Income taxation of nonresident foreign corporate entities
- Date of issue
- 1/27/2023 - 11/19/2023
- Replaces guidance
- VH/2169/00.01.00/2022, 28.8.2022
This is an unofficial translation. The official instruction (record number VH/5613/00.01.00/2022) is drafted in Finnish and Swedish languages.
This guidance concerns taxation of nonresident foreign corporate entities’ income received from Finnish sources.
Section 3.2.5 on the impact of remote working on the constitution of a permanent establishment updated on 25 January 2023.
The new section 6.3 has been added 25 August 2022 to this guide, reflecting the amended provisions of the Finnish Accounting act (Kirjanpitolaki (1336/1997)). The amendment of the act consists of its new section 1b in Chapter 1, containing detailed rules on foreign corporate entities’ obligation to keep accounting records. The amended provisions are applied as of 1 April 2022. Further, the content of chapter 6 has also been modified on other respects.
In addition, chapter 4.3 has been updated reflecting the amended provisions of the Act governing hybrid mismatch arrangements (1567/2019). Also, chapter 3.4 has been modified with regard to the ruling of KHO 2021:171 of the Supreme Administrative Court. Further, the content of chapter 3.2.1 has also been modified.
The guidance has been updated as of 1 January 2021 due to amendment of § 9 of the act on income tax (Tuloverolaki 1535/1992). In accordance with the amended § 9, subsection 1, paragraph 1 of the act on income tax, a foreign corporate entity is treated as a resident taxpayer in Finland if its place of effective management is in Finland. The amended § 9 entered into force on 1 January 2021 and is applied for the first time in tax year 2021. Foreign corporate entity’s tax residency status and the location of its place of effective management is discusses in the Tax Administration guidance Resident and nonresident tax liability of corporate entities.
In addition, chapter 4.5 has been updated due to the provisions on exit tax that entered into force on 1 January 2020. The updated guidance also takes into account the provisions on the removal of corporate source-of-income division that entered into force on 1 January 2020. Further, chapter 4.3 has been modified with regard to the reporting obligation. Chapter 5.2 has been updated to reflect the changes made to the tax treaty with Spain. Also, the language of the guidance has been edited.
Foreign corporate entities’ liability to pay VAT in Finland is discussed in the Tax Administration’s guidance VAT registration of foreign businesses (available in Finnish and Swedish, link to Finnish). You can read more about foreign corporate entities' employer obligations at Obligations of a foreign employer on tax.fi, and about prepayment registration in the Tax Administration’s guidance Starting up business. Attribution of income to a foreign corporate entity’s permanent establishment (PE) is discussed in the Tax Administration’s guidance General guidelines for the attribution of income to permanent establishment.
More information about other than tax matters – for example, how to register a branch office in the Trade Register – is available from the Finnish Patent and Registration Office on prh.fi and the Business Information System on ytj.fi. Information about business-related matters is also available on yritysuomi.fi, a website coordinated by the Ministry of Economic Affairs and Employment.
1 Finland's taxing right under the act on income tax
Foreign corporate entity refers to a foreign legal person that is comparable to a Finnish corporate entity but has not been organised under the laws of Finland or is not domiciled in Finland. For example, companies corresponding to Finnish limited liability companies (Oy), such as Swedish aktiebolag (AB) and Estonian osaühing (Oü), are foreign corporate entities.
National legal rules governing foreigners' liability to tax are found in § 9, § 10 and § 13 a, act on income tax, and in § 83, act on the assessment procedure (Verotusmenettelylaki 1558/1995). Foreign corporate entities may be resident or nonresident taxpayers in Finland. Nonresident taxpayers pay income tax on their Finnish-sourced income only. Such income may be received from the operation of a trade or business in this country. If a foreign corporate entity has a permanent establishment in Finland, it must pay tax on all the income that can be attributed to that permanent establishment (PE). Income of a PE may in some cases be sourced in other countries (for more information, see chapter 4 below). If a foreign corporate entity is a resident taxpayer in Finland, it is liable to pay tax on its global income to Finland and it is subject to the same tax rules as Finnish corporate entities.For more information a foreign corporate entity’s tax residency status, see the Tax Administration guidance on Resident and nonresident tax liability of corporate entities.
If Finland has no tax treaty with the domicile country of the foreign entity, Finland's taxing rights are determined by national tax rules only.
2 Impact of tax treaties
Finland has signed tax treaties with some 70 countries. The objective of the treaties is to reach mutual agreement between two sovereign countries on how the taxing rights should be shared and divided, and on how international double taxation can be eliminated in situations where a taxpayer (which may be a corporate as well as an individual taxpayer) domiciled in a treaty country receives income from another treaty country. Finland has additionally signed other international treaties, including Tax Information Exchange Agreements (TIEAs). List of valid tax treaties on website vero.fi
Tax treaties can restrict Finland’s taxing rights, but they cannot amplify them. In this way, when a tax treaty applies, income tax cannot be collected simply by virtue of national tax rules unless it is also accepted under the provisions of the tax treaty.
If Finland has the right to levy tax on income of a foreign corporate entity domiciled in the other tax treaty country, Finnish national tax rules determine the computation of taxable income (see chapters 4 and 5 of this guidance). Similarly, national tax rules define the tax rate, unless the provisions of the applicable tax treaty restrict the rate.
Existing tax treaties are based on the Model Tax Convention of the Organisation for Economic Co-operation and Development, the OECD. Consequently, the OECD Commentary of the Model Tax Convention (Model Tax Convention on Income and on Capital) can be used for purposes of interpretation of the tax treaties. It does not bear importance whether other country of the treaty is an OECD member, because Finland's tax treaties with all countries are generally based on the Model Tax Convention of the OECD (for a court ruling discussing this matter, see case KHO 2011:101 in the archives of Supreme Administrative Court). The Finnish Tax Administration uses the Commentary for purposes of interpretation whenever there is no contradiction with the provisions of the applicable tax treaty. The Commentary is taken into account also in this guidance.
