Taxation of pension income in cross-border circumstances

This is an unofficial translation. The official instruction is drafted in Finnish (Eläketulojen verotus kansainvälisissä tilanteissa, record number VH/417/00.01.00/2021 ) and Swedish (Beskattning av pensioninkomster i internationella situationer, record number VH/417/00.01.00/2021) languages.

The memorandum discusses the income taxes of persons resident in Finland who receive pensions from abroad, and conversely, the income taxes of those who receive pensions from Finnish payors while residing in other countries.

1 Introduction

Resident individuals in Finland can be beneficiaries of retirement income, i.e. pensions, sourced to other countries. Likewise, people who are tax residents of foreign countries can receive pensions from sources in Finland.

After the beneficiaries have received the income that falls under the above categories, the rules to control its tax treatment are found in Finland’s internal legislation and in the tax treaty, if any, concluded between Finland and the country of source, or between Finland and the beneficiary’s country of tax residence. Finland generally has the taxing rights on pensions paid from foreign countries to beneficiaries in Finland, and also the taxing rights on the pensions paid out from Finland to other countries. However, internal legal provisions and the provisions of the relevant tax treaty sometimes restrict these rights.

The articles of tax treaties refer to the State where the item of income has arisen as the “source state”. Reason for designating one State as the “source” include: employment was exercised there, the payor’s domicile is located there, and other reasons. This memorandum uses the word “source” to refer to the country from where the pension income is paid to the beneficiary. The “country of residence”, in turn, is the country where the individual beneficiary is resident within the meaning of the tax treaty.

The contents of this memorandum describe the impact of tax-treaty provisions on how taxes are assessed in Finland.  We cover both the taxes imposed on an individual resident of Finland who receives foreign-source pension and the taxes imposed on an individual resident of a foreign country who receives pension from Finland. This memorandum also contains a concise guide on healthcare contributions.

2 Resident and nonresident tax liability

Under § 9, subsection 1.1 of the act on income tax (Tuloverolaki 1535/1992), natural persons are tax residents of Finland if they live in this country. Under § 11, subsection 1 of the act, an individual is considered to live in Finland if he or she has their “permanent home and abode” in Finland, or if he or she stays in Finland continuously for more than 6 months.  Residents must pay Finnish tax on their income, both on income sourced to Finland and on income sourced to other countries.

People who have not lived in Finland during the tax year are treated as nonresident taxpayers, having a limited liability to tax (§ 9, subsection 1, line 2 of the act on income tax). Foreign citizens living outside Finland are considered tax nonresidents in Finland. Foreign citizens living outside Finland will remain nonresidents if they arrive in Finland but remain present in this country only for 6 months at most. Finnish citizens who have left Finland and been present in a foreign country for at least 3 years, or who have provided proof before the expiration of the 3-year limit that they did not have any substantial ties with Finland during the tax year are also considered nonresidents (§ 11, subsection 1 of the act on income tax). The legal provisions contain no exact definition of “substantial ties”. Instead, case-law has been used as a guideline for how substantial ties are determined. Nonresident individuals are only liable to pay tax in Finland on Finnish-source income.

Even if an individual is a tax resident of Finland under the Finnish act on income tax, he or she can additionally, due to living in another country, be treated as an individual taxpayer with full liability to tax on his or her worldwide income in that other country. The above circumstances create a situation known as double residency.  The provisions of tax treaties require that one or the other Contracting State give up its rights to tax the double resident’s worldwide income. The provisions that address the double residency problem are normally found in Article 4, paragraph 2 of the treaty. The overall structure of the treaties is based on the principle that an individual taxpayer can only be a tax resident of one of the Contracting States.

For more information, see Tax residency, nonresidency, and residency in accordance with a tax treaty – natural persons.

3 The pension income concept

The system in Finland is primarily based on an earnings-related pension, which is related to the beneficiary’s past employment. In addition, the minimum-level categories of retirement income are called “national old-age pension” and “guarantee pension”. The above constitutes the mandatory coverage. Various arrangements made on a non-mandatory basis can complement it Finland’s tax legislation contains no full enumeration of the categories of income that should be treated as pension income when the beneficiary’s taxes are assessed. Accordingly, some questions open to interpretation may surface if an individual beneficiary receives various forms of indemnity on a long-term basis. The tax authorities rely on established tax-assessment practice, which in turn is largely based on the existing tax rules on control different types of payments in the hands of beneficiaries. For example, under established practice of tax assessment, although the circumstances involve no formal decision on paid-out pension, an indemnity paid to beneficiaries due to their loss of earnings – generally based on motor traffic insurance and medical patient’s insurance contracts – is taxed as pension income. Its taxation as a form of pension begins one year after the date when the insured accident occurred. 

Tax treaties contain no overall definition of the classes of income that should be treated as pensions. Instead, every Contracting State is expected to provide an adequate definition based on its national legislation. For this reason, sometimes the Contracting States have contradictory qualifications, for example, a type of income is defined as pension in the source country while it is defined as a social benefit in the residence country. Qualification, for purposes of the treaty, has an impact on how the Article and provisions of the relevant treaty should be chosen. Moreover, under Finnish tax rules, the way an item of income is classified will affect the tax-deductions that become available for the individual beneficiary. For example, the deduction called “pension-income deduction” (eläketulovähennys; pensionsinkomstavdrag) is not available if Finland treats the income as a social benefit while the source country treats is as a pension.

The practice in Finland has been to tax all receipts of money as pensions that coincide with the definition of pension income under Finland’s national legislation. If a resident individual receives some income sourced to a foreign country, and it would under Finland’s national legislation be classified pension income, the Finnish Tax Administration imposes taxes on it in accordance with the tax rules on pensions, and the qualification that prevails in the source country for the income has no importance. In the same way, payments to overseas beneficiaries from a Finnish payor that are treated as pensions here are taxed in Finland in accordance with the tax rules on pensions, if the relevant tax treaty’s Articles on pensions give Finland the taxing rights.

For more information, see “Taxation of pension income” - Eläketulon verotus (in Finnish and Swedish).

4 Tax treaties

4.1 Introduction to treaty Articles on pensions

Tax treaties affect the treatment of income when pensions are paid from foreign countries to Finland and vice versa. The provisions that control the way taxing rights are allocated to either Contracting State are found in treaty Articles 18 and 19. However, in addition to these two Articles that apply primarily, the Article on other income (which in most treaties is Article no 21) is sometimes applied because the provisions of Articles 18 and 19 cannot be applied on a particular category of pension income.

In situations where a tax treaty applies on the pension’s tax treatment, the important factors include whether or not the pension is based on past services rendered to the public sector or on past employment with a private-sector employer. Moreover, the beneficiary’s citizenship sometimes has an impact on how taxing rights are allocated. However, treaty provisions do not affect the way insurance contributions must be paid. Finland has signed tax treaties with some 70 countries. The Tax Administration’s website www.tax.fi shows a list of Finland's tax treaties in force. Finland’s Ministry of Finance maintains a page that indicates the current situation regarding treaties that are being amended, and treaties that are currently under negotiation.

The majority of the treaties contains the provisions on pensions in their Article 18. Three main categories are covered:

• Pensions based on social security legislation
• Other pensions based on past employment in the private sector, and
• Annuities

The treaty provisions to control the taxes on pension earned from the public sector are found in Article 19. Usually, the source country has the right to tax pensions if the individual beneficiary had earned them during service in a public-sector organisation. However, if the beneficiary is also a citizen of his or her country of tax residence, only the country of residence is allowed to tax these pensions. Treaty Articles often set out rules that exclude the pensions earned during employment with public entities that conduct a business operation, so that the rules on pensions from service in the public sector do not apply.

It may be unclear whether the provisions of Article 19 – government service – or the provisions of Article 18 – pensions – should be applied. In the majority of Finland’s treaties with other countries, the government-service Article has priority while the Article on pensions is secondary. One of the consequences of this order of priority is that Article 19 on government service is applied to the tax treatment of pensions within the meaning of the act on pensions of the public sector (Julkisten alojen eläkelaki (81/2016)) although the payment of pensions is based on social-security laws.  An exception to this is constituted by pensions earned during employment with public entities that conduct a business operation, because Article 18 – pensions is applicable by virtue of a specific rule to that effect.

4.2 Pensions based on legislation on social security

4.2.1 Statutory pensions due to old age, inability to work, and unemployment

This category of pensions is among those based on social-security laws, and treaty Article 18 is applied. The tax treaties in force contain several different wordings when pensions based on legislation on social security are referred to, but the practice has been to interpret the wordings as having just one meaning. When a Contracting State pays out pensions based on social security, the source country is normally the country that taxes the income.

4.2.2 Pension based on mandatory accident insurance

The pension based on the act on occupational diseases and accidents (Työtapaturma- ja ammattitautilaki (459/2015), previous Finnish statute up to 31 Dec 2015 was called “tapaturmavakuutuslaki” (608/1048)) is based on legislation on social security. Accordingly, Article 18 applies.

