Tax residency and nonresidency

Date of issue
4/30/2014

Introduction

Under the provisions of the Finnish act on income taxation (tuloverolaki 1535/1992), taxpayers may either be residents (generally liable to tax) or nonresidents (liable to tax, but with restrictions). The act on income tax additionally contains a number of special provisions on the subject of liability to tax. Residents, having unlimited tax liability, are the people who live in Finland, and correspondingly, nonresidents, with limited tax liability, are people living in other countries. Residents pay Finnish taxes on their income sourced in Finland and on income sourced in other countries (= liability to tax on worldwide income). Nonresidents pay Finnish taxes on their Finnish-sourced income only.

Resident taxpayers, fully liable to tax

Individuals i.e. natural persons who live in Finland are Finnish tax residents. If an individual has his or her permanent home in Finland, they are treated as a resident. An individual who stays in Finland for a continuous period of more than six months is also treated as a resident.

If a corporate entity, a joint benefit administration or an estate of a deceased individual are domestic, they are treated as residents. Corporate entities are domestic when they are registered in this country or established in accordance with the laws of Finland. Death estates are domestic if the decedent had lived in Finland at the date of his or her death (under § 17.4, act on income tax).

A consortium or partnership is not treated as a taxpayer in itself. Instead, the receipts of income of a consortium or partnership are allocated to its shareholders – and taxable as the shareholders’ personal income. For this reason, consortia and partnerships are generally neither residents nor nonresidents.

Residents are subject to Finnish taxes on the income they receive in Finland and in other countries (§ 9.1, line 1, act on income taxation).

Tax treaties signed by Finland with other countries, and the Finnish act on the elimination of double taxation (1552/1995), prevent the occurrence of double taxation on an individual taxpayer’s income. However, the provisions of tax treaties are not important when the authorities determine whether an individual is a resident or nonresident. Instead, the authorities rely on the provisions of the act on income taxation when addressing the question of residency.

Nonresident taxpayers

All the natural persons who cannot be regarded as residents are regarded as nonresidents. If an individual (=natural person) does not live in Finland, he or she is a nonresident taxpayer for purposes of Finnish income taxes. Estates of deceased individuals are treated as nonresident taxpayers if the decedent was a nonresident at the date of his or her death. A corporate entity registered in a foreign country is a nonresident.

A nonresident is only liable to pay taxes on income earned in Finland. Examples of such income include the wages received from a Finnish payor for work done in Finland, and the dividends paid to an individual by a Finnish limited company (§ 10, act on income taxation). If a corporate entity is treated as having a permanent establishment, it must pay Finnish tax on its income attributable to it regardless of whether the source of the income is Finland or a foreign country (§ 9.3, act on income taxation).

However, some types of interest income that a nonresident can receive from a Finnish source are not taxable. For example, the receipts of interest on a bank deposit, or on bonds or debentures, are tax-exempt when the beneficiary is a nonresident (§ 9.2).

Read more about cross-border situations in the Tax Administration’s “Handbook of international taxation” – Kansainvälisen verotuksen käsikirja (in Finnish and in Swedish, publication no 284.13).

Individuals

To live in Finland

The act on income tax contains provisions that define the meaning of “to live in Finland” for purposes of taxes. This definition is there because it affects the tax treatment of an individual by determing whether he or she is a resident. Even if – within the meaning of the act on income tax – an individual lives in Finland, it does not necessarily mean that he or she is physically present in this country.

The main abode and home

If an individual has their main abode and home (=permanent home) in Finland, they are regarded as living in Finland. In general terms, an individual has their main abode and home in Finland if they are registered in the Population Register System. Even if the Population Register System does not contain an entry stating that a particular individual lives in Finland, he or she may nevertheless have their main abode and home here, within the meaning of the act on income taxation.

For example, the Population Register System may contain an entry that an individual who has a temporary work assignment in a foreign country has left Finland in order to live in that country. However, for tax purposes, this particular individual is simultaneously regarded as living in Finland.

Presence longer than six months

Someone who has previously lived in a foreign country becomes a Finnish tax resident when he or she stays in this country for a continuous period of more than six months. The counting of the six-month period is straight, i.e. it is not sensitive to start and end dates of calendar years. For example, an individual’s presence can begin on 2 September and end on 31 March the following year. When a foreign citizen is present in Finland, he or she is a Finnish tax resident, fully liable to tax, and for the rest of the year, he or she is a non-resident taxpayer.

An individual who has lived in a foreign country previously may become a resident even if they were present in Finland for less than six months, if during this time, the place of their main abode and home is Finland.