Tax treaties include provisions on the taxation of business income that usually allow Finland to tax the business income of a foreign taxpayer domiciled in the other tax treaty country only if it has a permanent establishment in Finland. If there is a permanent establishment, Finland has the right to tax all the income that the permanent establishment generates, including any other income types enumerated in the tax treaty (see chapter 5 below).
However, even if the foreign corporate entity domiciled in the other country has no permanent establishment in Finland, the applicable treaty provisions, which govern other types of income, may permit Finland to tax the other types of income. For example, royalties from Finland may be within Finland’s taxing rights even if the foreign taxpayer has no permanent establishment in Finland (see chapter 5 below).
3 Permanent establishment for purposes of income tax
3.1 Effects of the existence of a permanent establishment on the application of tax treaties
Under the provisions of national legislation, Finland may collect tax from a nonresident foreign company on the income received from the operation of a trade or business in Finland (see chapter 1 above). However, when a tax treaty is applied, Finland may only levy tax on business income if the foreign company domiciled in the other tax treaty country has a PE in Finland. In situations requiring interpretation as to whether a PE exists, the definition of a PE found in the applicable tax treaty is significant, instead of what is provided in Finland's national tax rules, which set out a more ample scope of taxing rights.
Article 5 of the Model Tax Convention of the OECD has been used as a standard that governs the definitions of a PE in the tax treaties Finland has made. Some details may vary in different tax treaties. In Finnish national legislation, the definition of a PE is in § 13 a, act on income tax.
There are differences between the income-tax rules and the VAT rules on permanent establishments. As a result, a foreign enterprise may be treated as having a permanent (or fixed) establishment for purposes of VAT but not for purposes of income tax. In certain more rare situations, foreign enterprises may conversely be treated as having a permanent establishment for purposes of income tax but not as having a permanent (or fixed) establishment for purposes of VAT. For more information, click VAT registration of foreigners in Finland (available in Finnish and Swedish, link to Finnish).
Because a nonresident foreign corporate entity may have more than one business unit in Finland, it may consequently be treated as having more than one PE here. However, the foreign corporate entity is a single taxpayer and can have only one Business ID. For purposes of tax assessment, all the PEs are treated as one unit.
3.2 The general rule on the permanent establishment
3.2.1 Existence of a place of business
Article 5, paragraph 1 of the OECD Model Tax Convention contains the general rule (definition) of the 'permanent establishment' term, stating that it means a fixed place of business, through which the business of an enterprise is wholly or partly carried on. A similar provision is in all the tax treaties Finland has made.
Article 5, paragraph 2 of the OECD Model Tax Convention includes a number of examples concerning the general rule. The list is not exhaustive. Accordingly, the term 'permanent establishment' includes especially:
- a place of management;
- a branch;
- an office;
- a factory;
- a workshop, and
- a mine, an oil or gas well, a quarry or any other place for extraction of natural resources.
Any premises, facilities or installations used for carrying on business of an enterprise, whether or not they are used exclusively for that purpose, may be interpreted as the place of business under the above general rule. This means that the place of business does not have to be a definite, limited space, such as a room. It is enough for the purposes of the general rule that the space is at the disposal of the enterprise in fact: it is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise. Again, the place of business may be situated in the business facilities of another enterprise, e.g. if there is a certain space at the disposal of the foreign enterprise, used on a regular basis. Also, a shipyard is a fixed place of business that gives rise to permanent establishment under the general rule.
To be considered a PE under the above general rule, the place of business must meet the following conditions:
- it must be established at a distinct geographical place;
- it must be established with a certain degree of permanence, and
- the business of the enterprise must be actually carried through the fixed place of business.
See below for a further discussion of the above requirements. The chapter ends with a discussion on a couple of special situations.
3.2.2 Fixed place of business in terms of its location
It is required that the place of business has a fixed location. Thus, there has to be a link between the place of business and a specific geographical point. However, the equipment of the place of business does not have to be attached to the ground. It is enough that the equipment remains on a particular site.
A fixed place of business can be made up by a larger area within which the actual business location varies if the business operations in the area constitute a coherent whole commercially and geographically with respect to the business. Both of the above requirements must be fulfilled simultaneously. A single commercial and geographical unit could be for example an office hotel, a pedestrian street, a mine, an outdoor market or a fair.
3.2.3 Permanency of a place of business in terms of time
There is no provision laying down an exact time limit that would define how long an operation of a trade or business must go on, but it has been provided that a temporary and short-lived setup does not usually constitute a PE. According to tax practice, and the guidance of the OECD Commentary, a business carried on in a country through a place of business that is maintained for less than six months has normally not been considered as having enough permanence in terms of time. Conversely, if the duration has exceeded six months, the business has been usually considered permanent. Temporary interruptions are not taken into account when assessing the permanency of a place of business.
A foreign enterprise may set up a place of business designed to be used for such a short period of time that it would not constitute a PE. However, if it is in fact maintained for such a period that it can no longer be considered a temporary one, it becomes a fixed place of business retrospectively.
Setting up a place of business may involve a period of preparations. The period during which the fixed place of business itself is being set up by the enterprise should not be counted, provided that this activity differs substantially from the activity, which the place of business is to serve permanently.
Operations that last for a shorter period than six months may constitute a PE from their inception under the following circumstances:
Business operations that were intended permanent are prematurely liquidated due to special circumstances. For example, in a situation where a foreign enterprise obtains a space to set up a retail store and starts selling goods there, but discontinues the business after two months after making the conclusion that it is a bad investment.
The business activities are seasonal and of a recurrent nature. An example of an operation in this category is the recurrent selling of ice cream at an outdoor marketplace in the summer (for a three-month period every summer). For assessing whether a recurrent operation has enough permanence, consideration must be given to the period of time during which the place is used, in combination with the number of times during which it is used (which may extend over a number of years).
The foreign enterprise operates a certain business exclusively in Finland. In these circumstances, the business has a stronger connection with Finland than with the country where the foreign company is domiciled.