4.2.3 Employer-provided additional pension coverage

Some retired individuals may have an additional pension contract made during the period when the old, now repealed Act on employment pension (Työntekijäin eläkelaki (395/1961)) was in effect, i.e. an employer-paid contract, registered as an additional benefit referred to in § 11 of the repealed Act. If you receive pension by virtue of a distribution from this type of contract, it is taxed the same way as pensions based on legislation on social security (under the ruling KHO 1994-B-555). Accordingly, Article 18 applies.

If the pension was not registered as an additional benefit referred to in § 11 of the repealed Act, the tax treatment is the same as that of annuities, not pensions based on social security. If the tax treaty to be applied contains no provisions on annuities, the tax treatment is based on the view that the additional benefit is linked to the individual recipient’s past employment. However, an additional benefit that has not been registered may become taxable as a pension based on social security by virtue of the individual beneficiary reaching retirement age. At that point in time, the additional benefit ceases, and the individual’s statutory pension period begins.

4.2.4 Survivors' pension

Under Finnish law, the pension type known as survivors' pension (perhe-eläke; familjepension) can be paid to a deceased person’s surviving spouse and children. The distribution may be based on the deceased person’s (spouse’s or parent’s) earnings-related pension, pensions earned during self-employment, or based on national laws governing old-age pension.

When a tax treaty is applied, the Article that applies on survivors' pensions is the same that would apply to the deceased spouse’s or parent’s receipts of the underlying pension. If survivors' pensions are distributed, they are treated as being based on social-security legislation, regardless of the category of the underlying pension, which may be earnings-related or based on self-employment or on national laws on old-age pension. 

If the tax treaty contains no provisions that would control the treatment of pensions based on social security, treaty provisions on pensions earned during past employment in the private sector can become applicable to survivors' pensions. However, if the underlying pension for the survivors' pensions is the national old-age pension, it cannot be regarded as being based on past employment. If the tax treaty contains no provisions on pensions based on social security, only the usual provision on past employment in the private sector, the Article on other income is applied on survivors' pensions.

Some treaties (including the Nordic Tax Treaty) do not differentiate between pensions based on social security and pensions earned during past employment in the private sector.  In this case, the treaty Article on pensions is applied on survivors' pensions, regardless of the category of the underlying pension, which may be earnings-related or based on self-employment or on national laws on old-age pension.

Some treaties provide that the Contracting State’s taxing rights are dependent on the beneficiary’s citizenship. Where survivors' pensions are distributed, the citizenship of the actual beneficiary is important in this regard, not the deceased person’s citizenship.

4.2.5 Other distributions based on social-security legislation

In addition to the distributions discussed in the previous chapters and sections, the tax treatment establishing a link to social-security legislation extends to a number of recurring payments that are called pensions and annuities. They include the distributions based on the act on war veterans’ injuries (Sotilasvammalaki (404/1948)) and on the act on occupational diseases (Ammattitautilaki (1343/1988, now repealed)). In general, the tax-treaty Article on pensions (no 18 in almost all treaties) provides all the tax rules to be applied on all other distributions based on social security. Examples of these distributions – which are not pensions – include unemployment relief and the government-paid daily allowance due to sickness.

However, even if a recurring payment were based on social security, it does not fall under the category, within the meaning of the tax treaty, of distributions based on social-security legislation if the payment is part of the individual beneficiary’s remuneration for work performance. An example of such remuneration is the Finnish public support paid to family caregivers (omaishoitajan tuki; stöd för närståendevård). The reasoning is due to the fact that the useful rewards from the rendered social services go to a different person, not to the beneficiary of the amount.

4.2.6 Pension based on motor vehicle liability insurance

The tax treatment of pensions from motor vehicle insurance involves the principle that they are pensions not based on social security. In addition, these pensions cannot be seen as being linked to past employment. As a result, the main approach is to apply the treaty Article on other income (no 21 in most tax treaties).

Some treaties (including the Nordic Tax Treaty) do not differentiate between pensions based on social security and pensions earned during past employment in the private sector.  In this case, the treaty Article on pensions is applied to pensions based on motor vehicle liability insurance.

4.2.7 Other pensions based on past employment in the private sector

If the tax treaty contains no provisions that would control the treatment of pensions based on social security, the residence country taxes the distributions based on employment in the private sector. This means that treaty Article 18 cannot become applicable on national old-age pensions, pensions based on self-employment and agriculture (under the Finnish acts called YEL and MYEL, respectively). Instead, the treaty Article on other income is applied because these pensions are not linked to past employment. The above rule also applies to situations where the pension’s period of accrual has been a period when no wages were paid to the individual beneficiary. This kind of periods may be related to academic studies that were later finished as the individual earned a graduate degree.

Some of the treaties that Finland has signed with other countries, including the Nordic Tax Treaty and the Finland–UK treaty, contain no definition of pension income as having a connection with past employment. With these treaties, the provisions on pensions (in Article 18 of the Nordic treaty and Article 19 of the Finland–UK treaty) are applicable on all amounts that beneficiaries can receive, which under national legislation are defined as pensions – thus also including the motor traffic liability insurance-related pensions. In accordance with the provisions of the above treaties, the source country is the Contracting State with the taxing right with respect to pensions.

4.3 Annuities

Many of the treaties that Finland has signed with other countries have specific provisions on annuities and a definition of annuity in Article 18. The definition is that “annuities” means stated sums paid periodically at stated times, during life or a specified or ascertainable number of years, under an obligation to make the payments in return for adequate and full consideration (in a sense, annuities are “pensions that someone has bought”). In some circumstances, there are a recurring payments to the beneficiary that bear the name of annuities although it does not match the tax-treaty definition. Likewise, distributions based on social-security legislation may also be called annuities. Finnish legislation from earlier years and Finland’s older treaty texts may use the word “annuity”–elinkorko although the meaning is approximately the same as “pensions”.

How taxing rights on annuities are allocated to Contracting States varies from treaty to treaty. The treaties can also contain some additional conditions and a maximum limit that restrict the taxing rights.

4.3.1 Individual retirement insurance contracts and other pension arrangements on a non-mandatory basis

Most distributions from these arrangements fall under the category of income called annuities in tax treaties. An arrangement of non-mandatory character i.e. “voluntary” pension insurance can be made by the individual himself or by the employer company. If the individual is the contracting party who entered into the pension insurance contract, and the relevant tax-treaty Article on pensions only contains provisions on the taxation of amounts based on past employment and the treaty contains no provisions to control annuities, the treaty Article to be applied on the distributions is the Article on other income.

If the treaty contains provisions on annuities, these provisions apply on the distributions from employer-provided individual pension insurance contracts or from collective pension insurance contracts, as both types of contracts are non-mandatory. The treaty provisions, if any, on annuities also apply on other retirement-income arrangements, including distributions from capital redemption policies and distributions paid out by private pension funds. Some retired individuals may have an additional pension contract that has been signed under the period when the old, now repealed Act on employment pension (Työntekijäin eläkelaki (395/1961)) was in effect, i.e. the contract is registered as an additional benefit referred to in § 11 of the repealed Act. This type of contract is equated with statutory pension, based on legislation on social security (see section 4.2.3 of this memorandum).

For more information on pension contracts and on distributions from individual retirement accounts, see the Tax Administration’s instruction “Taxation of income from long-term savings agreements and individual retirement accounts” — Pitkäaikaissäästämissopimuksen ja vapaaehtoisen yksilöllisen eläkevakuutuksen verotus (only in Finnish/Swedish).

4.4 Relief for international double taxation of pensions

4.4.1 The credit method and the exemption method

It is a common occurrence that both the source country and the beneficiary’s country of residence levies taxes on pensions. Then, the individual beneficiary’s country of residence should relieve any double taxation. If Finland is the country of residence for treaty purposes, Finland is the country that relieves double taxation in accordance with tax-treaty provisions, either through the credit or the exemption method. (For more information, see Relief for international double taxation.) More rarely occurring situations involve treaty provisions that lay down that the pension is fully exempted from taxes in Finland, which leaves the tax treatment of the beneficiary’s other income unaffected by the receipts of that pension.

The country of residence takes action to relieve double taxation only if tax has been withheld in the source country in full accordance with the provisions of the tax treaty. If under the treaty, the pension will only be taxed in the country of residence, but a withholding was carried out in the source country, the country of residence takes no action to relieve double taxation. This means that if the beneficiary paid too much tax to the source country because of the excessive withholding, he or she must request a refund from that country’s tax authority. To do so, the beneficiary must contact the tax authority and ask for instructions. For a further discussion of the effects on Finnish taxes of a tax assessment carried out in a foreign country that has not been in line with the relevant treaty, see the Tax Administration’s “Taxation abroad contrary to tax treaty” guide.