It may be that an individual who lives outside Finland on a permanent basis has an employment that involves frequent presence and work in Finland. In a court case with the Supreme Administrative Court (ruling no 1990/4757), a Finnish company hired a factory consultant who lived in Sweden with his family. The length of the employment contract was more than six months. The consultant additionally worked in foreign countries and when he was present in Finland, it was for no more than four days a week. During weekends and days off, he was in Sweden, spending time at his home. The lengths of his absences from Finland were 3 to 29 days. The conclusion was that he was treated as having been present in Finland continuously for more than six months.

However, if someone living in Sweden near the Swedish-Finnish border commutes to a place of work in Finland, the circumstances do not give rise to a continuous presence in Finland (ruling KHO 1987 II 506).

Under the provisions of § 11, the act on income tax, the presence in Finland must be continuous but even though it is interrupted for a temporary absence, it is still regarded as continuous. However, the provisions of § 11 do not indicate what the maximum length of such an absence is.  The approach based on the Tax Administration’s assessment practice is that approximately two months is a long enough absence that makes the presence of the individual to be interrupted so that it is no longer regarded as a “continuous presence”.

However, decisions on whether someone’s absence should be treated as temporary are made on a case-by-case basis.  For example, important factors that affect this are whether he or she continues to have a place to live in Finland and whether he or she still has an employment contract in Finland.

Example: A Polish musician leaves Finland for Norway. Prior to that, he has stayed seven months in Finland. Two months later, he decides to move back to Finland. Under the circumstances, the counting of time for the six months of presence must re-start from zero.

Example: An individual who lives in a foreign country on a permanent basis will come to Finland to be present here for 2 months, to then leave Finland for an absence of 4 months, and to return again for 2 months. He or she remains a tax nonresident. The treatment of the residency question is different if the foreign citizen is present in Finland for a longer time – perhaps for a couple of years. In this case, it may be asserted that the place of their abode is Finland.  In this case, if the foreign citizen leaves Finland for 4 months, he or she will remain a Finnish tax resident, even during the 4-month period spent elsewhere.

The end of an individual’s residency status

If you are a foreign citizen (or have no citizenship) and leave Finland to live abroad permanently, you will become a Finnish tax nonresident from the day of your move. If you are a citizen of Finland, the three-year rule – the special provision of § 11, act on income tax – will apply.

Finnish citizens and the three-year rule

When a citizen of Finland moves to another country, he or she is normally regarded as a Finnish tax resident during the year when they move away and during the three following years. However, if they prove that they no longer have substantial ties with Finland, they may, already prior to the end of the third year, be treated as a nonresident. A Finnish citizen who moves away during the tax year will be considered a tax nonresident if he or she demands it, and if their substantial ties with Finland were broken at the time of leaving the country. In this case, he or she will be liable to Finnish tax only on any income received from a Finnish source.

When the authorities have concluded that a Finnish citizen’s ties have broken, he or she will not become a Finnish tax resident again unless the place of their main abode and home is moved to Finland, or if they are present in this country for more than six months. In other words, they do not become a Finnish resident again if some other substantial ties come to light later (ruling KHO 1993/1831).

To extend an individual’s tax residency in Finland for more than three years after leaving is not possible if the only reason for such extension is that the individual has demanded it.

Substantial ties with Finland

The provisions of law do not contain an exact definition of “substantial ties”. Instead, case-law from the courts has been used as a guideline for how they should be defined. The decision on whether or not an individual is connected with Finland by substantial ties is based on an examination of all their relevant personal circumstances.

The main requirement for the breaking of ties is that the individual leaves the country on a permanent basis. A Finnish citizen moving to a foreign country on a temporary basis still has substantial ties to Finland even if they no longer have their main abode and home in Finland. For example, an individual is treated as having substantial ties if they are staying in a foreign country for the purpose of studying or for health reasons.

Substantial ties continue to be there if he or she operates a trade or business in Finland or if their spouse and family continue to live in Finland.

To work in Finland means substantial ties

If an individual leaves Finland but the family’s permanent home is still in their possession, either in their continued own use or left empty, the individual is treated as having substantial ties. However, substantial ties do not exist merely by virtue of owning a summer cottage (even with the land where it is located).

To be covered by the Finnish social security system means substantial ties

Substantial ties are generally not in existence only because an individual receives capital income from a Finnish source. However, if the individual must perform a considerable work effort due to the management of their assets in this country, it may mean that he or she has substantial ties.

Requesting treatment as a non-resident taxpayer

When a Finnish citizen moves to a foreign country, they become a nonresident after the year of leaving Finland and three full calendar years have elapsed.

However, if they prove that they no longer have substantial ties to Finland, they may, already prior to the end of the third year, be treated as a nonresident.

Individuals may submit an application for tax treatment as a nonresident by submitting a claim to that effect when sending back their pre-completed tax return. The Tax Administration’s decision on whether a nonresident status is granted is made in connection with the assessment of the individual’s taxes. If a particular individual receives Finnish income subject to source taxation in Finland, they can submit an application for a tax-at-source card already during the tax year when the income is received (on Form 6207a). However, to receive a tax-at-source card does not mean that the individual’s status has been changed into nonresident status. The Tax Administration will not make that decision until the taxes are assessed for the year.