3.2.4 Carrying on activities through a place of business
A place of business will only constitute a permanent establishment if the enterprise, wholly or partially, conducts business through it. This normally means that the foreign enterprise has personnel there who work for it. The personnel do not necessarily have to be employees of the foreign enterprise: it is sufficient if they are under its authority (e.g. they may be leased employees whose actual employer is another enterprise). The personnel may also conduct the business activities through the place of business; i.e. they do not have to work entirely at the place of business.
A permanent establishment may exist even if business is carried on mainly through an automatic equipment or facility, regardless of whether the foreign company itself has arranged for its technical maintenance and supervision, or whether there is an external service provider taking care of it. For example, a PE is made up of a transformer station connected to an electric power line although its technical maintenance is carried out by an outside service provider (for more information, see ruling KVL 52/2007 of the Central Tax Board).
The business of employee leasing or leasing of equipment does not give rise to a PE in Finland if the leasing business is conducted through a location in another country (for more information, see ruling KHO 1986/1679 II 501 of the Supreme Administrative Court). For guidance on the distinction between employee leasing and subcontracting, click Leased employees - taxation in Finland.
3.2.5 Special situations concerning the general rule of permanent establishment
If an employee or director of an enterprise works from a home office, a PE may be constituted at the home office. This requires that the employee or director has a space at home through which they work on a permanent basis. Working from home non-recurrently or randomly is not considered permanent. Similarly, it does not constitute a PE if the work done through the home office is of auxiliary or preparatory nature (see chapter 3.4 below).
A PE might be constituted at an employee’s home for example in a situation where a foreign enterprise has not provided the employee an office space, although it is a requirement for his work, and if the enterprise assumes the employee works through his home in Finland.
When assessing the constitution of a PE, the connection of the activities pursued in the home office with the business activities pursued by the foreign enterprise and the significance of the working location considering the enterprise’s business activities are taken into account. As a rule, constituting a PE when working remotely requires that the enterprise has business-related interests to carry out work from Finland. Such interests include the provision of services for customers in Finland and the connection between the work and sales targeted at Finland or Finland’s neighbouring areas. The ground rule is that Finland’s neighbouring areas include the Nordic and Baltic countries. Working remotely from a home office exclusively at the employee’s request without any business-related connection does not constitute a PE in Finland. However, the enterprise’s notification of remote working at the employee’s request alone is considered insufficient, as the assessment is based on objectively identifiable facts of the business activities pursued by the enterprise in Finland and elsewhere.
If the enterprise provides the employee with an office space, but the employee works from a home office located in Finland at their own request, the employer cannot be considered to have demanded the use of the home office to pursue the enterprise’s business activities, provided that the business connection described above and the need to work specifically from Finland do not exist. Where the office space provided by the company is located is irrelevant.
In a situation where the employer does not provide any opportunity to use the enterprise’s facilities, even if the tasks require an office space, the enterprise can, instead, be considered to have demanded the use of a home office to pursue the enterprise’s business activities. In this case, it is irrelevant whether the enterprise’s activities are targeted at Finland, as the home office constitutes a PE for the foreign enterprise in Finland if the activities pursued from the home office are other than auxiliary or preparatory activities. The employer is also considered to require working from home when the employee would be able to work in the enterprise’s office space from time to time, but the employer demands that certain employees must work from home on certain days, because the enterprise’s office space does not have enough room for all employees at the same time. Furthermore, the employer is considered to require working from home in situations where the employer compensates the employee for office costs accrued from their home office by paying rent for the use of the office, for example. However, the employer is not considered to require working from home if the employer only provides the employee with a computer and other regular office supplies for use in work carried out at home. When assessing whether the employer requires working from a home office, all of the factors above will be considered as a whole.
In remote working arrangements, work can be carried out partly in a home office and partly in an office located in the foreign enterprise’s country of residence or elsewhere. When assessing the constitution of a PE, the employee’s tasks as a whole will be considered, as well as the relationship between the work carried out from a home office and the enterprise’s other activities and work carried out by the person outside their home office. Engaging in activities other than auxiliary and preparatory activities from the employee’s home can only constitute a PE for the foreign enterprise in Finland.
Place of management
A place of management could constitute a PE under the general rule according to the OECD Model Tax Convention (art. 5.2 cited above). Consequently, it is required that a place of management has sufficient permanence in terms of time in a fixed location. According to tax-assessment practice, a place of management can be located, for example, inside the premises of another enterprise (e.g. ruling KHO 1999/1031 of the Supreme Administrative Court) or at the home of a company director. A place of management is a place where decisions concerning the entire company or parts of it are made. These management decisions must be business-oriented, active and independent.
The assessment whether decision-making falls into category of management or not is based on case by case analysis in which weighting should be given among other pertinent circumstances to the size of the enterprise and the nature of its business. If a certain location is customarily the place where the annual general meetings or board meetings of an enterprise are held, it does not, by itself, necessarily mean that it is a place of management.
Corporate entities may have more than one place of management (in different countries). However, they can only have one 'place of effective management' (Art. 4 of the OECD Model). Nevertheless, other places of management than the 'place of effective management' may amount to a PE. For more information, see Tax Administration’s guidance Resident and nonresident tax liability of corporate entities.
Regarding work carried out by a director from their home office, it must be assessed whether the home office is a location in which independent decisions on the entire enterprise or its parts are made, considering the size of the enterprise and the arrangement of its management. Similarly to other employees, work carried out in a home office and elsewhere will be taken into account in the assessment when a director works remotely in part. When assessing decision-making on the entire enterprise or its parts, the targeting of the enterprise’s activities at Finland or its neighbouring areas is irrelevant when assessing the constitution of a PE based on the place of management. In a situation where independent decisions on the entire enterprise or its parts are actually made in a home office, whether the enterprise provides the director with an opportunity to use other office space is irrelevant.
In the case of a small foreign enterprise, i.e. a one person company, the self-employed individual who owns the enterprise can independently decide on where business activities are pursued and/or where the enterprise is led. In these situations, if the self-employed individual works permanently from a home office located in Finland and also leads the enterprise’s activities from there, a PE will be constituted for the foreign enterprise in Finland based on the place of management being located in Finland. In such a situation, a PE will also be constituted on the grounds that the self-employed individual has an office at home as referred to in the OECD Model Tax Convention. With regard to large enterprises with a large management structure, work carried out from home by an individual director constitutes a PE in Finland more rarely, because independent decisions on the entire enterprise or its parts are not usually made in the home office.