Sometimes the source country authorities interpret the category of the income in a mismatched way from a Finnish perspective.  For example, there may be an item of income that under the pensions Article of the treaty must be taxed in Finland only – as Finland regards is as pensions – but the source country has treated the item of income as relating to some other treaty Article. By virtue of that interpretation, the source country believes to have the taxing rights. Under the circumstances, Finland would recognize the source country’s interpretation of how the item of income should be classified. Accordingly, Finland would take action to relieve the resulting double taxation although there is a difference between Finland’s and the other Contracting State’s interpretation. The method of relief depends on the treaty Article that the source country has chosen to apply on the income (for more information on the rules affecting tax treatment in Finland, see also chapter 3 of this memorandum).  

If the source country of the pension has no tax treaty with Finland, the entire receipts of the income in the Finnish beneficiary’s hands are subject to tax. The Finnish Tax Administration will remove any double taxation under the credit method. The provisions of § 3 of the act on the elimination of international double taxation (1552/95) lay down the principle that only the taxes can be credited that were paid to a foreign sovereign state. Accordingly, no taxes that have been paid to a local municipality, federal state, province, etc. are credited.

4.4.2 Tax-treaty articles on reverse crediting

If a Finnish payor is paying pensions as required by social-security legislation to an individual beneficiary who is a tax resident of Italy, Switzerland or Thailand, then, in spite of being the source country, Finland is the country that takes the necessary measures to relieve double taxation. Correspondingly, if the beneficiary is a Finnish tax resident and the country of source is Thailand or Italy, the measures are taken by the country of source.  This is called reverse credit.

As of 2019, reverse crediting is additionally applied on the pensions within the meaning of Article 17, paragraph 2 of the treaty between Finland and Spain. This means that reverse crediting is applied to almost all pensions paid from Finland to tax residents of Spain, the only exception being the pensions related to past service in the public sector. However, reverse credits also apply to the pensions paid by public entities that operate business. Reverse credits are not applicable on pensions based on motor vehicle liability insurance because this category of pensions is only taxable in the beneficiary’s country of residence.

The effective outcome of reverse credit, in the case of income in the form of pensions, benefits or annuities from a Finnish source, is that after the tax paid to the country of residence has been subtracted on this income, Finnish tax authorities assess the taxes in Finland on it.  However, the credit cannot be greater than the amount of taxes to be imposed in Finland on the same income. The rules on foreign tax credit, as provided in the act on elimination of international double taxation (Laki kansainvälisen kaksinkertaisen verotuksen poistamisesta, 1552/1995), are not applicable because the said act only controls the double taxation caused by income sourced to a foreign country.

4.4.3 The ceiling rule in tax assessment

Subsection 3 of § 136 of the act on income taxation is a ceiling rule that sets out the maximum level of taxes to be imposed. The rule is applied when a tax resident of Finland has received income from a foreign source, taxable as earned income, and the method for relieving double taxation is the exemption method. The purpose of the ceiling rule is to make sure that the individual who received such foreign-source income does not have to pay more tax on earned income than someone who received the same amount of income from Finnish sources only (§ 136.4 of the act on income tax).

The ceiling rule calls for a calculation to determine whether the individual taxpayer’s total burden of taxation (foreign-paid income taxes + Finnish income taxes) is heavier than the tax burden on someone who would receive the same amount of income from Finnish sources only. If the result of such a calculation shows that the burden would be heavier, Finland relinquishes a proportional part of its income taxes. However, the rule has no impact on how health insurance contributions and the Public Broadcasting Tax are imposed.

5 Taxes on pension income from foreign sources of a finnish-resident individual

5.1 General remarks

Pursuant to § 9, subsection 1.1 of the act on income tax, residents are liable to tax on both income sourced to Finland and income sourced to other countries. Accordingly, retirement income i.e. pensions, if sourced to foreign countries is part of a Finnish resident’s income subject to tax – even if the pensions were already taxed in the country of source.

The articles of the double tax treaty signed between Finland and the country of source have an effect on the tax treatment. The provisions from tax treaty to tax treaty. For this reason, we recommend that the specific treaty that applies to the circumstances at hand be verified with sufficient care.

The text below discusses the taxes in typical cross-border situations from the beneficiaries’ perspective. We focus on the impact of the treaties that are in effect between Finland and countries of source. There is considerable variation in the way pensions are financed and paid out to beneficiaries in different countries of the world. From the perspective of the tax system in our country, it is often difficult to determine how various items of income in the hands of a Finnish individual resident taxpayer should be classified. Likewise, it is difficult to identify the tax-treaty provisions that apply. In these circumstances, the rules affecting income taxes vary case by case. The text below takes account of the above. A number of special situations are also taken up. They include the treatment of the income received in the form of distributions from various pension insurance contracts, the treatment of individual retirement accounts, and the treatment of refunded insurance premiums.

Not only the tax treaty but also other international conventions affect taxes on pension income. One of the topics discussed below is the taxation of the pensions received by former employees of the European Union and of the United Nations.

5.2 Sweden, Denmark, Norway and Iceland

Pension received from a source in one of the Nordic countries is part of a Finnish resident’s income subject to tax. Article 18 of the Nordic Tax Treaty (SopS 26/1997) contains rules on how the pension must be taxed. The Nordic Tax Treaty has no specific article that would set out rules on pensions earned in former employment in a public-sector organisation. For this reason, the provisions of Article 18 are applied on all categories of pensions. Article 18 lays down that the country of source always has the taxing right with respect to retirement income. As a result, the country of residence, i.e. Finland, is the country that must relieve any double taxation. Relief for double taxation is provided through the credit method.

There is an exception in Article 26, paragraph 2 from the general rule described above: this paragraph contains rules on the secondary taxing right that a Nordic Contracting State may have. If the country of residence has received the taxing right under Treaty provisions, but the country does not use the right due to the provisions of its national legislation, the only Contracting State that can impose tax on the income is the country of residence, and consequently there is no need for giving relief for double taxation.

Changes were made to the Nordic Tax Treaty on 4 April 2008. After the change, the exemption method is applied on Nordic-sourced pension income if the beneficiary has been a Finnish tax resident on or prior to 4 April 2008 and has received, already at that time, pensions from another Nordic country. The exemption method continues to be applied for as long as the beneficiary resides in Finland on a continuous basis. In addition, the exemption method is also applied on a new pension income, the start date of which is later than 4 April 2008, if the beneficiary has been a Finnish tax resident and has received, already prior to 4 April 2008, pensions from another Nordic country and double taxation has been relieved for the latter pension through the exemption method.

The indemnity called “Sjuk- och aktivitetsersättning” is paid out from a Swedish source to individuals who have a reduced ability to work. This form of income is regarded as pension income in Sweden. The classification is similar in Finland: the “Sjuk- och aktivitetsersättning”, if received, is treated as pension income.

5.2.1 Tax paid to Sweden, subject to crediting in Finland

The tax assessment of pensions in Sweden is affected by whether the individual beneficiary is treated as a Swedish tax resident or a tax non-resident in Sweden. If you are a nonresident in Sweden and you receive pension, you pay the Swedish SINK tax.  Part of your income can be exempt from taxes in Sweden, if you are a beneficiary of “allmän pension” (general pension) based on Swedish legislation on social security. If the pension from a Swedish source stays below a threshold of taxation, Sweden imposes no tax.

This exemption is based on Sweden’s national legislation. Accordingly, whether or not the sum reaches the threshold has no impact on the income being subject to tax in Finland. The entire amount of your pension income from Swedish sources is subject to tax in Finland even if some or all of it is exempt from tax in Sweden.

5.3 Estonia

Article 18, or Article 19, paragraph 2 of the Finland–Estonia tax treaty (SopS 96/1993) contains rules on how pension income sourced to Estonia is taxed. Pensions based on social-security legislation from Estonia are part of a Finnish resident’s income subject to tax. Any resulting double taxation is relieved through the exemption method. The same procedure is applied if the pensions are based on service with a public-sector organisation when the beneficiary is a Finnish tax resident while not a citizen of Finland (under Article 19, paragraph 2, line “a”).

At the same time, if a Finnish tax resident who also is a Finnish citizen receives pension from Estonia related to past service with a public-sector organisation, this pension will be taxed in Finland only (under Article 19, paragraph 2, line “b”). In the same way, pensions not based on Estonian legislation on social security are only taxed in Finland if the beneficiary is without any citizenship or if the beneficiary is a citizen of Finland who does not simultaneously have Estonian citizenship.

Any pension income that is not based on the Estonian legislation on social security, paid to a Finnish tax resident who is an Estonian citizen is taxed in Finland. Any resulting double taxation is relieved through the credit method.

If the pension is based on past employment with a public entity that conducts a business operation, the treaty provisions that apply are those of Article 18 of the Estonian-Finnish treaty – not of Article 19, paragraph 2.

Pensions paid to beneficiaries by the “Sotsiaalkindlustusamet” agency in Estonia are treated as pensions, as referred to in Article 18 of the Estonia – Finland tax treaty. This means that these pensions are seen as being based on past service in the public sector. However, exceptions to the rule above are sometimes made. For this reason, the question of how the taxing right is allocated between the Contracting States must be resolved case by case.

