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Deduction of expenses in international situations

Date of issue
4/28/2023
Validity
4/28/2023 - Until further notice

This is an unofficial translation. The official instruction is drafted in Finnish (Menojen vähennyskelpoisuus kansainvälisissä tilanteissa, record number VH/6568/00.01.00/2022) and Swedish (Avdragbarheten för utgifter i internationella situationer, record number VH/6568/00.01.00/2022) languages.

This guidance discusses the deductibility of paid expenses supporting the earned income or capital income received by natural persons in various cross-border situations. Impact of national legislation or international treaties are described, especially when Finland has no taxing rights over the income to which the expenses are related.  We also describe the deductibility of pension insurance contributions in connection with taxes on earnings, the deductibility of interest expenses related to debt taken on for an income-producing purpose in the taxation of capital income, and the deductibility of capital losses in the taxation of capital income.

1 General remarks

Under § 9, subsection 1, paragraph 1 of the Act on income tax (Tuloverolaki 1535/1992), natural persons who are tax residents of Finland must pay tax to Finland on their world­wide income, whereas those who are nonresident taxpayers in Finland (§ 9, subsection 1, paragraph 2 of the Act) pay tax to Finland only for the income received from sources in Finland. A list of examples of taxable income sourced to Finland is presented in § 10 of the Act. For more information on residency and non-residency of individual taxpayers, see the Finnish Tax Administration’s guide Tax residency, nonresidency and residency in accordance with a tax treaty – natural persons. 

In general, the assessment of resident taxpayers’ income tax is based on their total income and on a progressive basis, while capital income is taxed progressively only in part, in accordance with the Act on assessment procedure (Laki verotusmenettelystä (1558/1995)).

For nonresidents, income tax is assessed as provided in the Act on the taxation of non-residents' income and capital (Laki rajoitetusti verovelvollisten tulon verottamisesta (627/1978), also called the Act on source taxes (Lähdeverolaki)). Assessment is based on withholding the income tax at source. The tax withheld at source is a final tax, and the percentage depends on the income category. However, part of nonresident taxpayers’ income is taxed in accordance with the provisions of the Act on assessment procedure. Income subject to tax according to the Act on assessment procedure includes pensions and rental income. If the conditions set out in the Act on the taxation of non-residents' income and capital are met, nonresident taxpayers also have an option to submit an application for having all of their earned income assessed in accordance with the provisions of the Act on assessment procedure, i.e. under the progressive taxation in the same way as for Finnish resident taxpayers.

In international situations, the provisions of tax treaties between different countries (states) on the avoidance of double taxation restrict Finland’s taxing rights. Some of the restrictions can prevent Finland fully from imposing tax on some items of income: for example, on capital gains resulting from transactions with securities. Other ones can set out a maximum tax (for example, income in the form of received dividends is often subject to maximum tax of 10% or 15%).

Tax treaties may also restrict the taxes to be imposed on the Finnish-sourced income received by a taxpayer who is deemed a tax resident in Finland but at the same time a resident of the other Contracting State in accordance with the tax treaty. The provisions of tax treaties may also restrict taxation of Finnish-sourced income received by a nonresident taxpayer when their country of tax residence is a country that has signed a tax treaty with Finland. Not only the above but also the provisions of other international treaties or conventions may restrict Finland’s taxing rights with regard to the taxpayer’s income.

Treaty provisions and those of other international treaties contain no provisions concerning the deductibility of expenses. Instead, detailed rules on how taxpayers can claim deductions for expenses that support income remain within the sphere of national legislation. From this, it follows that Finnish law is the only applicable legislation for settling the question of whether an expense is deductible in the context of tax assessment in Finland.

References in this guide to a situation where a tax treaty restricts Finland’s taxing rights should be read as extended to any other situation where an international convention or treaty, etc. restricts Finland´s taxing rights.

This guide describes the deduction rights of a nonresident taxpayer and the deduction rights of a Finnish tax resident who is a ”treaty” resident in another Contracting State in situations where the relevant income is exempted from Finnish taxes either due to national legislation, due to provisions of the tax treaty, or due to provisions of another international treaty. However, this guide does not address the problems related to bases for various deductions or allowable amounts because they are discussed in other instructions the Tax Administration has released.