Exceptions due to restrictions
The impact of restrictions imposed by the authorities due to the coronavirus pandemic on the interpretation of tax treaties regarding the constitution of a PE has been discussed in the Finnish Tax Administration’s statement “COVID-19-related restrictions and their effects on the taxes on foreign corporate entities’ income”.
3.3 Construction and installation projects
3.3.1 Permanent establishment based on the duration of a project
A building site or a construction or installation project constitutes a permanent establishment only if it lasts longer than what the applicable tax treaty has defined as the time limit. In the Model Tax Convention, this time limit has been set at 12 months. In the Model and in the majority of Finland's tax treaties as well, the relevant provisions are found in Article 5, paragraph 3. This paragraph also defines the types of activities on which the time limit should be applied. The definition of the activities and the time limit deviates in a number of treaties from the Model Tax Convention (see chapter 3.3.2 below). For example, under the treaty between Estonia and Finland, a project site that lasts longer than 6 months constitutes a PE.
A site usually exists from the date when the contractor begins his work, including any preparatory work, in the country where the construction is to be established. In general, a site continues to exist until the work is completed or permanently abandoned. A site should not be regarded as ceasing to exist when work is temporarily discontinued. Temporary interruptions may be seasonal, due to weather conditions, or due to other reasons such as lack of materials or problems with the availability of workforce. Similarly, the duration of a site normally includes its finishing works after final inspection. However, if additional work is done due to a warranty clause (such as a guarantee repair job) the required time for warranty works is not included in the total duration of original site.
If a foreign company has several projects in Finland, each one of them should be treated separately from the perspective of the time limit. However, if various projects form a coherent whole commercially and geographically, the projects could be considered as a single unit and the durations could be summed together. Similarly, if a certain project is artificially divided up into several parts, the projects could be considered as a single unit.
A single construction or installation site may form a coherent whole commercially and geographically even if the orders have been placed by several persons (e.g. when the worksite is located in the same place or when buildings are constructed next to each other). Tax assessment practice has adopted the view that a coherent whole commercially and geographically may be formed, for example, when projects that are close to one another geographically are done for same client. However, no such coherent whole commercially and geographically exists in a case where it is evident that the projects in question have nothing to do with one another. A longer interruption between projects at the same location could be an example of such a situation. Similarly, a coherent whole commercially and geographically does not exist if projects based on separate contracts have no commercial link between them. A case by case analysis is required to assess whether a coherent whole commercially and geographically could be formed.
When considering the total duration of a main contractor's activity on a site, the period spent by subcontractors must be included in it. If the main contractor is responsible for the completion of the project to the buyer, the main contractor might have a PE in Finland even if a subcontractor wholly or partially does the work at the project site. As far as the subcontractor is concerned, a PE is constituted if its activities last more than required time limit, or if the business activity otherwise constitutes a PE.
3.3.2 Operations covered by the tax treaty paragraph on construction, building and installation
The tax treaty paragraph on construction, building and installation also covers demolition, renovation and repair of buildings, the laying of pipelines, and earthworks, excavation and dredging. However, excluded from the treaty paragraph are contracts that merely involve maintenance work or redecoration, such as painting or wallpapering. Nevertheless, painting and other finishing of surfaces may be treated as construction or installation work if they are part of the finishing of a project at a new construction site.
Provisions of a number of Finland's treaties lay down that supervision and assembly work must be governed by the treaty paragraph on construction, building and installation. In other words, special provisions apply to such work.
Any preparatory work of a construction or installation project in Finland is normally considered part of the project. Preparatory work may involve planning, design, supervision and consultations in Finland. Planning or supervision activity may in itself give rise to a PE by virtue of the treaty paragraph on construction, building and installation, even if they are carried out by another enterprise than the contractor who is responsible for the construction or installation. This interpretation is applied to situations in which the tax treaty between Finland and the domicile country of the contractor company has been signed after the Commentary version for 2003 was published (i.e. after 28 January 2003). When the applicable treaty is older, planning or supervision activity are normally not considered to amount to a PE due to the above-mentioned treaty paragraph if the activity is carried out by other enterprise than a contractor that is responsible for construction or installation. The latter interpretation is in line with the pre-2003 OECD Commentary. However, even in such cases, there is the possibility that the contractor must be treated as having a PE because of the general rule, or because of a dependent agent.
3.3.3 Permanent establishments by the general rule or by a dependent agent in construction, building and installation
Foreign companies engaged in construction, building or installation may have a PE in Finland because of the general rule (as noted above in 3,2). This requires that the conditions of the general rule are fulfilled. For example, there may be a place of business being used as the place of management for many building sites or construction projects. However, an office that has been set up at a building site does not amount to a PE under the general rule if it only serves that one site. Instead, the paragraph of the tax treaty on construction, building and installation must be applied to the case.
PEs in construction, building and installation industries may additionally arise because of the presence of a dependent agent (see 3.5 below).
3.4 Negative list (activities of preparatory or auxiliary character)
Article 5, paragraph 4 of the OECD Model Tax Convention enumerates some activities that may be regarded as preparatory or auxiliary. Such activities do not normally constitute a PE even if the other conditions were met. Tax treaties between Finland and other countries contain a similar list.
For example, advertising, collection of information, supply of information or scientific research may fall within activities of preparatory or auxiliary character. Similarly, the maintenance of a stock of goods or merchandise belonging to the enterprise for the purpose of storage, display or delivery may be a preparatory or auxiliary activity that does not constitute a PE. The activities has also been preparatory or auxiliary character in a situation where the employees of the company engaged in sales activities in Finland only present the company's products without participating in any way in the actual sales (see ruling KHO 2021:171 of the Supreme Administrative Court).
However, a case by case analysis based on circumstances of conducted business activities must be made in order to judge whether the activities are of preparatory or auxiliary character.