5.4 The Federal Republic of Germany

The new treaty between Finland and the Federal Republic of Germany (SopS 86/2017) is applied on pension income received as of the beginning of 2018. Under the new Germany – Finland treaty, Finland has the taxing right with respect to all types of pensions from sources in Germany in the hands of a Finnish tax resident. Inasmuch as the treaty provisions also accord a taxing right to Germany, double taxation is eliminated in Finland, either through the credit or the exemption method. The choice depends on the type of the pension.

If a resident of Finland receives pensions from Germany based on social security legislation or based on the public social security system, the income is taxed in Finland. The pensions may additionally be taxed in Germany. Any resulting double taxation is relieved in Finland through the credit method.

In the same way, if a resident of Finland receives distributions from Germany from a pension insurance for which the contract had been signed on a voluntary basis, or from comparable accounts and contracts, the income is taxed in Finland. The pensions may additionally be taxed in Germany. Any resulting double taxation is relieved in Finland through the credit method.

However, receipts of pension based on service with a public sector organisation are only taxed in Germany. During the tax assessment of the individual beneficiary in Finland, the Tax Administration will add this income to the beneficiary’s other income when assessing the beneficiary’s total income. The German-sourced pension income is, in that case, taxed in Finland as an item of income related to the exemption method. In contrast with the above, receipts of pension with respect to former service in a public sector organisation are only taxed in Finland if the beneficiary is a resident here and a Finnish citizen. In this case, Germany does not have the right to tax the income. If the pension is based on former employment with a public entity that operates a business, it is taxed in Finland and the method applied when Finland relieves double taxation is the credit method.

If a pension institution of the private sector is the payor of the pensions related to former employment with a public-sector entity, and if the Federal Republic of Germany applies treaty Article 17 on that pension income, the pensions may additionally be taxed in Germany. Any resulting double taxation is relieved in Finland through the credit method. 

For information on the previous tax treatment up to December 2017 of pension income sourced to Germany, see this memorandum’s previous version (in Finnish and in Swedish), which you can look up in “version history” on top.

5.5 The United States of America

Article 18, or Article 19 of the Finland–U.S. tax treaty (SopS 2/1991) contains rules on how pension income sourced to the United States is taxed. Under the treaty, receipts of pensions based on past employment in the private sector by an individual whose country of residence is Finland are taxed in Finland only (Article 18, paragraph 1, line (a)).

Receipts of pensions from the United States with respect to former service in a public sector organisation are only taxed in the United States, if the beneficiary is not a citizen of Finland (Article 19, paragraph 2, lines (a) and (b)). In the same way, if a resident of Finland receives pensions based on social security legislation from the United States, the income is taxed in the United States only (Article 18, paragraph 1, line (b)).  However, the U.S.-source pension income is added to the beneficiary’s other income when taxes are assessed on total income, which means that is taxed in Finland as an item of income related to the exemption method.

5.5.1 Distributions from U.S. retirement accounts known as the 401(k) and IRA

Widely used in the United States are the 401(k) programs for savings towards retirement. Deposits can be made both by the worker and the employer. Under U.S. legislation, workers are entitled to assign part of their gross wages to go to the 401(k) account (the pretax method of depositing money). Employees can alternatively assign money to the 401(k) program from their net income (the after-tax method), and this arrangement is known as the Roth 401(k) account.

When an individual beneficiary is a resident of Finland and he or she withdraws a sum from the 401(k) arrangement or from a comparable employer-provided pension savings arrangement, so that he or she has reached the retirement age and satisfied the other requirements of 401(k), the withdrawal is subject to Finnish taxation as pension income, insofar as the employer had deposited the relevant amount of money, or insofar as the worker had deposited it before tax (under the pretax method). This includes the deposit i.e. investment itself and any returns on it. The withdrawal may alternatively be based on worker-deposited after-tax assignments to the 401(k), (under the after-tax method). In this case, the beneficiary can withdraw the sum and it is exempt from Finnish taxes. However, if there is a return on investment and part of the withdrawal consists of that return, this part is an item of capital income, subject to Finnish tax.

If the beneficiary has a U.S. Individual Retirement Account, IRA, Finnish taxes are imposed the same way as with the 401(k) account, if the balance in the IRA is based on a transfer of money from the beneficiary’s 401(k) arrangement. If the balance in the individual beneficiary’s IRA is not based on a 401(k) arrangement, because the individual had deposited money directly into the IRA, the withdrawal is taxed in Finland and treated as pension income.  The same applies to the part of the withdrawals from an IRA that is based on employer’s deposits into the worker’s IRA. The program variant in which the worker has an IRA and puts money in it from net income (after-tax method), withdrawals are taxed in Finland only insofar as they consist of returns on investment (and they become an item of capital income, subject to Finnish tax). The program variant in which the worker deposits money in their IRA from net income (after-tax method) is called “Roth IRA”.

If the beneficiary has either a 401(k) or IRA arrangement from which he or she withdraws money in advance of the terms and conditions (before maturity), withdrawals are taxed in Finland under the tax rules on other earned income, not pension income. If the withdrawals are based on the worker’s past deposits from his or her net income (after-tax method), withdrawals are taxed in Finland only insofar as they consist of returns on investment (as capital income, subject to Finnish tax).

When an individual beneficiary is a resident of Finland and he or she receives pension income from the United States of America based on 401(k) or IRA, the income is taxable only in Finland. Under the provisions of the treaty, the United States has no taxing right with respect to the income. However, the U.S. payor can withhold an amount of 30% as an internal, U.S. withholding tax. This has occurred even in cases where the beneficiary has shown the payor the W-8BEN form, which is an IRS form that should prove his or her foreign, non-U.S. status as a beneficiary. However, amounts withheld in this manner are not regarded as a final tax. Beneficiaries resident in Finland can ask the IRS to refund the withholding because under the provisions of the treaty, the United States has no taxing right with respect to the income. The beneficiary’s Finnish assessment for the year cannot give credit based on amounts paid to the United States on items of income that – under the tax treaty – have been outside of U.S. taxing rights.

If the U.S. withholding has not been refunded by the time when Finnish assessment has been completed and the ensuing back taxes fall due, the beneficiary may ask the Finnish Tax Administration to set up a payment arrangement. For more information, see the Tax Administration’s Payment arrangement guides. This memorandum’s chapter 4.5 above addresses the consequences of a taxation a foreign country that the foreign authorities have carried out in a different way than what the treaty provides. For more information, see Elimination of double taxation (above) and the Tax Administration’s “Taxation abroad contrary to tax treaty” guide.

5.6 Individual retirement account contracts and other pension insurance arrangements on a non-mandatory basis

If you have signed an agreement with a foreign insurance company on an individual retirement account of some kind, the Finnish rules to be applied are those of the act on income tax, on the condition that the insurance policy satisfies the requirements listed in § 34a of the act. This means that the distributions you receive during your retirement are seen as earned income, insofar as you deducted the contributions against your earned income in your Finnish tax assessment during the years when you paid the contributions. The distributions are also seen as earned income if the contributions were based on an employer-provided pension insurance contract with the foreign insurance company. Insofar as the distributions you receive do not satisfy either of these two conditions, they are seen as capital income.

If you have been on a savings program to prepare for your retirement on a voluntary basis and you are a Finnish resident, the income you withdraw from the program is earned income, taxable as pension income. To make withdrawals is treated as income subject to tax regardless of whether the accumulated savings were based on your deposits as the worker, or on deposits made by your employer. Insofar as you, the worker, invested your after-tax earnings or wages into the savings program (the after-tax method), the withdrawals are income subject to tax (capital-income tax) in your hands only for the part that represents the profits that your pension savings have generation, i.e. the return on your investment (ruling KHO 2018:55 of Finland’s Supreme Administrative Court). Often, the taxing right with respect to such income is also allocated to the source country of the income. In that case, Finland will provide relief for any resulting double taxation through the method set out by the tax treaty, i.e. either through the credit method or through the exemption method.

5.7 Receiving refunds of pension insurance contributions or premiums

If you receive any refunds of paid-in foreign pension contributions and you are a Finnish resident, it is income subject to tax, classified as part of your earned income. It is treated as income subject to tax regardless of whether the refunds are based on contributions that you, the worker, had paid – or contributions made by your employer. The received refund is not classified as wage income and the tax-exemption for work in a foreign country within the meaning of § 77 of the act on income tax is not applicable although during the time when the contributions were paid in, and the pension accrued, you had worked in a foreign country (ruling KHO 15 May 2001, record no 1133). However, if you had used your after-tax money to pay the contributions/premiums (the after-tax method), the received refund is income subject to tax (capital-income tax)  in your hands only for the part that represents the profits (return-on-investment) that your pension account has generated.