To request an advance ruling – offered against a fee – is a way to ascertain the residency status. Advance rulings are binding to the Tax Administration. Requests for advance rulings on income taxes must be submitted before the end date of the period when individual taxpayers must submit an income tax return. The Tax Administration can give an advance ruling only up until the tax year that ends during the calendar year after the decision was issued. Read more about advance rulings in “How to file an application for advance ruling/exemption and the decision thereon” –Ennakkoratkaisu- ja poikkeuslupahakemuksen tekeminen ja siihen annettava päätös (in Finnish and Swedish, link to Finnish — record number A15/200/2013).

Individuals who submit an application for tax treatment as a nonresident must provide an account of whether they are connected with Finland by substantial ties, with descriptions of their circumstances as follows:

  1. Do they leave Finland definitely, and if yes, what are the main reasons for that
  2. What kind of permanent home they have in the country where they go to, enclosing photocopies, for example, of the deed of purchase of such a home, or of a rental agreement
  3. Do they give up the dwelling they have had in Finland – relevant enclosures may be a deed of sale, or a lease agreement indicating that they no longer use the dwelling, or a document proving that they have terminated their rental contract for a place to live in Finland
  4. Do they still have property and assets in Finland
  5. Information on their family relations and on whether the family will leave the country as well
  6. Information on their coverage by the Finnish social security system/a certificate received from Kela proving that coverage has ended
  7. Documentation issued by the country where they go to proving their tax residence there and their liability to pay tax on their worldwide income to that country (= a residence certificate)
  8. Do they have plans to spend time in Finland in the future
  9. Information on their future income from sources in Finland and from sources in foreign countries

The impact of international treaties on the tax treatment of the individual’s income

Some of the tax treaties that Finland has signed may restrict Finland’s taxing rights that would be applicable under its national legislation. Some treaties are bilateral and others are multilateral, and the treaty provisions define how taxing rights are divided between Finland and the other contracting states.

Treaty provisions also define which one of the contracting states is the country where an individual is considered to be a tax resident: these provisions refer to the country of residence “for treaty purposes”. Under the provisions, an individual is treated as being a tax resident of a contracting state if he or she, under the laws of that state, is liable to tax therein by reason of his or her domicile, residence, place of management or any other criterion of a similar nature. If both of the two contracting states treat the individual as their resident (having a double residence), the country where he or she should be treated as an actual resident is the one with which his or her personal and economic ties are stronger.  In this context, the individual’s personal family ties may often be referred to.

Because of the way the provisions on residency in various tax treaties are formulated it may occur that someone who is a tax resident of Finland is a resident of another country for purposes of the relevant tax treaty. In this case, Finland only imposes tax on the individual’s income that is sourced in Finland – even though he or she simultaneously is a Finnish tax resident, fully liable to tax.

Making a request on treatment as a tax resident for treaty purposes

If both of the two contracting states treat an individual as their resident although he or she has left one state to start living in the other, he or she can submit a claim that the country where they have started to live in should be treated as their country of residence. The residence country, as determined by the provisions of the relevant tax treaty, is important because it refers to the country that has the rights to impose taxes on the individual’s income. The other country only has the source-country right to impose tax (the right to tax the income sourced there, taking account of any restrictions set out by the treaty).

Individuals can use the pre-completed return form in order to demand that the new country where they begin to live should be regarded as their residence country. The Tax Administration’s decision on “residency status for treaty purposes” is made when the Tax Administration assesses the individual’s taxes for the year.

If the particular individual receives income, subject to withholding, from a source in Finland, which under the treaty is only taxed by the country of residence, he or she may request a revision of the withholding calculation on their tax card (on Form 6207a) due to the fact that Finland no longer is their actual residence country (for treaty purposes).  However, to receive a revised card does not mean that the individual’s country of residence has changed. The Tax Administration will not make that decision until the taxes are assessed for the year.

To request an advance ruling – offered against a fee – is a way to ascertain the residency status. Advance rulings are binding to the Tax Administration.