Activities cannot be considered preparatory or auxiliary if they make up an essential and significant part of the activity of the foreign company as a whole, or if they make up a business unit of their own. This restriction also concerns the activities enumerated above, such as advertising. When considering the character of the business activities it need to determine whether the activities carried on through the permanent establishment are the same than the core business of the company.
For this reason, the following activities normally cannot be considered preparatory or auxiliary:
- performance of functions closely related to the main business of the foreign enterprise (e.g. scientific research in circumstances where the patents resulting from it have a significant role in the business);
- active participation in sales efforts (for more information, see court rulings including KHO 1991/4893 ja KVL 1997/206);
- management functions;
- after-sales operations including repair and maintenance of sold merchandise;
- customization of goods and services for the special needs of certain clients; and
- offering goods or services in the interest of other parties than the head office of the foreign enterprise itself (e.g. advertising the products of another company of the group).
3.5 Dependent agent permanent establishments
The existence of an agent or a representative may constitute a PE for a foreign enterprise even if the enterprise or its representative has no fixed place of business in Finland. The majority of ‘dependent agent PEs’ involve selling products or services of a foreign head office in Finland.
A dependent agent may cause a foreign principal enterprise to have a PE if the agent regularly enters into contracts for its principal. This does not necessarily mean that such a representative has the formal right to sign contracts for the principal. As an example, it is sufficient that the agent receives orders and forwards them to the foreign enterprise being the principal if the latter routinely accepts the orders.
A dependent agent may be an individual as well as a corporate entity. However, it does not amount to a PE if the agent's work is of auxiliary or preparatory nature (see 3.4 above).
Moreover, it does not amount to a PE if the foreign enterprise operates its business through a broker, a general commission agent or any other agent who is independent. An independent agent is financially and legally independent from its foreign principal. An independent agent typically acts in the ordinary course of its business (the agent is responsible to its principal for the results of its work, but the principal does not control how the work is carried out) and carries the risks that relate to its business.
3.6 Operation of ships and aircraft in international traffic
The majority of Finland's tax treaties contain a special provision on the category of income that has been received through the operation of ships or aircraft in international traffic. This special provision lays down that the only country that can levy tax on such income is the country where the 'place of effective management' of the company is located. In the OECD Model Tax Convention and in the majority of Finland's treaties, the relevant provisions are found in article 8. The article concerns the income that is sourced directly from the transportation of passengers or cargo by ships or aircraft, and additionally the income from the operations that support them and are associated with them. In these situations, the income of a PE is usually outside the taxing rights of Finland even if there was, for example, a sales office of a foreign airline located permanently in this country. Instead, the taxing rights of Finland may concern other Finnish-sourced income of a foreign airline company, including income derived from immoveable property.
Moreover, the fact that, for example, an airline company has a PE in Finland may be significant from the perspective of employer obligations and the taxation of PE’s employees. For more information on employer obligations click Obligations of a foreign employer. More information also Operation of ships and aircraft in international traffic.
4 Income attributable to the Permanent Establishment
4.1 Attribution of income to a permanent establishment
When a nonresident foreign corporate entity has a PE in Finland, Finnish tax authorities have the right to impose income tax on all income attributable to the PE (§ 9, subsection 3, act on income tax). The guideline known as the ‘arm’s length principle’ is applied in determining the income attributable to the PE. Thus, what must be attributed to the PE are the income and costs that would have accrued to it if it were an independent company, operating a similar trade or business in similar circumstances. The foreign entity must pay income tax at the normal corporate tax rate (20%).
If the arm’s length principle has not been followed and the profits of the PE are therefore smaller or the losses are greater than they otherwise would have been, an amount that the PE would have made if the conditions had been similar to those between independent parties is added to the taxable income by virtue of § 31 of the act on assessment procedure (Verotusmenettelylaki 1558/1995) and the article on business income in the tax treaty (article 7 of the Model Tax Convention). Attribution of income to a nonresident foreign corporate entity’s PE is discussed in greater detail in the Tax Administration’s General guidelines for the attribution of income to permanent establishment.
4.2 Calculating the earnings of a permanent establishment
The earnings of a foreign corporate entity’s PE are calculated in accordance with the provisions of the Act on the Taxation of Business Income (Act on Business Tax). All the income generated from the PE’s business operations and taxable under the Act on Business Tax are attributed to the PE. The income also includes interest income, dividends, royalties and capital gains belonging to the permanent establishment. Expenses for generating and maintaining the PE’s income are deductible as provided by the Act on Business Tax. The deductible expenses include the PE’s payroll expenses. The PE’s expenses related to its operations are deductible, irrespective of whether they are generated in Finland or abroad.
However, no tax deduction is usually granted for interest or royalties paid out by the PE within the corporate entity itself (for example, in connection with the PE's dealings with the head office), because they are not regarded as amounts actually paid to a separate corporate entity. For example, if a foreign Company X has a PE in Finland, the PE cannot make deductible interest payments to Company X in its country of domicile, because both the payer and the beneficiary of the interest are parts of the same legal person. An exception from this rule could be made for example with the PEs of financial institutions.
4.3 Income derived from a partnership
If the nonresident foreign corporate entity receives profit-shares from a Finnish partnership, or profit-shares from a business partnership within the meaning of § 8 a of the Act governing hybrid mismatch arrangements (Laki eräiden rajat ylittävien hybridijärjestelyjen verotuksesta, 1567/2019), this is treated as income sourced to Finland and taxed accordingly.
According to the Supreme Administrative Court’s decision (KHO 2002:34), a business partnership’s income taxable as a partner’s income must be assessed based on the partnership’s business operations in the partner’s tax assessment. For example, if a Finnish partnership or a foreign partnership with a PE in Finland conducts business operations in Finland, a nonresident foreign partner’s share of its income must be treated as business income. If a foreign corporate entity is a partner in a partnership, its share of the partnership’s income must be reported on an income tax return in the same way as any other taxable income. However, the expenses for the production of the income share can be deducted in accordance with Finland’s tax legislation. If a taxable income share is not known when the tax return is being filed, the income share does not need to be filed. However, you must correct the tax return and file the income share as soon as you know the amount.