5.8 The United Nations (UN)

Wages and fees in the hands of the employees (civil servants) who work for the United Nations and its Special Organizations are exempt from taxes under the Convention on the Privileges and Immunities of the UN (SopS 24/1958). However, the exemption does not extend to the employee’s (civil servant’s) pension income although the payor is the United Nations or its Special Organizations. This means that pensions received from that source are part of a Finnish resident’s income subject to tax (under ruling KHO 1990-B-528 and ruling KHO 1978-B-II-556). 

5.9 The European Union (EU)

Under the Protocol on the privileges and immunities of the Communities, article 12 (which previously was article 13), exemption is accorded to employees (civil servants) from national taxes on salaries, wages and emoluments paid by the European Union. Moreover, under Regulation (Euratom, ECSC, EEC) No 549/69 of the Council, article 2, exemption is also given to persons receiving disability, retirement or survivors' pensions paid by the Communities. In reference to the above, the pensions paid by the EU to earlier employees (civil servants and functionaries) are not taxed in Finland if the beneficiaries pay taxes on them to the EU. In the same way, these pensions have no impact on the tax treatment of any other earned income that the beneficiaries may have (Jean Humblet vs. the Federal State of Belgium C-6/60).

Pension payments are made from EU funds to the members of the European Parliament. Taxes are imposed on the pensions, payable to the EU. Under the new Statute for Members of the European Parliament (2005/684/EC), Member States have the power to make the salaries and pensions paid to MEPs subject to national tax law provisions, provided that any double taxation is avoided. In the case of a Finnish tax resident who becomes a beneficiary of pension by virtue of past parliamentary membership, the income is subject to Finnish tax. Relief for double taxation is provided through the credit method, as referred to in § 9 of the act on the elimination of international double taxation.

If a set of requirements are fulfilled, an individual in the service of the European Union can reassign his or her pension rights to Finland.  For more information, see the Tax Administration’s specific guide “Tax treatment of the transfer of pension rights between the Finnish and EC pension systems” – Euroopan unionin henkilöstön eläkeoikeuden siirto verotuksessa (in Finnish and in Swedish).

5.10 Pensions from foreign payors to Finnish residents and the healthcare contribution of health insurance

5.10.1 How the healthcare contribution of health insurance is imposed

Chapter 18, § 19a of the Health Insurance Act (1224/2004) contains detailed rules on foreign-source pension income, which can be the base for the healthcare contribution of health insurance. Under Chapter 18, § 19, subsection 1, if an individual receives pensions from abroad, the amounts are be taken into consideration as income when determining the contribution. 

However, no pensions within the meaning of the Social security regulation or Basic regulation, paid from another EU or EEA country, or from Switzerland, to Finland are taken into consideration if:

• The person is not being paid a pension, based on the social security regulation or basic regulation, from Finland
• The person has, while working in a country paying the foreign pension, paid an insurance contribution based on his labour income in order to fund medical care expenses during retirement.

There is a maximum amount laid down in Chapter 18, § 19a, subsection 4 that the healthcare contribution of health insurance, based on pensions from the EU/ETA or Switzerland must not exceed: it cannot be greater than the total of pensions paid from Finland within the meaning of the Social security regulation or Basic regulation.

5.10.2 The healthcare contribution of health insurance in the case of pension income sourced to Sweden

Ruling no C-50/05 was handed down by the European Court of Justice in 2006. The ruling concerns a case where an individual beneficiary, a Finnish resident, received pensions from sources in Finland and in Sweden. According to the ruling, the conclusion of how the basis is determined for insurance contributions is that the residence country can include in that basis of calculation, in addition to the pensions paid in the residence country, also of pensions paid by the institutions of another Member State, provided that the contributions do not exceed the amount of pensions paid in the residence country.

The following was included in the text of the ruling: “However, Article 39 EC (which is 45 TFEU at present) precludes the amount of pensions received from institutions of another Member State from being taken into account if contributions have already been paid in that other State out of income from work received in that State. It is for the persons concerned to prove that the earlier contributions were in fact paid”.

In 2007, the Tax Administration asked Skatteverket, the Swedish Tax Agency to state its opinion on whether relevant Swedish contributions had been paid by the Finnish pensioners who had lived and worked in Sweden. The answer from Skatteverket lays down that they paid them in 1963−1974 and again, 1993−1997. Nevertheless, the purpose of the Swedish authorities to levy this contribution was not that the amounts would go toward the insured individuals’ medical expenses, which would have to be covered in the future i.e. following retirement from work. This means that the beneficiaries concerned to not have to pay double contributions for covering one set of healthcare benefits, because Finland includes also the pensions sourced to Sweden in the beneficiaries’ base for the healthcare contribution of health insurance.

The statement on the subject of health insurance contributions from Skatteverket (Sweden) 

6 Taxes on pension income sourced to Finland

6.1 General remarks

Finland, being the source country, normally imposes taxes on the pensions paid out to beneficiaries in other countries. However, Finland's right to tax may be limited by a tax treaty. The treaty impact either takes the form of preventing Finnish taxation with respect to the pensions, or the Finnish tax cannot go higher than a maximum amount indicated as a percentage. If the beneficiary is a tax nonresident, our country’s national legislation will also have an impact on Finland’s taxing rights.

If the individual beneficiary is a Finnish citizen, he or she can still be a Finnish tax resident during the year when they move away from Finland to start living in the other country – and during the three following years. Residents must pay Finnish tax on their income, both on Finnish-source income and foreign-source income. However, Finland's right to tax may be limited by a tax treaty if the individual beneficiary’s country of tax residence for purposes of the treaty is another country, not Finland. In this case, when the treaty provisions are applied, Finland is placed in the position of the source country.

Nonresident individuals are only liable to pay tax to Finland on Finnish-source income. This means that the receipts of income in nonresidents’ hands may be taxed in Finland only if it is sourced to Finland. A list of items of income that are seen as sourced to Finland is in § 10 of the act on income tax. It is a list intended as an example; however, the categories that are included in it have been regarded as being part of a complete list under standard tax-assessment practices. Retirement income received from a Finnish source is income sourced to Finland within the meaning of § 10. The tax treatment of Finnish-source retirement income in the hands of a nonresident is not only affected by national legal provisions but also by the tax treaties that are in force.

6.2 Pension received from a Finnish source (§ 10 and § 13 of the act on income tax)

6.2.1 From government service (the public sector)

If the pension is received from the State of Finland, a Finnish municipal entity or other public entity, it is sourced to Finland (§ 10.5 of the act on income tax).

However, if the State of Finland is the payor of a pension based on past employment with a diplomatic mission located in other countries, it is tax-exemptible if:

• The individual beneficiary was a non-resident taxpayer in Finland and not a Finnish citizen during their past employment,
• The individual beneficiary is a non-resident taxpayer in Finland and not a Finnish citizen when the pension is being paid (§ 76, subsection 1, line 4), and
• The decision concerning the individual’s pensions was made on 1 January 1996 or later, and the relevant tax treaty poses no restriction on the residence country against taxing the pension (§ 76, subsection 2).

6.2.2 Pensions earned during past employment with organisations outside the public sector

Pensions earned during past employment, labour and services with a private-sector employer are regarded as Finnish-source income if the location where the employee worked is in Finland (or mostly in Finland) and the employer is or has been Finnish (§ 10, line 5, act on income tax).

Correspondingly, if the pensions are based on past employment with a Finnish employer, and the location was mainly in other countries, not Finland, the income is not sourced to Finland under the act on income tax. In cases where the individual beneficiary has had multiple employment contracts at different times and the pensions are based on them, the tax authorities must determine the main location – whether in a foreign country or in Finland – separately for each one of the contracts (ruling KHO 2014:146).

In the same way, other pension income, which is based on a Finnish insurance company’s motor traffic liability insurance or on a pension insurance contract, is regarded as Finnish-source income (§ 10, line 5 of the act on income tax).

When an individual beneficiary is a non-resident taxpayer and he or she receives pensions from past employment on board a Finnish vessel or aircraft, either directly or indirectly, the pensions are regarded as Finnish-source income (§ 13 of the act on income tax). For example, receipts of seafarers’ pensions are taxed in Finland even if the individual beneficiary had not worked in Finland.

6.2.3 Pension insurance contracts concluded on a non-mandatory basis

Pension based on a Finnish insurance company’s non-mandatory pension insurance contract is regarded as Finnish-source income (under § 10, line 5 of the act on income tax). In addition, pension income or other receipts of money that are based on an individual, non-mandatory pension insurance contract made with an insurance company in another state is sourced to Finland insofar as the contributions had been deducted in the past Finnish tax assessments (under § 10, line 2 of the act on income tax).

For more information on pension contracts and on distributions from individual retirement accounts, see the Tax Administration’s instruction “Taxation of income from long-term savings agreements and individual retirement accounts” — Pitkäaikaissäästämissopimuksen ja vapaaehtoisen yksilöllisen eläkevakuutuksen verotus (in Finnish and Swedish).

