Paying nonwage compensation to a foreign company
- - 3/20/2017
This bulletin is designed for a Finnish service recipient paying nonwage compensation to a foreign company.
1. Obligation to withhold tax at source
The Finnish service recipient has the obligation to withhold tax at source on nonwage payments to foreign companies when the work or comparable services have been performed in Finland.
However, the service recipient should withhold no tax at source if
a) the foreign company is prepayment-registered in Finland
b) the foreign company has applied for a tax-at-source card, showing zero percent of tax.
Additionally, the service recipient should withhold no tax at source if the foreign company presents a full explanation to show that an international treaty prevents Finland from collecting tax (in the case of a bilateral tax treaty between Finland and another country, this situation will usually involve that the foreign company has no permanent establishment in Finland). Nevertheless, if the nonwage pay is associated with the performance of construction work of houses and other buildings, earthmoving, water engineering, or other building work, assembly or installation project work, shipbuilding work, transporting or cleaning, caring and nurturing work, or if the nonwage pay is associated with leased employees in the sectors listed above, tax at source should always be withheld unless the foreign company is prepayment-registered in Finland, or the foreign company presents a tax-at-source card, showing zero percent of tax (§ 10 e, Act on the Taxation of the Income of Nonresidents (627/1978)).
The rate of tax at source is 13%, when the nonwage compensation is paid to a foreign enterprise or a business partnership, comparable to a Finnish limited company (osakeyhtiö; aktiebolag). The rate of tax at source is 35%, when the nonwage compensation is paid to a private entrepreneur or a self-employed person.
If the foreign company wishes to avoid that the tax at source is withheld from the nonwage compensation it receives, it is recommendable for the company to apply for prepayment registration or to apply for a 0% tax-at-source card. Several publications for foreign enterprises have been posted at www.tax.fi dealing with subjects such as prepayment registration, liability to Finnish income tax
and working with leased employees.
2. How to pay tax at source forward to Finnish Tax Administration
The Finnish service recipient is expected to pay the tax-at-source amount to Tax Account and report the amounts in the Periodic tax return (lines 605, 606 and 608 of Periodic Tax Return form).
3. Annual information return
To fulfill the annual information-reporting requirement, the Finnish payer of nonwage compensation is expected to declare the amounts paid by form 7809, if tax was withheld at source. If the nonwage compensation was paid to a non-resident individual, 7809 is to be submitted, even if no tax was withheld. The applicable Type of Payment is A4. The annual information report is submitted by the end of January following the calendar year during which the tax at source was withheld.
4. Refunds of too much tax withheld
We recommend foreign companies to apply for prepayment registration or request for 0% tax-at-source card at an early stage — preferably already before the work in Finland and invoicing has been started. If the date of payment of the nonwage compensation falls before the date of prepayment registration or the date of receipt of the 0% tax-at-source card, the Finnish service recipient will have to withhold tax at source.
If a tax treaty with Finland is in force, the foreign company will be liable to Finnish income tax, and any received compensation will be taxable income, usually for the reason that its business operation in Finland gives rise to a permanent establishment. The rules that determine whether a permanent establishment is constituted or not are dependent on the clauses of the relevant tax treaty. The usual wording in the tax treaties that Finland has made with other countries is based on Article 5, Model Tax Convention of the OECD. Nevertheless, some variation exists as to the definitions of permanent establishment.
Some tax treaties determine a foreign-resident self-employed individual liable to pay Finnish income tax based on activities in Finland when the individual’s duration of stay has exceeded 183 days within any 12-month period, even if a permanent establishment is not created (e.g. Estonia, Latvia, Lithuania, Norway, Sweden, Denmark and Iceland).
If Finland has no right to impose tax on the income of the foreign company, the company can submit a request for refund of excessively collected tax at source.
Two alternative procedures of refund are possible:
1. The Finnish service recipient that has withheld the tax refunds it to the foreign company
This alternative requires that the foreign company deliver the Finnish service recipient a written explanation, showing that no withholding of tax at source was necessary. In practice, a valid explanation is a retroactive 0% tax-at-source card issued by a Finnish tax office. If the foreign company has been prepayment-registered in Finland at a later date, it is not a valid explanation. If the Finnish service recipient receives, during the year of payment, a retroactive 0% tax-at-source card, the Finnish company can refund the tax to the foreign company. Revised documentation must be issued to the foreign company in this case. When preparing the revised documentation to show the refunded amount, the Finnish company should maintain an audit trail with the original proof of taxes withheld. Furthermore, Periodic tax returns that have been submitted will have to be corrected to reflect the refund payment.
If the year of payment has passed, this procedure will no longer be possible, and procedure (2) must be used.
2. The foreign company submits a refund application to Finnish Tax Administration
The tax at source refund may be requested by filing form 6203a at the Finnish Tax Administration.
Form 6203a should be complete with the following enclosures: Proof of payment issued by the Finnish payer of the compensation, including proof of taxes withheld, and a statement by the Finnish payer to confirm that no withheld tax at source amounts have been refunded to the applicant. The application letter should also include an explanation, as described in , of the applicant’s business conducted in Finland, and, if applicable, a copy of the business contract showing the services or work performed.
Nevertheless, neither of the two above methods of tax at source refund is feasible if Finland has the right to impose Finnish income tax, the most common reason for this being a permanent establishment created in Finland, or if a stay in Finland exceeding 183 days is involved. The foreign company will have to file an income tax return in Finland, and the collected tax at source will be credited against the Finnish income-tax liability. The foreign company should enclose documentation from the Finnish payer of the compensation, showing that tax at source had been withheld.