In accordance with § 9, subsection 5 of the act on income tax and differently from the above, when an agreement on the elimination of double taxation concluded between Finland and the country of residence of a nonresident silent partner of a limited partnership conducting only capital investment activity is applied, a portion corresponding to the partner’s share of the limited partnership’s income is taxable only to the extent that the income would have been taxable had it been received directly by the nonresident taxpayer. If the partner’s taxable income exceeds the said partner’s share of the partnership’s income, the exceeding part is treated as taxable income for the next 10 tax years as the income share accrues. A limited partnership conducting capital investment activity must be an alternative investment fund as referred to in the Act on Alternative Investment Funds Managers (162/2014), and its sole and actual purpose according to the partnership agreement must be capital investment activity.
§ 9, subsection 5 of the act on income tax is also applied when a portion corresponding to the nonresident taxpayer’s share of the income referred to in the subsection consists of shares of one or more Finnish or foreign partnerships’ income. A precondition is that an agreement on the elimination of double taxation concluded between Finland and the country of residence of a nonresident taxpayer is applied to the nonresident taxpayer and that the foreign partnership is registered in a jurisdiction or founded under the laws of a jurisdiction with which an agreement has been made on the exchange of tax-related information between authorities (§ 9, subsection 6, act on income tax).
Income in the form of profit-shares from a Finnish business partnership is also taxed in Finland as income in the nonresident partner’s hands if the requirements are fulfilled for applying the provisions of § 8 a of the Act governing hybrid mismatch arrangements. If these are fulfilled, then the provisions of § 9, subsection 5 and subsection 6 of the act on income taxation are not applicable. The provisions of § 8 a of the Act on hybrid mismatch concern nonresident partners that are legal persons or are legal arrangements. The provisions are applied if, under the legislation of the nonresident partner’s country of tax residence, the Finnish business partnership is treated as a separate taxpayer (a reverse hybrid entity), and due to this interpretation, the partner’s country of tax residence imposes no taxes on the profit-share. It is also required that the partner receiving the income has direct or indirect (more than 50%) controlling power over the hybrid entity, together with the other partners in the entity.
However, the Act on hybrid mismatch is not applied on the nonresident partner’s taxes if another legal provision makes the received profit-share taxable in Finland. In the same way, the Act is not applied on the nonresident partner’s taxes if the hybrid entity is an alternative investment fund as referred to in the Act on Alternative Investment Funds Managers, has a large number of shareholders, and has a diversified portfolio of securities. For more information on how the provisions of § 8 of the Act on hybrid mismatch are applied, see (chapter 9 of) the Tax Administration’s guidance “Taxation of certain cross-border hybrids” - Eräiden rajat ylittävien hybridijärjestelyiden verotus (in Finnish and Swedish, link to Finnish).
4.4 Business losses attributable to a permanent establishment
The provisions of the act on income tax concerning loss balancing are applied to permanent establishments. For example, losses from a business source of income attributable to a PE can be deducted from the PE’s operating profit in the course of the next 10 years as profits accrue.
If more than 50% of the shares of the PE’s head office change hands directly or indirectly, the PE cannot deduct the losses generated in or before the year when the ownership changed except with special permission (§ 122, subsection 1, act on income tax). However, a listed company is entitled to deduct its losses after the change of ownership without special permission if more than 50% of the company’s non-publicly traded shares have not changed hands in the manner described above (§ 122, subsection 2, act on income tax). More information about change of ownership and applying for special permission is available from the Tax Administration guidance on allowable loss and change of ownership (available in Finnish and Swedish, link to Finnish).
On certain conditions, the PE’s allowable losses can be deducted in the taxation of a tax resident foreign corporate entity if a nonresident foreign corporate entity whose PE the losses are attributed to becomes a resident taxpayer under the provisions of § 9, act on income tax. .For more information a foreign corporate entity’s tax residency status, see the Tax Administration guidance on Resident and nonresident tax liability of corporate entities.
4.5 Transfer of a permanent establishment’s assets or termination of operations
Assets of a PE located in Finland may be transferred to the country of residence of the foreign corporate entity or to a PE located in another country. The operations of a PE located in Finland may also be closed down, in which case its assets can be sold or transferred to the foreign corporate entity’s country of residence.
If the business of a PE located in Finland is transferred to another country or if a foreign corporate entity transfers assets from its Finnish PE to its head office located in another country or to its permanent establishment located in another country such that Finland no longer has the right to collect tax on those assets, the exit value of the assets minus undepreciated acquisition cost is treated as the PE’s taxable income (§ 51 e, Business Tax Act). Read more about exit tax and related postponement of payment in the Tax Administration’s guidance on exit tax (available in Finnish and Swedish, link to Finnish).
If a PE is terminated by selling its assets, the selling price of the assets must be added to the income of the PE for the last tax year. Undepreciated acquisition costs (in tax accounting) of the assets may be deducted from the selling price.
As an alternative, the PE can be converted into an independent limited-liability company under the provisions of § 52 d-e, Business Tax Act. Such conversion is based on the principle of continuity, and it is not treated as a liquidation. The provisions on the transfer of business may be applied to a company domiciled in an EEA country, provided that the other conditions are met. EEA countries are the countries of the European Union plus Iceland, Liechtenstein and Norway. The provisions may also be applied to such conversions if the foreign company is a resident of a country that has a tax treaty with Finland with a clause that prevents discriminatory tax treatment of a permanent establishment (see ruling KHO:2013:169 of the Supreme Administrative Court. Anti-discrimination clauses are normally found in article 24). When a PE of a foreign company is converted into an independent limited-liability company, any approved allowable losses are transferred to the new company under § 123 a of the act on income tax on the conditions laid down in § 119, if the foreign company is a resident of an EU country (see ruling KHO:2013:169 of the Supreme Administrative Court, in which the allowable losses were not transferred).