6.3 The taxation process in Finland

6.3.1 Taxes on pensions paid from Finland to other countries

When individual beneficiaries are Finnish tax residents living in a foreign country, the taxation process with regard to pension income sourced to Finland is the same as with beneficiaries who live in Finland. Accordingly, the procedure of preassessment is the same as with Finnish resident individuals who live in Finland.

However, when the beneficiaries are nonresident taxpayers, the provisions of the act on the taxation of nonresidents' income are applied (Laki rajoitetusti verovelvollisten tulon verottamisesta (627/1978)). In the case of Finnish nonresidents living in a foreign country, the taxation process with regard to pension income sourced to Finland is the same as with beneficiaries who live in Finland (856/2005). Accordingly, the procedure of preassessment is the same as with the beneficiaries who live in Finland.

Taxation is carried out in the manner laid down in the act on assessment procedure (Verotusmenettelylaki 1558/1995). After an individual has left Finland to live in other countries for a longer time than one year, there is no longer a Finnish municipality of domicile on record. However, from the perspective of tax assessment, no changes are made to the municipality of domicile during the period when the individual continues to be held a Finnish resident. Even if an individual is a Finnish resident only for a few months of the tax year, he or she must pay municipal income tax for the entire year, which is calculated on the basis of taxable income for purposes of municipal taxes. The tax revenue goes to the Finnish municipality that was on record as the individual’s domicile at the end date of the calendar year preceding the year when he or she left Finland (§ 5, subsection 2 of the act on assessment procedure, and § 5 of the Municipality of Residence Act (201/1994)).

If the individual is a non-resident taxpayer for the entire year, the national average municipal income-tax rate will determine the tax. The average rate for 2020 was 19.97 percent. The tax revenue attributed to a non-resident taxpayer’s all taxes goes to the State of Finland (under § 15, subsection 2 of the act on the taxation of nonresidents' income).

The chapters below discuss the taxes in typical cross-border situations from the beneficiaries’ perspective. The text addresses the treatment of pension payments sourced to Finland in accordance with the provisions of the tax treaty – when the source country is Finland, and the beneficiary’s country of residence for treaty purposes is the other Contracting State.

6.3.2 Sweden, Denmark, Norway and Iceland

When the beneficiary’s country of residence for treaty purposes is Sweden, Denmark, Norway or Iceland, and pensions sourced to Finland are being paid, the treaty provides that Finland, the source country, can always tax the pensions. Then, the resulting double taxation relieved by the tax authorities of the country of residence through the credit method or the exemption method.

Guidance is provided in six different languages about Nordic tax affairs for individuals on a special website (www.nordisketax.net), covering all the Nordic countries and various cross-border events.

6.3.3 Spain

The treaty currently in effect between Finland and Spain has been applied since the beginning of 2019. As provided in Article 17, paragraph 2 of the current treaty, and also in its Article 18, paragraph 2, Finland can tax almost all pensions, social benefits and annuities, paid from Finland to an individual beneficiary resident in Spain. The tax process governed by the current treaty is described here. For information on the previous treaty that still applied up to the end of 2018, click on “version history” to look up this memorandum’s earlier versions (in Finnish and in Swedish).

Finland has the taxing rights with respect to pensions based on past employment in the private sector, disability pensions, distributions from voluntary, individual pension insurance and collective pension insurance, pensions of the self-employed (under the Act no 1727/2006, YEL, past entrepreneurship in business) and pensions of farmers (Act no 1280/2006, MYEL, past operation of agriculture).

Pensions based on services rendered to a public-sector entity in Finland are taxed in Finland. However, if the beneficiary is a Spanish resident and a citizen of Spain, these pensions are only taxed in Spain. If the pensions are based on past employment in Finland with a public-sector organisation that conducts business, the provisions of treaty Article 17 on pensions from the private sector become applicable, meaning that the pensions are taxed in Finland with no importance attached to the beneficiary’s citizenship.

Other classes of pension income that are taxed in Finland are national old-age pensions, guarantee pensions, other pensions and benefits based on legislation on social security or based on the social-security system such as maternity allowance, paternity allowance, parental allowance and unemployment relief. However, the treaty Article on other income applies to the pensions that are based on motor vehicle liability insurance, and these pensions are only taxable in the beneficiary’s country of residence.

6.3.3.1 Reverse crediting

Article 17 of the tax treat with Spain refers to pensions, social benefits and annuities. Any double taxation that may arise is relieved through an arrangement known as reverse crediting. Accordingly, reverse credit is applicable on Finnish-source pensions based on past employment with the private sector, disability pensions, pensions based on individual or collective pension insurance contracts, the pensions of the self-employed governed by the YEL and MYEL laws (for past entrepreneurship in business, and past operation of agriculture, respectively).

Reverse crediting also applies on pensions based on past employment with Finnish public-sector organisations that conduct business. It is also applied on social benefits paid to beneficiaries in accordance with Finnish legislation on social security.

Reverse crediting means that the pensions, social benefits or annuities paid from Finland to a resident of Spain are taxed in Finland in such a way that when the Finnish Tax Administration assesses the beneficiary’s taxes for the year, credit is given for the full amount of tax paid to Spain on the item of income concerned. However, such a credit cannot be greater than the amount of taxes to be imposed in Finland on the same income. The rules on foreign tax credit under the Finnish act on elimination of international double taxation (1552/1995) are not applicable because the said act only controls the occurrence of double taxation that is caused by income sourced to a foreign country.

6.3.3.2 The transition rule during three years (2019-2021)

The new Finland–Spain treaty contains a 3-year transition rule that prevents Finland from imposing taxes for the 2019, 2020 and 2021 tax years on receipts of pensions within the meaning of Article 18 of the old Finland–Spain treaty, which are based on past service or employment, and which are based on past employment with a public-sector organisation that conducts business; insofar as these receipts are subject to tax in Spain, the beneficiary’s country of residence.

Pensions based on “past service or employment” are statutory employment pensions and they also include distributions from an employer-provided voluntary pension insurance contract, individual as well as collective, and pensions based on the Employees’ Pension Act (TyEL) and the disability pension based on the act on accident insurance and occupational diseases.

If receipts sourced to Finland of such a pension, or of pensions based on employment with a public-sector organisation that conducts business, are not subject to tax in Spain, the transition rule does not apply on the receipts. As a result, starting from the beginning of 2019, the receipts are taxable in Finland. For example, let us assume that an individual receives a Finnish disability pension, which is treated as exempt from Spanish tax up to a threshold. After it exceeds the threshold, it is subject to tax in Spain. The Finnish Tax Administration will impose tax on the part below the threshold, i.e. the amount exemptible in Spain.  If Finland is responsible for the beneficiary's medical care costs, the entire amount of the disability pension is subject to the Finnish healthcare contribution.

If the pension income is subject to tax under Spanish legislation, but no tax is actually charged for reasons including tax-deductions, or the amount being below the threshold, the transition rule may be applied, so the income may be left untaxed in Finland. The transition rule continues to apply up to the end of 2021 regardless of the start date of pension payments, and regardless of the point in time when the individual beneficiary became a tax resident of Spain. The transition rule’s effect is that part of the pensions remains untaxed in Finland. When the tax to be imposed in Finland is calculated on the part taxable in this country, the part left untaxed is not included in the total. However, even the untaxed part is subject to the Finnish healthcare contribution if Finland is responsible for the beneficiary's medical costs.

The 3-year transition rule of the new Finland–Spain treaty applies to no other pension income than pensions based on “past service or employment” in the private sector and with a public-sector organisation that conducts business. This means that the rule is not applicable on pensions paid to self-employed beneficiaries (under the YEL and MYEL legislation) who have run an enterprise or an agricultural activity, on national old-age pensions, and on the pensions that are based on voluntary individual pension insurance contracts.

After the rule ceases to be in effect, Finnish-source pensions based on past service or employment in the private sector and with a public-sector organisation that conducts business will be taxed in Finland. If Spain is the individual beneficiary’s residence country, Spain also has the taxing right with respect to the pensions. Relief for double taxation is provided in Finland through giving credit for the amount of tax paid to Spain (through reverse credit).

6.3.4 Portugal

Starting 1 January 2019, there is no longer a tax treaty between Finland and Portugal. For this reason, receipts of retirement income sourced to Finland in the hands of a beneficiary who lives in Spain are taxed in accordance with the rules of Finland’s national legislation.

If the individual living in Portugal is a Finnish resident taxpayer, he or she is liable to tax on both income sourced to Finland and income sourced to other countries. Finnish tax residents have the general status of tax liability in Finland, which covers all classes of pension income regardless of its country of source.

If the individual living in Portugal is a Finnish resident taxpayer, he or she is liable to pay tax on income sourced to Finland. The sections 6.2.1 to 6.2.3 of this memorandum address the circumstances where pension income in a nonresident taxpayer’s hands must be treated as sourced to Finland.