References in this guide to a ‘resident of a foreign country’ are intended to mean both a nonresident taxpayer and a Finnish tax resident who is resident in a foreign country under the relevant tax treaty.  The principles discussed in this guide generally apply on both types of foreign residency.

2 Deductability of expenses

2.1 The general principle for allowing a tax deduction due to an expense

“Expenses for the production of income” refers to taxpayer-paid expenses that support the production of income or the maintenance of income. According to § 29, subsection 1 of the Act on income tax, taxpayers who have paid expenses for purposes related to producing or maintaining income can claim deductions for them (natural deductions). According to § 31, subsection 4 of the Act, no deductibility is granted to the taxpayer’s living expenses nor to expenses that support the taxpayer’s tax-exempt income. For both earned income and capital income, the Act additionally contains a number of specific rules concerning taxpayer-paid expenses. For further information, see chapters 3 and 4 below.

The general provisions of the Act demonstrate the logical approach of the tax rules: for an expense to be deductible the income must be subject to tax. Accordingly, when an item of income is taxable in Finland, the taxpayer can deduct the expenses that have supported it. The above rules also indicate the principle of symmetry which is one of the major principles in tax law. However, some provisions of the Act do not adhere to the symmetry. For example, although income in the form of dividends is partially tax-exempt, the Act’s provisions make the taxpayer-paid expenses related to dividends fully deductible.

2.2 Expense deductions in international circumstances

The Act on income taxation contains no provisions concerning the way deductions should be determined in various international circumstances. Therefore, the Act’s general provisions govern the way deductibility of the expenses should be evaluated.

As provided in § 135 of the Act, after the fiscal authorities have assessed a taxpayer’s taxes for the year in accordance with what is agreed under a tax treaty, it is deemed that the assessment was conducted according to the provisions of the Act on income taxation. The contents of § 135 lead to another principle for tax treaty situations: expenses for the taxpayer’s production of income are deductible in Finnish tax assessment if the expenses are related to the kind of income that falls within Finland’s taxing rights laid down in the tax treaty.

The wording of subsection 3 – later repealed – of the original § 135 of the Act (1535/1992) prevented taxpayers’ deductions for expenses relating to income, which under the tax treaty is exempt from Finnish tax. Deductions were prevented even if the expense would otherwise be deductible based on the Act on the taxation of business income, on the Act on the taxation of agricultural income, or on the Act on income taxation. The original wording was repealed because of legal amendments that made the provisions on international credit and exemption methods become part of the Act on the elimination of international double taxation (Laki kansainvälisen kaksinkertaisen verotuksen poistamisesta 1552/1995) .

Government Proposal (HE 76/1995 vp) addressing section 135 of the Act on income tax indicates that there is no need to keep the legal rules on credit and exemption methods in § 135, because the Act on the elimination of international double taxation now contains similar provisions. However, the provisions containing restrictions of deductibility (in the original § 135) did not enter into the Act on the elimination of international double taxation.

Provisions concerning an exemption-with-progression method are found in § 6 of the Act on the elimination of international double taxation: when income is exempted from Finnish tax, it only has an impact on the progressive accumulation of income of a Finnish-resident taxpayer’s income on the condition that it represents the same type of income and is subject to Finnish tax. These provisions also contain the rule laying down that deductions for interest payments and expenses relating to income are deductible from the income exempted from Finnish tax, but the amounts of these deductions cannot exceed the amount of the income.

Subsection 3, which is now repealed, laid down rules concerning the deductibility of expenses in situations where a Finnish resident taxpayer had income sourced to a foreign country and exempted from Finnish tax. The repealed rule also applied on residents of foreign countries who received income exempted from Finnish tax. In contrast with the repealed rules, § 6 of the Act on the elimination of international double taxation is only applicable to a Finnish tax resident who receives income sourced to a foreign country, and Finland has relinquished the taxing rights in respect of that income.

The Government Proposal describing the objectives and reasoning for the changes gives no indication that the general level of deductibility of expenses for the production and maintenance of income should be increased, or that any other changes to the legal state had been aimed for. In the same way, no indication is found for an objective to let deductions be granted in respect of expenses connected to income exempt from Finnish taxes to residents of a foreign country.

