Relief for double taxation provided in Finland
Finnish companies must pay tax in Finland on their income from both Finnish and foreign sources. Foreign-sourced income may also be treated as taxable income in the country of source. If you were to pay tax on the same income both in Finland and in a foreign country, it would be double taxation. The Finnish Tax Administration eliminates any double taxation when assessing your taxes in Finland.
Requesting elimination of double taxation
You can request the elimination of double taxation on your income tax return. Fill in the foreign income you have received, the amount of tax you paid on it abroad, the type of the income (dividends, salary, etc.), and the name of the country of source.
Partnerships and self-employed individuals: Request the elimination of double taxation online or on Form 70A (available in Finnish and Swedish, link to Finnish)
You can also submit the request after the year’s tax assessment process has ended.
As an alternative, you can prevent double taxation in advance by reducing your tax withholding or prepayments. This requires that you present evidence that you are going to receive income from a foreign country and that you are going to pay tax on it abroad. The tax office can take this into account and reduce your payment amounts accordingly. You must still report the foreign-sourced income and foreign-paid tax on your tax return.
Double taxation can be eliminated by two methods: the credit method and the exemption method. The credit method is the most common. The exemption method is used only if the bilateral tax treaty between Finland and the other country requires it.
The credit method means that foreign-sourced income is taxed in Finland but the tax paid abroad is deducted, i.e. credit is granted for it.
Example: You have received €5,000 from foreign sources, and you have paid €1,000 in tax abroad. The Finnish tax on your income is €1,300. The tax you have paid abroad is deducted from your Finnish tax (€1,300 – €1,000). You must only pay €300 of taxes in Finland.
The maximum amount of credit that can be granted is the amount of tax that would have to be paid on the same income in Finland. For example, the taxes paid abroad may be higher than the maximum credit in the following circumstances:
- the foreign tax rate is higher than the Finnish tax rate
- the taxpayer has less taxable income in Finland than in the foreign county
- regarding the source of income concerned, the taxpayer is showing a loss in Finland.
Example: In 2010, you received €5,000 of foreign income, and the country of source collected €1,500 in income tax on it. The Finnish tax on your income is €1,300. The tax you paid abroad is higher than the Finnish tax, so the credit in Finland is only €1,300. The difference of €200 can be credited later during the following five years from any taxes payable on foreign-sourced income of the same income type or income source. Unused credit amounts are credited in chronological order.
Double taxation is usually eliminated by means of the credit method. The exemption method is only used if required by tax treaty.
Foreign income credited by the exemption method is not included in the corporate entity’s total taxable income. In general, this means that corporation cannot deduct any expenses or interest payments related to the production of this income. However, expenses and interest payments related to tax-exempt dividend income can be deducted.