5 Income tax treatment if a nonresident foreign corporate entity has no permanent establishment
5.1 Categories of income
This chapter discusses the types of income that occur most frequently in foreign-held entities, and which are within Finland's taxing rights although the foreign company does not have a permanent establishment in Finland. However, for guidance regarding income derived from partnerships, see 4.3 in the previous chapter.
5.2 Income derived from immoveable property and residential units
National tax rules provide that Finland has the taxing rights on income derived from real property and housing-company flats and apartments if they are located in Finnish territory. By extension, income types including capital gains and rental income are taxable, even if the nonresident foreign corporate entity has no PE in Finland (§ 10, act on income tax). The existing tax treaties usually impose no restrictions of Finland’s taxing rights in this regard, because tax-treaty provisions are generally based on the idea that income from real property should be taxable in the country of its location.
Under Finnish law, shares in a Finnish housing company are not considered real property. However, most of Finland’s tax treaties allow Finland to tax income derived from housing-company shares, if the apartments (that the shares give right to) are located in Finland. The foreign entity must pay income tax at the normal corporate tax rate (20%)
If a nonresident foreign corporate entity has income that is derived from real property or units of a housing company, it is expected to report it on the tax return, without any prompting on the tax authorities’ part. Matters associated with assessment procedures and the dealing with any non-compliant behaviour are subject to the same rules as where the foreign entity has a PE (for more information, see chapter 6).
5.3 Dividends, interest and royalties
For comprehensive guidance on this income category, click Payments of dividends, interest and royalties to nonresidents. The payers of these kinds of income are expected to collect tax at source, at rates defined in the Finnish national legislation or in tax treaties. If the income consisting of dividends, interest and royalties is attributable to a PE of a foreign corporate enterprise, Finland collects tax on it as part of the PE income, and the PE must report it when filing its tax return (see 4.3 above and 6.1 below).
Receipts of interest in Finland are not taxable income to a nonresident foreign corporate entity if the interest is paid for a balance of commercial accounts receivable / accounts payable, or it is a bank deposit, a government bond, debenture, other similar instrument or a loan from a foreign country to the Finnish operation. Payments for equity and share capital are not considered interest. Furthermore, to be exempt from income tax, receipts of interest should not be attributable to the business of a nonresident foreign corporate entity's PE (§ 9, subsection 2, act ono income tax).
5.4 Securities trading and sales of other moveable property
Investing in Finnish securities and other moveable property and trading them through a place located in a foreign country does not give rise to a PE in Finland for a foreign enterprise. Therefore, the resulting income will not be taxed in Finland as business income. However, the income may be within Finland's taxing rights, by virtue of national tax rules that concern other than PE income and by virtue of the applicable tax treaty provisions that govern other types of income (see 5.3 above). Moreover, the income may be within Finland's taxing rights in a situation where a foreign nonresident receives Finnish-sourced income from a partnership (see 4.3 above).
Capital gains received from sales of securities or moveable property are usually not taxable as a nonresident foreign corporate entity's income in Finland, because the income is not mentioned in § 10 of the act on income tax as income received from Finland. However, unless the relevant tax treaty prevents Finland from taxing the income, if one or several Finnish-located real property units make up more than 50 percent of the assets of a housing company, any other joint-stock company, or cooperative society, the capital gains will be taxable if a sale of shares in such an entity, or a sale of real property has resulted in a profit (§ 10, paragraph 10, act on income tax).
6 Assessment procedure, tax control, and consequences of taxpayer's non-compliance
6.1 Income tax returns
Nonresident foreign corporate entities receiving income from Finnish sources must file a tax return on their initiative, without prompting, whenever they receive income that is taxable in Finland and taxation has not been assessed at source. If a nonresident foreign corporate entity has a PE in Finland, it must file a tax return every year in order to report the revenues, expenses, assets and liabilities of the PE.
In case the activities in Finland do not give rise to a permanent establishment, tax return must be filed if the company has income derived from real property (either a real estate unit or shares in housing companies) located in Finland, as well as if the foreign entity has tax domicile in a country that has no bilateral tax treaty with Finland, and it has business or trade income received from Finland.
The financial statements must be delivered to the Tax Administration as an enclosure to the party’s income tax return. For more information see
- Decision on filing a tax return and a correction return on real estate information and
- Decision on information to be filed on a tax return (available in Finnish and Swedish, links to Finnish).
Foreign corporate entities must additionally provide more information if the authorities should ask them to do so, in order to facilitate statutory tax assessment or later adjustments to it (§ 11, act on the assessment procedure).
Both the taxpayer and the Tax Administration are legally required to participate in the efforts that must be made for clearing up any tax matters. The party that has better opportunities to obtain information should provide it (§ 26, subsection 4, act on the assessment procedure). Taxation must be carried out using the facts that are at the disposal of the tax authority, received from the taxpayer and third-party sources (§ 26, subsection 5, act on assessment procedure).
The financial year of a nonresident foreign corporate entity's PE is the same as that of the head office. The deadline is four months after the end of the month when the financial year closes. It is important to specify the financial year (also known as 'accounting period' and 'accounting year') for the Tax Administration when the foreign enterprise is registered in Finland. If the end date should change, the company must notify the Tax Administration.
Corporate taxpayers must file their income tax returns electronically to the Tax Administration. For more information on filing tax return: Income tax returns for foreign corporations.
PEs of foreign enterprises are expected to enclose a profit and loss account and balance sheet with their tax return. Assets and liabilities are also to be reported. If submitted documents are in a foreign language, a Finnish or Swedish translation is usually necessary. The translation should be made by an authorised translator or other qualified translator. The tax authorities have a right to request a translation if necessary.PEs of foreign enterprises are expected to enclose a profit and loss account and balance sheet with their tax return. Assets and liabilities are also to be reported. If submitted documents are in a foreign language, a Finnish or Swedish translation is usually necessary. The translation should be made by an authorised translator or other qualified translator. The tax authorities have a right to request a translation if necessary.