For information on the previous Finland–Portugal treaty that still applied up to the end of 2018, click on “version history” to look up this memorandum’s earlier versions (in Finnish and in Swedish).

6.3.5 France

Under the Finland–France treaty, taxing rights on pension are only given to the country of residence unless the pension is based on past services rendered to the public sector. Pensions based on past service with the public sector can be taxed in the source state if that state, a subdivision, public body or authority of that state was the recipient of the services (Article 19, paragraph 1). The treaty with France provides that other pensions, not those based on public-sector service, are taxed in the residence country only and that the Article on other income (Article 21) is applied on them. From this, it follows that only the country of residence can impose taxes on receipts of national old-age pension, of pension based on voluntary individual pension insurance contracts, and of pension based on traffic liability insurance.

6.3.6 Italy and Australia

Some of Finland’s tax treaties contain provisions that give importance to the citizenship of the beneficiary, also in matters relating to the allocation of taxing rights on pensions not based on past services rendered to the public sector. Under the treaty between Italy and Finland (SopS 55/1983), if an individual whose country of residence is Italy – who is not a Finnish citizen – receives pensions sourced to Finland, based on social-security legislation, the country of source, i.e. Finland, has no taxing rights with respect to the income. The income is taxable in the country of residence only (Article 18, paragraph 2).

Under the treaty between Finland and Australia (SopS 91/2007), only the country of residence is given the taxing rights on pension income if the individual beneficiary is not a citizen of the source country (Article 17, paragraph 3). This applies on all pension categories i.e. those based on social security, those based on past employment in the private sector, and those based on past services rendered to the public sector.

6.3.7 The Federal Republic of Germany

The new treaty between Finland and the Federal Republic of Germany (SopS 86/2017) is applied on pension income received as of the beginning of 2018. In accordance with the new treaty, all retirement income sourced to Finland may be taxed in Finland. However, Finland does not have the taxing rights on pensions based on past services rendered to the public sector if the beneficiary is a resident of Germany and a German citizen. However, the pension is based on former employment with a public entity that operates a business, it is taxable in Finland.

6.3.8 Repurchase of a previously concluded pension insurance contract

Repurchase arrangements mostly concern the non-mandatory insurance contracts. Typical repurchases take place after the insurance company has decided to change the original pension insurance contract’s terms and conditions, or after another insurance institution takes over the contracts, which are then reassigned from one insurance company to another. If an individual beneficiary receives money because his or her non-mandatory pension insurance is repurchased, it is taxable as earned income insofar as the contributions had been deducted against earned income in Finnish tax assessment during the preceding years. The remaining part of the received amount is treated as capital income.

Such receipts of money fall under the category where the treaty Article on other income applies. In most tax treaties, the Article on other income only gives the taxing right to the beneficiary’s country of residence. As an exception, some treaties (including Finland–Canada and Finland–Estonia) lay down that the receipts of repurchase money may be taxed in the source country.

6.4 Pensions from Finland and the healthcare contribution of health insurance

After an individual has left Finland to start living in a foreign country, the first 3 calendar years that follow his or her departure are a period when the healthcare contribution of health insurance continues to be imposed. Finnish authorities would impose the contribution even if the pension income were only taxed in the country of residence, because treaty provisions do not affect the way insurance contributions must be paid.

You are relieved of the liability to pay the contribution if you present a certificate issued by the Social Insurance Institution of Finland, Kela, stating that you have no coverage in Finland, and by virtue of the EU Regulation 883/2004 on social security, it does not fall under Finland’s responsibility to reimburse medical care expenses to the authorities of the new country of residence when the country is in the EU or ETA or the country is Switzerland.

After 3 years have elapsed from the year when the individual left Finland, no healthcare contribution is imposed anymore if the country of residence is outside of the EU, ETA and Switzerland. However, it is possible to impose the contribution on a resident of an EU or ETA country or Switzerland, if it falls under Finland’s responsibility to reimburse medical care expenses to the authorities of the new country of residence (Chapter 18, § 6 of the Health Insurance Act).

6.5 Allocation of taxing rights to the country of residence

Often, an individual beneficiary who leaves Finland becomes a resident taxpayer both in Finland and in the new country of residence; this is known as a double residency status. The provisions of a tax treaty are needed when the tax authorities have to determine which one of the Contracting States must be treated as the individual’s treaty country of residence.

The provisions that address the double residency problem are found in Article 4, paragraph 2 of the treaty. Accordingly, the Contracting State where the individual has a permanent home available is the country of residence.

If the individual who receives pensions has a permanent home available in both Contracting States, he or she is a resident of the Contracting State with which their personal and economic relations are closest (centre of vital interests). When this treaty Article has been interpreted by Finnish tax authorities, the practice has been to attach more importance to personal relations (family). This means that if an individual is primarily living together with family in the permanent home located in the other Contracting State, the centre of vital interests is located there, even if there are significant economic ties with Finland.

If an individual has no permanent home available in either Contracting State, or if it cannot be determined in which one of the Contracting States the centre of vital interests is, he or she is a resident of the State where he or she has a habitual abode. The practice has been to find out the majority of days of presence in one or the other State.

If an individual is habitually present in several countries on a permanent basis, or is not present in any country, the country of residence for treaty purposes is the individual’s country of citizenship. It is quite uncommon to determine the country of residence for treaty purposes by citizenship.

The reassignment of the taxing right on pensions from Finland to the beneficiary’s country of residence requires that the beneficiary be treated as the other Contracting State’s resident for treaty purposes. Accordingly, the individual must have moved to the other country on a true and permanent basis. If after departure, the individual beneficiary of pensions has no permanent home remaining in Finland, the above requirements are in most cases fulfilled.

However, if you still have a living accommodation in Finland and you also often stay in Finland, it will be more complicated to determine where your pensions should be taxed. Determining your country of residence requires careful consideration of your overall situation. Taxing rights on pensions cannot be transferred until a sufficient written account is submitted, in other words, all the facts and circumstances below have been addressed:

1. The beneficiary of pensions must describe their living arrangements and dwelling:
   • Proof has been provided that a permanent home is available in the other Contracting State (established tax-assessment practice is to regard one year, as a minimum, a sufficient period of making a dwelling available). Acceptable proof is constituted by a photocopy of the contract of purchase of a dwelling, or a photocopy of a lease or rental agreement.
   • Proof has been provided on that you have relinquished your permanent home in Finland, e.g. a photocopy of the contract of sale, a statement showing that you have given notice on your rental contract, or an account stating that you have rented out the apartment you own.
2. Information must be provided on the place where the beneficiary’s family members live.
3. After moving away, does the beneficiary spend time in Finland – if so, the count of days of presence must be stated.
4. Information on the beneficiary’s future income from sources in Finland after moving away must be provided, including whether he or she operates business in Finland.
5. It is also required that the residence country’s tax authorities treat the beneficiary as a tax resident, for purposes of the treaty.
   • The consequence of the above is that the country of residence can impose taxes on income sourced to Finland and other countries (having the taxing rights on worldwide income). The Finnish Tax Administration’s form called “Certificate of residence and tax liability” can be completed (Form 6135f). However, forms issued by the authorities of foreign countries provide similar information, i.e. the tax authority of the country concerned affirms the individual beneficiary’s country of tax residence.
6. Whether or not the individual is covered under Finland’s residence-based social security
   • The individual is a holder of the Social Insurance Institution’s – Kela’s – certificate that indicates that coverage under the residence-based social security in Finland has ceased, or of a certificate confirming that he or she has relinquished the personal Kela Card.
7. It is required that the beneficiary has submitted a notice of departure from Finland to the Finnish registration authority

If you have left Finland and you are a beneficiary of pensions, to have the taxing rights reassigned to the new country of residence, submit Form 6207a — Application for tax at source card and/or tax card – Persons moving to or living in a foreign country. 

If tax-treaty provisions prevent the taxation in Finland of a beneficiary’s pensions, the earliest point in time when the taxing rights can be reassigned is the date when both the departure date from Finland has passed (or is the current day’s date) and the issued certificate is in effect, proving that the new residence country is the beneficiary’s treaty country of residence.

6.6 Country of tax residence changes mid-year      

It is common that the country of residence of an individual taxpayer changes part way through the year. If the individual leaves a country in order to start living in another country permanently, the point in time when he or she moves is normally also the time when the country of tax residence changes. In addition, the national legislation of the individual’s new country of residence, along with the provisions of the relevant tax treaty have an impact when we determine an individual’s country of residence.

 

Enclosure 1: Allocation of taxing rights as provided in the Tax Treaty, pensions from foreign payors to beneficiaries in Finland

Note: The information in this table is a general guide only; look up the relevant treaty for exact instructions.