When submitting a demand for “residence country for treaty purposes”, individuals must provide an account that contains descriptions of their circumstances as follows:

  1. Do they leave Finland definitely
  2. Do they have a permanent place to live in the foreign country, enclosing photocopies of a deed of purchase or rental agreement
  3. Do they still use the dwelling they have had in Finland – possible enclosures may be a deed of sale or a lease agreement indicating that they rent out the dwelling to a tenant, or a document proving that they have terminated their rental contract of a rented dwelling
  4. Information on the place where their family members live
  5. Information on their presence in Finland in the course of the year
  6. Information on their future income from sources in Finland after moving away
  7. Information on whether they operate a business in Finland after moving away
  8. Documentation issued by the country where they go to proving their tax residence there and their liability to pay tax on their worldwide income to that country (= a residence certificate)

Special groups of taxpayers

The foreign missions of Finland

Finnish citizens are treated as having Finnish tax residency when they work at Finland’s diplomatic and other missions in other countries if they are part of the mission staff (§ 11.2. line 1, act on income taxation). However, the place of their family members’ residence is determined under the general rules on what country must be considered as the country of tax residence. The general rules are also applied in the case of locally hired employees. If someone is locally hired and also a citizen of Finland, he or she is a Finnish tax resident, if under Finnish internal tax laws, the place of residence is Finland (main abode and home located in Finland).

Business Finland (formerly Finpro or Ulkomaankauppaliitto ry.)

Finnish citizens are treated as Finnish tax residents when they work in a foreign country for Business Finland (formerly Finpro or Ulkomaankauppaliitto ry) if they had lived in Finland before entering into an employment contract with this organisation (§ 11.2, line 2, act on income tax).
 The majority of these employees are commercial secretaries who have previously worked for the Ministry for Foreign Affairs and moved on to work for Business Finland.

Other employment with the state of Finland

People employed by the State of Finland, with permanent employment contracts, working abroad but not in a Finnish diplomatic mission, are Finnish tax residents for the entire length of their service contracts if they had lived in Finland before entering into the employment contract. In this case, the usual three-year limit does not apply. However, if a particular individual shows proof that they no longer have maintained any substantial ties to Finland during the tax year, they are treated as a nonresident. These rules are not applied on honorary consuls (§ 11.3, act on income tax).

Finnish citizens in the UN peace-keeping forces abroad are Finnish tax residents. They have an employment contract with the State of Finland, not with the United Nations. Example: an individual who received wages for working in Cyprus as a member of the UN Battalion was treated as having received income subject to Finnish taxation (ruling KHO 1978 II 514).

International organisations

Finnish citizens are treated as Finnish tax residents when they work for the United Nations, the UN Organizations, the International Atomic Energy Association or in international cooperation with developing countries if they had lived in Finland before entering into the relevant employment contract (§ 11.2, line 3, act on income tax).

However, if a particular individual shows proof that they no longer have maintained any substantial ties to Finland during the tax year, they are treated as a nonresident. The individual himself must demand this and present proof that no substantial ties exist.

Personnel of the European Union

Under Article 14 of the Protocol on the privileges and immunities of the European Union of 8 April 1965, the tax residence of a citizen of a EU country who relocates to another country to work for the EU remains the same as it has been prior to that.

The protocol is part of EU law, so it is treated as having priority over the internal laws of Finland. Because of this, an individual who has left Finland because of employment with an institution of the European Union is still treated as a Finnish tax resident for the entire period when he or she works for the EU, without regard to the provisions of the act on income tax. In the same way, the spouse of an individual employed by the European Union is treated as a Finnish resident, independent of the length of time spent outside Finland, unless he or she operates a business or maintains some other activity that generates income. This means that under EU law, Finland’s taxing rights can be more extensive than what the Finnish act on income tax provides (for more information, see the Supreme Administrative Court’s ruling KHO 2011:88).

Members of the diplomatic corps of a foreign country

Often, foreign nationals who work for a diplomatic mission or a comparable representation or for an office of a career consul, their family or household employees are tax residents, due to the length of their presence in Finland. However, Finland only imposes tax on income in the following circumstances:

  1. If a diplomat receives income derived from real estate property located in Finland.
  2. If a diplomat receives business income from a business operated here.
  3. If a diplomat receives rental income from an apartment in a housing company, or a similar association that owns apartments, where the diplomat is a shareholder.
  4. If a diplomat receives wages or pensions from an employment that is not the one described above (under § 12.1, act on income tax).

If a foreign citizen works for a unit of an international organisation located in Finland, such as the United Nations, a UN Organization, the International Atomic Energy Association, etc., the tax rules applied on him or her are the same as those applied on diplomats.

Nonresident individual taxpayers who are not Finnish citizens do not pay Finnish income taxes on received wages and fees relating to their work at an international conference held in Finland (§ 12.2, act on income tax).

Additional tax rules applicable on diplomats’ and consuls’ income are found in various international agreements.

Finnish vessels

Under the special provisions of § 13, act on income taxation, the following tax rules apply to people who work on board Finnish vessels. If an individual workong on board a Finnish ship or aircraft is not a Finnish tax resident under the provisions of the act on income tax, he or she must pay tax to Finland – in addition to taxes on any other Finnish-sourced income – only on their wage income earned:

  1. on board the ship or aircraft; or
  2. at another location if the employer has given them orders to work at another location for a temporary period.

In addition, he or she must pay Finnish income tax on pensions that directly or indirectly relate to the work described above.