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Taxes in connection with payments of royalties and compensation for use

Normally the meaning of ‘royalties’ and ‘compensation for use’ is cash reimbursement payable in exchange for an intangible right of some kind. From the payor’s perspective, a number of special considerations associated with tax preassessment and source-tax withholding need to be taken into account. It is especially important to identify an outbound payment as a royalty (or compensation for use). In addition, the reporting requirement to the Incomes Register needs to be fulfilled.  

To identify royalties and compensation for use — legislation in force

Reimbursements for intangible rights are controlled by an extensive legal base, not only connected to national Finnish legislation but also emanating from international treaties for the avoidance of double taxation. As a result, royalty payments are subjected to a number of detailed rules. In addition, the tax treatment of royalty payments is affected by EU law that includes legal norms providing exemption from taxation in the case of royalty payments between associated companies.  

From the payor’s perspective, when reimbursement is paid out in exchange for intangible rights, it is important to verify how the amount should be classified in terms of types of income in the beneficiary’s hands. National legislation contains domestic definitions for ‘royalties’ as well as for ‘compensation for use’. However, when payments are made across national borders, the applicable tax treaty provisions often offer the most relevant guideline for identifying a royalty. Because treaty provisions are rarely identical, to identify that royalties within the meaning of the applicable tax treaty were paid requires that evaluations be carried out separately for each transaction. If the circumstances are unclear, we recommend that the payor submit an application for an advance ruling to clear up the matter. 

Required information returns for giving details on paid-out royalties and compensation for use

Payors are expected to submit the required data to the Incomes Register. The reporting rules are different from usual in the case of royalties and compensation for use, because instead of reports to the Incomes Register, other payments – such as dividends and interest – normally involve an obligation of the payor to submit a tax return for self-assessed taxes and an annual information return.  Reporting to the Incomes Register makes it unnecessary to send information once a year to the Tax Administration that would indicate the period’s total amount of withheld taxes, or give specific details for every beneficiary on an annual basis. 

The following passages and sections describe the rules on tax withholding and data reports to the Incomes Register when compensation for use is paid to Finnish tax residents. In addition, instructions are provided on matters connected to royalty payments to nonresident beneficiaries including the amounts to be withheld at source. 

In accordance with Finnish legislation, ‘royalties’ is defined as compensation for the right to use a copyright, a photograph-related right, or a patent, trade mark or other industrial property rights, thus including their use, the rights to their use, and the selling of such rights. Sometimes, ‘royalties’ also means the compensation paid in exchange for know-how and detailed information regarding industrial, commercial and scientific endeavours.

Amount withheld and reports to the Incomes Register when paying compensation for use

In general, if the payor and beneficiary are Finnish, the payor will first need to withhold tax when paying, and then report the relevant data to the Incomes Register by appropriate deadlines. Whereas in general, and for all beneficiaries, the information-reporting requirement is connected to fact that the payor has withheld an amount of tax, when the beneficiary is a natural person, the payor needs to submit data to the Incomes Register always. Payors must withhold tax in all circumstances where the beneficiary is a party not having a valid registration in the Prepayment register.

The size of the withholding and the beneficiary’s grounds for receiving the compensation

For the payor, the beneficiary’s tax-card withholding rate determines the amount to withhold on the total payable. If the payor does not have the necessary information for carrying out the withholding, the amount to withhold is 60% whenever the type of the income, from the beneficiary’s perspective, is ‘earned income’. In situations where the compensation is classified ‘capital income’ instead, the payor must withhold 30%. If the beneficiary is a corporate entity, benefit under joint administration or a partnership – and has no registration in the Prepayment register – the payor must withhold 13%.

To determine the proper type of income and to determine the percentage rate that must be withheld in the case of a natural person, the payor has to know the origin of the beneficiary’s right of ownership, i.e. know their grounds for receiving the compensation for use. If the beneficiary received the rights by way of inheritance, by last will, or against payment of consideration, the type of income would be capital income. Otherwise, receipts of compensation for use are taxable as earned income. 

The earnings payment report for the Incomes Register

After payment of any compensation for use, the payors are required to submit data to the Incomes Register. Most importantly, to notify the Incomes Register of all paid compensation for use which is subjected to withholding, the data set called “earnings payment report” must be submitted. Additionally, data must be submitted whenever compensation for use has been paid to natural persons, regardless of whether any taxes were withheld.

Data to indicate the amount paid and the tax withheld must be submitted no later than on the fifth calendar day from the date when the compensation was paid. However, if this deadline falls on a Saturday, Sunday or other holiday, you can submit the data on the following business day.