6.2 Tax control and consequences of taxpayer's non-compliance
Foreign and domestic corporate entities alike are subject to tax control, constantly exercised by the Finnish Tax Administration. Control consists of assessment procedure, tax audits, taxpayer guidance and monitoring of tax payments. Similarly, the ongoing exchange of information between Finnish and foreign tax authorities is a part of tax control. It is based on international conventions and mutual cooperation with the authorities.
The Tax Administration may impose a late-filing penalty on foreign corporate entities that neglect their duty to report (§ 33, act on the assessment procedure), or may impose a tax increase (§ 32, 32a, 32b, act on the assessment procedure) on the same grounds as on any domestic entity. For example, if an entity has failed to file a tax return on time, the Tax Administration may impose a punitive tax increase or late-filing penalty in connection with the assessment. More information on penalty fees imposed as a consequence of non-compliance in reporting is available in Tax Administration’s instruction Seuraamusmaksut tuloverotuksessa (in Finnish and Swedish, link to Finnish).
Taxable income of a nonresident foreign corporate entity may be estimated if it has a PE in Finland and it fails to file a tax return, or files an incorrect tax return that cannot be used in tax assessment, even if corrections were made. If tax assessment is based on an estimate, an additional punitive tax increase will be imposed. Separate legal rules of the Penal Code on tax crimes may be applied if negligence is considered deliberate.
6.3 Accounting and auditong obligations
In accordance with Chapter 1, § 1b, subsection 1 of the Accounting act (Kirjanpitolaki (1336/1997)), foreign legal persons are under obligation to keep accounting records for the business or trade they operate. In accordance with subsection 2, the provision also applies to death estates, investment funds and undertakings of collective investment, trusts and comparable legal entities and other foreign sets of assets that have been dedicated for a special purpose.
After the end of every year, the party that must set up accounting must prepare a closing of its books. These financial statements must be delivered to the Tax Administration, as an enclosure to the party’s income tax return. In accordance with Chapter 1, § 1b, subsection 6 of the Accounting act, the party is also under obligation, if the Tax Administration has requested it, to deliver any further information that the Tax Administration may need in order to carry out its tasks as required by law. Whenever an item of information is not available in Finnish or Swedish, the Tax Administration can request translation and the information must then be translated into Finnish or Swedish before delivery.
In accordance with Chapter 1, § 1b, subsection 3 of the Accounting act, “financial statements within the meaning of the Accounting act” are annual financial statements that have been prepared as provided in the Directive 2013/34/EU on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings. This means that it is sufficient if the foreign company’s financial statements comply with the legal provisions in force in a country of the European Economic Area. Moreover, also in accordance with Chapter 1, § 1b, subsection 3 of the Accounting act, if the company’s financial statements comply with IFRS, the International financial reporting standards, they are “financial statements within the meaning of the Accounting act”.
In addition to the above, the following are deemed as “financial statements within the meaning of the Accounting act”: financial statements drawn up as is customary in the United Kingdom, financial statements that comply with the Generally accepted accounting principles of the United States of America (US GAAP), and financial statements drawn up as is customary in Japan (Japan GAAP) (in reference to the Finnish Government’s Proposal no 221/2021, page 10).
In accordance with Chapter 1, § 1b, subsection 3 of the Accounting act, “financial statements within the meaning of the Accounting act” can also mean a foreign set of financial statements not based on any of the norms listed above, but still giving a true and fair view, therefore meeting the requirements of the norms.
If a legal person from a country outside of the European Economic Area has not drawn up financial statements, or if its set of financial statements fails to meet the requirements as provided in Chapter 1, § 1b, subsection 3 of the Accounting act, the legal person must prepare a specific set of financial statements, for the trade or business it has operated in Finland, adhering to the rules found in Chapter 3 of the Accounting act.
A foreign corporate entity’s branch office registered in Finland must conduct an audit in Finland unless the entity’s financial statements are prepared, audited and published in accordance with the rules of the EU or in an equivalent manner (§ 1, subsection 1, Auditing Act). The auditor’s report must be attached to the tax return. Special provisions apply to the auditing of a branch office of a foreign credit or financial institution and the auditing of a commercial agency of a foreign insurance company.
7 Elimination of double taxation
When a nonresident foreign corporate entity generates income in Finland it may be subject to taxation not only in Finland but also in its country of domicile and registration. Double taxation is usually eliminated in the domicile country (country of residence). This is done according to the provisions of the applicable tax treaty and according to the national tax rules of the country of residence. For this reason, to gain more information on the elimination of double taxation, foreign taxpayers should consult their country of residence. The country can either credit the Finnish tax or treat the Finnish-sourced income as tax-exempt.
8 Tax liability of a company representative
8.1 Representative entered in Trade Register
The obligation of foreign corporate entities to appoint a representative is laid down in the provisions of Act on the Right to Carry on a Trade (elinkeinolaki). The Trade Register requires that a start-up form should be submitted if a foreign entity opens a Finnish branch office (sivuliike) or other comparable place of business. The branch must have a representative with the right to receive official communications, including subpoenas, on behalf of the foreign entity. The representative’s name and contact information are entered in the Trade Register.
The appointed representative may be domiciled in an EEA country if a foreign corporate entity or a foundation has been organized under the laws of an EEA country, and it has its headquarters, tax domicile or head office in an EEA country. However, if the above requirements are not met, the appointed representative should be domiciled in Finland.
8.2 Representative’s responsibility for tax payments
Pursuant to § 52, act on the assessment procedure, the representative of a foreign entity may be liable for income taxes of the entity. This liability concerns taxes that are levied on natural and legal persons resident outside the EEA. Consequently, a representative is not liable for taxes levied on corporate entities that are residents of an EEA country.
A representative entered in the Trade Register is liable for tax levied on a branch of a foreign corporate entity, if the entity is resident in a non-EEA country. If a non-EEA resident credit institution has a branch office in Finland, the director of the branch is liable for the tax levied on the credit institution.
8.3 Limitations of the representative's tax liability
The representative’s tax liability only concerns an appointed representative whose name is entered in Trade Register records. Consequently, such a representative will carry no liability for taxes that have been levied when the representative did not act as the representative of the entity in question (see ruling KHO 2006:57).