customers, the enterprise will be treated as having a permanent establishment. After-sales services offered to a customer of the principal enterprise are not usually regarded as preparatory and auxiliary activities. Examples of such services are repair work under warranty and deliveries of spare parts to the customer from a fixed place of business. They are deemed an explicit part of the business operations and therefore cannot be regarded as merely preparatory and auxiliary activities.

Income tax returns and employer obligations

Companies that are treated as having a permanent establishment in Finland must seek for entry in the Register of Employers, if necessary, and must file a Finnish income tax return.

Companies that have a VAT permanent establishment are regarded as VAT payers in Finland. For more information, read the guidance Permanent establishment for purposes of VAT