If the beneficiary has a Finnish personal identity code, you should include it in the earnings payment report. This ensures proper identification of the income earner. If no Finnish identity code is available, you must include the income earner’s foreign identifier, and their name, gender, date of birth and address. Where the beneficiary is a corporate entity i.e. a legal person, select the following value for the “Type of additional income earner information”: Corporate entity.

Where the compensation is taxable as earned income for the beneficiary, select the type of income “313 – Compensation for use, earned income”. Income type “313 Compensation for use, earned income” is equally used for reporting any paid-out compensation for use to a partnership, corporate entity or joint venture. Where the compensation for use is deemed capital income for the beneficiary, use type of income “314 – Compensation for use, capital income”. For both income types, data submitted to the Incomes Register must indicate the gross amounts. Specify “402 – Withholding tax” for the amounts withheld.

When a compensation paid to a Finnish tax resident other than a natural person is made involving no amount withheld, no data needs to be submitted to the Incomes Register. Please note the difference in reporting rules here, because when royalties are paid to a nonresident beneficiary, data must always be submitted to the Incomes Register regardless of whether or not any taxes were withheld at source.

Royalties, licensing fees and other credit transactions similar to them are regarded as income received from Finnish sources. In cross-border situations, national legal norms outline the basic approach for determining how ‘royalties’ is defined, and for determining the percentage rate of the tax to be withheld at source. Under Finnish law, ‘royalties’ means reimbursement payable in exchange for the use of copyright for a written, artistic or scientific work, for a right based on a photograph or photographs, or for patents, trademarks, models, forms, drawings, secret formulas or manufacturing methods, the right of use, or information on industrial, commercial or scientific experience. 

If you pay royalties from Finland to a beneficiary in another country, not only the provisions of Finnish legislation are applicable but also tax treaty law and EU law. For this reason, it is important for payors to note that not only the percentage rate of tax they should withhold at source may be different, but the definition of ‘royalties’ is often different, as well. For more information on legal definitions, see the Tax Administration’s detailed guidance Payments of dividends, interest and royalties to nonresidents and Articles of tax treaties.

The amount to be withheld at source

Under Finnish law, the percentage rate, of the gross royalties paid, applicable to beneficiaries that are foreign corporate entities is 20%, and the percentage rate applicable to other beneficiaries is 30%. In accordance with the provisions found in the majority of Finland’s tax treaties, there are restrictions of the taxing rights of the Contracting State of source applicable to payments of royalties from there. Some treaties provide for a full restriction i.e. for denying the source state’s taxing rights fully. In addition, exemptions from tax withholding at source are allowed for royalty payments to associated companies that meet the requirements of the Directive on a common system of taxation applicable to interest and royalties. For these reasons, it is important that you make the necessary checks on a case-by-case basis in order to determine the amount you should withhold at source.

It is the payor’s responsibility to verify that all the preconditions for applying the treaty are fulfilled, if the payor invokes the provisions of a treaty to withhold less tax at source than what is required under Finnish law. If the circumstances leave room for varying interpretations or if there is unclarity, the beneficiary can submit an application to the Tax Administration for a tax-at-source card. After the card is received and presented to the payor, the rate indicated on the card can be used when paying the royalties to the beneficiary. 

Always submit the required data to the Incomes Register

Any and all royalties paid to a nonresident beneficiary need to be included in your reports to the Incomes Register. Payors must fulfil this requirement even in cases where the Directive on interest and royalty payments and the relevant tax treaties provide that the source country of royalties has no taxing rights at all. If no data is submitted to the Incomes Register, you can become subjected to a late-filing charge or a penalty charge for negligence. The submitted reports are utilized by the Tax Administration in connection with international exchange of tax information.

Data to indicate royalties paid and taxes withheld must be submitted no later than on the fifth calendar day from the date of payment. However, if this deadline falls on a Saturday, Sunday or other holiday, you can submit the data on the following business day.

To facilitate proper identification of the income earner, the submitted report must contain the beneficiary’s personal identifier/Tax Identification Number (TIN) issued in the foreign country, the beneficiary’s name, date of birth, gender, country of residence and address. The report must additionally indicate the value “Non-resident taxpayer”: Yes. Where the beneficiary is a corporate entity i.e. a legal person, select the following value for the “Type of additional income earner information”: Corporate entity.

Indicate the paid gross amount of royalties, and designate it on the earnings payment report under type of income 362 – Royalty paid to a non-resident taxpayer. To indicate the tax withheld at source, use type designation 404 – Tax at source, and fill in the actual amount of money that you withheld.   Fill in 0 euro if you withheld no tax at source when paying the royalties to the beneficiary. Earnings payment reports need to be submitted to the Incomes Register reflecting the actual situation that prevailed at the time when you made the payment.

Page last updated 1/9/2024