V = the exemption method

H = the credit method

Y = the exclusive taxing right is given to Finland

Allocation of taxing rights as provided in the Tax Treaty, pensions from foreign payors to beneficiaries in Finland

The country from where pensions are paid	Pensions based on social security legislation	From government service (the public sector)	Other pensions based on past employment in the private sector, annuities, and based on past employment with public org. conducting business
The Netherlands and Zambia Australia	V   H1)	V2)   H1)	H   Y
United Arab Emirates, Argentina, Azerbaidzhan, Barbados, Indonesia, Kazakhstan, Moldova,  Uzbekistan, Turkmenistan, Hong Kong and Sri Lanka (starting 2019)	H12)	V2) 3)	H
Armenia, Belgium, Bosnia-Herzegovina, Brazil, Ireland, Israel, Kyrgystan, Croatia, Macedonia, Mexico, Pakistan, Serbia and Montenegro, Singapore, Slovakia, Slovenia, Tadzhikistan,  Thailand7), Czech Republic, Ukraine, Uruguay and Vietnam	H	V2)	Y13)
Bulgaria	V	Y	Y
Spain	H14)	V2)	H15)
Egypt and France	Y	V4)	Y
Italy7), Switzerland and Tanzania	Y	V2)	Y
China, Morocco and Poland	H	V2)	Y
Philippines5), Austria, China, Korea, Greece, Cyprus, Hungary, USA and New Zealand	V	V2)	Y5) 13)
India, United Kingdom, Malta and Romania	V	V2)	V
Japan   Canada	Y   H	H11)   H	Y   H
Latvia, Lithuania and Estonia   Luxembourg, Malaysia	V   V	V2)   V	H6)   Y
Nordic countries9), Russian Federation and South Africa	V	V	V
Germany   Turkey	H   V2)	V2)   V2)	H   Y8)

¹⁾ the value is Y if the beneficiary is not an Australian citizen 
²⁾ the value is Y if the beneficiary is a citizen of Finland
³⁾ pensions sourced to Barbados fall under the exemption method regardless of the beneficiary’s citizenship
⁴⁾ the value is Y if the pensions are not based on past services rendered to the public sector or on civil service (France)
⁵⁾ Finland’s treaty with Philippines excludes municipal income taxes; receipts of private-sector pensions may still be taxed in Philippines (H) if they are based on a Philippine enterprise’s pension arrangement, not registered as referred to in Philippine legislation
⁶⁾ the value is Y if the beneficiary has no citizenship, or is a citizen of Finland and not a citizen of the source country simultaneously
⁷⁾ the source country may tax its citizens’ receipts of pension based on social-security legislation, but the source country must relieve any resulting double taxation
⁸⁾ the value is V 2) if the pensions are based on past employment with a public org. conducting business
⁹⁾ the value is H if the receipts of pension are “new” (start date later than 4 Apr 2008)
¹⁰⁾ does not count toward the progression of the income-tax rate (KHO:1990-B-535)
¹¹⁾ the value is V if the beneficiary of pensions sourced to Japan is a Japanese citizen
¹²⁾ the value is V if the receipts are sourced to Argentina and they are seen as tax-exempt social-security allowances there
¹³⁾ the value is H if the source country for annuities is Belgium, Brazil, Israel, Cyprus, Mexico, Slovakia, Tadzhikistan, Czech Republic or Uruguay
¹⁴⁾ The pension is taxed in Finland and Spanish authorities give credit for the tax paid to Finland (reverse credit). Only taxed in Finland for 2019, 2020, 2021 if pensions are based on past employment or service
¹⁵⁾The pension is taxed in Finland and Spanish authorities give credit for the tax paid to Finland (reverse credit). For the 2019, 2020 and 2021 tax years, the receipts of pension are taxable only in Finland if based on past employment or service, including employer-provided voluntary pension insurance and past employment with a public organisation conducting business.

Enclosure 2: Allocation of taxing rights as provided in the Tax Treaty, pensions from Finland to beneficiaries in foreign countries

Note: The information in this table is a general guide only; look up the relevant treaty for exact instructions.

x = the income may be taxed in Finland in accordance with the Treaty
– = shall be taxable only in the residence country acc. the tax treaty

Allocation of taxing rights as provided in the Tax Treaty, pensions from Finland to beneficiaries in foreign countries

Country of residence	Social-security-related pensions including Employees Pensions Act, YEL & MYEL laws, seafarers’ pension, workers' compensation, nat’l old-age pension, survivors' pension	From government service and based on past employment with a public organisation that conducts business	Voluntary pension contracts, signed by the individual beneficiary or by the employer	Other pensions including traffic liability insurance or other insurance contract for accident risk coverage
The Netherlands	x11)	x5)	x9) 11)	–
Australia	x2)	x2)	–	–
Egypt	–	x1)	x	x
Japani, France10)	–	x1) 4)	–	–
Azerbaidzhan Belgium, Georgia, Israel, Kyrgystan12), Cyprus, Macedonia12), Malta, Moldova, Romania, Slovakia, Tadzhikistan, Czech Republic, Ukraine, Singapore, Belarus,  Turkmenistanng,Hong Kong	x	x5)	x	–
Bosnia-Herzegovina, Ireland, Austria, Republic of Korea, Greece, Croatia, Luxembourg, Serbia and Montenegro, Switzerland, Hungary, U.S.A.	x	x5)	–	–
Malaysia, Bulgaria	x	x	–	–
Barbados, South Africa, Iceland, Canada7), Norway, Sweden, Denmark	x	x	x	x
Armenia12), Russian Federation	x	x	x	–
United Arab Emirates, Argentina, Brazil, United Kingdom, Philippines, Indonesia, India, Kazakhstan, Pakistan, Zambia, Thailand, Vietnam, Uruguay, New Zealand, Uzbekistan, Sri Lanka (starting 2019)	x	x5) 20) 21)	x	x
Tanzania	–	x1) 3)	–	–
Spain	x17)	x18)	x19)	–
Poland	x	x5)	x	–
China	x	x5)	x	x
Latvia, Lithuania and Estonia	x	x5)	x6)	x
Mexico	x9)	x5)	x9)	x
Italy	x2)	x5)	–	–
Morocco Germany	x	x5)	x	x
Turkey	x3)	x3)	x	x
Slovenia	x12)	x5) 13)	x12)	–
other State	x	x	x	x

¹⁾ the value is “–” if the pensions are based on past employment with public org. conducting business
²⁾ the value is “–” if the beneficiary is not a Finnish citizen
³⁾ the value is “–” if the beneficiary is a citizen of the country of residence
⁴⁾ the value is “–” if the pensions are not based on past services rendered to the public sector

⁵⁾ the value is “–” if the beneficiary is a citizen of the country of residence and the pensions are not based on public-sector org. conducting business6) the value is “–” if the beneficiary is a citizen of the country of residence, and not a citizen of Finland simultaneously. If the beneficiary is a citizen of Finland, the maximum tax is 15%
⁶⁾ the value is “–” if the beneficiary is a citizen of the country of residence, and not a citizen of Finland simultaneously. If the beneficiary is a citizen of Finland, the maximum tax is 15%
⁷⁾ maximum tax on pensions is 20%. Max. tax on purchased-pension contracts (annuities) is 15%, provided that when the contributions were paid in, they were not tax-deductible, fully or partially

⁹⁾ maximum tax on pensions is 20%
¹⁰⁾ a special agreement controls locally hired employees in Finland’s diplomatic mission in France
¹¹⁾ the value is “–” if the beneficiary, already on Dec 20, 1997, lived in the Netherlands and held the rights to receive the pension before Dec 20, 1997
¹²⁾ maximum tax is 25%

¹³⁾ maximum tax is 25% if based on past employment with public org. conducting business.
¹⁴⁾ this value is x if the country of residence has not taxed the pensions
¹⁵⁾ this value is x if the pension is based on voluntary individual pension  insurance contract and the country of residence has not taxed the pension
¹⁶⁾ other than pensions based on past service/employment   this value is x if the country of residence has not taxed the pension.

¹⁷⁾ this value is “–” for 2019,2020,2021 if the pensions are subject to tax in the country of residence. However, the value is x for pensions other than those based on past service/employment (nat’l old-age pension, YEL and MYEL).
¹⁸⁾ this value is “–” for 2019,2020,2021 if the pensions are based on past employment with a public-sector org. that conducts business, and they are subject to tax in the country of residence. However, if the pensions are based on past services to the public sector (non-business), the value is “–” if the beneficiary is a citizen of Spain.
¹⁹⁾ this value is “–” for 2019, 2020 and 2021 for pensions based on employer-provided voluntary pension insurance, if the pensions are subject to tax in the country of residence

²⁰⁾ the value in the case of Sri Lanka is X even if the beneficiary were a citizen of the country of residence if her/she also is a Finnish citizen and a tax resident of Finland. This means that if a beneficiary has received pensions from the public sector that are not related to the conduct of business by the public organisation, Finland is under obligation to give credit for the tax paid to Sri Lanka.
²¹⁾ this value is “–” if the beneficiary is a tax resident of Hong Kong and a holder of a permit for residence in Hong Kong.