Relief for double taxation
Finnish-based companies must pay tax in Finland on their income from both domestic and foreign sources. Foreign-sourced income may also be treated as taxable in the source country. Paying tax on the same income would be double taxation. The Finnish Tax Administration grants relief for it when assessing your Finnish corporate income tax.
Two methods are in use: the credit method and the exemption method. The primary method is the credit method, and 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 tax paid abroad is deducted – credit is being granted for it.
Example: A taxpayer has €5,000 of foreign income, and the country of source has collected €1,000 income tax on it. Under Finnish rules, the tax on the €5,000 would have been €1,300. Using the credit method, Finnish tax is not charged in full, because credit is given for the amount paid abroad (€1,300 - €1,000). The taxpayer has only to pay €300.
No higher credit may be given than Finnish tax law allows for the income concerned; this rule determines the maximum available credit. Taxes paid abroad may be higher than the maximum available credit if
- The foreign rate of tax is higher than the Finnish one
- The taxpayer has less taxable income in Finland than in the foreign county
- The taxpayer is showing a loss in Finland for the source of income concerned
Example: For tax year 2014, the taxpayer has €5,000 of foreign income and the country of source has collected €1,500 income tax on it. Under Finnish rules, the tax on the €5,000 would have been €1,300. In this example, the tax paid abroad is higher than the Finnish tax, so the credit in Finland is only €1,300 and the difference of €200 is not credited, but it can be used later during the five following years for any taxes payable on foreign income of the same type or source. Unused credits are used in chronological order.
This method involves no Finnish taxation of the foreign-sourced income, but it takes it into account in the assessment of the taxpayer's Finnish taxes, and increases the taxes payable on other incomes (the progressive exemption method) that are taxed progressively here. The exemption method does not cause any increase to the taxes are flat, not progressive. Flat taxes include the income tax collected from corporate taxpayers showing a profit and the income tax on capital (investment) income. With the exemption method, the taxpayer can deduct expenses for the production of income, and the maximum level of that deduction is the total amount of the foreign income.
You ask the Tax Administration for relief by filling in your income tax return complete with the foreign income you have received, the amount of tax you paid on it abroad, classification of the type of the income (such as dividends, salary, etc.), and the name of the country of source. Business taxpayers must complete Form 70 (corporate taxpayers) or 70A (partnerships and the self-employed).
Relief may be requested even after the close of the year's tax-assessment process.
Alternatively, you can prevent double taxation from occurring at all by having your withholding or prepayments of income tax reduced – this requires that you present evidence to the tax office that you are going to receive income sourced from foreign countries and pay tax on it abroad. The tax office can take this into account and reduce your withholding accordingly.
You must still report the foreign-sourced income and foreign-paid tax on your tax return.