It would go against the logic of tax rules to allow deductions for expenses for the production of income, for interest payments, and for capital losses, for which Finland’s taxing rights on the income are restricted due to tax treaties, other international treaties or due to national laws. No deductions are allowed, either, for a Finnish resident’s expenses for the production of income when the expenses support tax-exempt income.

3 Expenses relating to taxpayers’ earned income

3.1 General remarks on deductions for expenses relating to earnings

The rules governing earned income and the deductibility of paid expenses are generally the same for international situations as in situations where the taxpayer only works in Finland for a Finnish employer, or works in Finland for a foreign employer.

For more information on the deductibility of expenses that support earnings, see the Tax Administration’s in-depth guides (available only in Finnish and Swedish, links to Finnish): 

However, in international situations, the provisions of Finnish national laws, the provisions of tax treaties, and the provisions of other international conventions may restrict Finland’s taxing rights on the earned income. In addition, in these circumstances, a number of restrictions affect the deductibility of expenses for the production of income.

3.2 Deductibility of expenses paid by a resident taxpayer

In general, when paid expenses relating to earned income, which is subject to Finnish tax and which under treaty provisions is within Finland’s taxing rights, a Finnish tax resident can deduct the expenses.

Example 1: Starting 1 February 2022 and ending 31 May 2022, a Finnish resident taxpayer works in Germany for a German employer. After 31 May, the taxpayer returns to Finland. The tax treaty between the Federal Republic of Germany and Finland on the Avoidance of double taxation of income and capital does not prevent Finland from imposing tax on wages received for work done in Germany.  The Finnish Tax Administration eliminates any double taxation when assessing the taxpayer’s taxes in Finland. The taxpayer has the right to claim deductions for the expenses he paid for the production of income when working in Germany.

No resident taxpayer can be given deductions in Finland for expenses that are related to income which falls outside of Finland’s taxing rights due to treaty provisions. In addition, the Tax Administration does not grant the taxpayer an allowable loss in the earned-income category based on expenses of this type. In the same way, expenses that are related to tax-exempt income are not deductible also when claimed against any other items of income that are subject to Finnish tax and which Finland has the taxing rights of under a tax treaty, because in that case, the claimed expenses would not have been related to the taxpayer’s production of taxable income.

Example 2: Starting 1 January 2019 and ending 1 June 2022, a Finnish resident taxpayer worked in the United States of America for a U.S. corporation. Under the Treaty for the avoidance of double taxation between the U.S.A and Finland, the taxpayer was treated as a U.S. tax resident during that period, and further, according to provisions of the Treaty, the wages received for the work the taxpayer performed in the United States fall outside of Finland’s taxing rights.

After returning to Finland, the taxpayer continued to work here, and Finland has now become their treaty country of residence. No deductions from wages for the work done in Finland are allowed in respect of expenses that are related to the income received during the period when the treaty country of residence was the United States.

Sometimes the taxpayer-paid expenses may simultaneously be related to both items of income within Finland’s taxing rights, and other items of income that fall outside of Finland’s taxing rights. A typical example of taxpayer-paid expenses is tool costs such as the price of a computer. In these circumstances, deductibility must be determined case by case.

The provisions of § 77 of the Act on income tax lay down the principle known as the six-month rule. According to those provisions, wages received for working in a foreign country can be exempt from tax when certain conditions are met. Taxpayer cannot claim deductions, from any other income the taxpayer might have, for the expenses paid that are related to the wage income that falls under the six-month rule. For further information, see “The 6-month rule applied to wages earned abroad” — Ulkomaantyöskentelystä saatua palkkaa koskeva kuuden kuukauden sääntö.

3.3 Deductibility of expenses paid by a nonresident taxpayer

Rights to claim deductions are different depending on whether the nonresident’s income is taxed in accordance with the provisions of the Act on the taxation of non-residents’ income – or whether the income, on the nonresident’s request, is taxed in accordance with the provisions of the Act on assessment procedure.

When the payor withholds tax at source, it is a final tax imposed on the gross income in the nonresident’s hands. Under § 2, subsection 2 of the Act on the taxation of non-residents’ income, no deductions are allowed besides the one defined in § 6 of the Act on the taxation of non-residents’ income (€510 per month or €17 per day).

According to § 13, subsection 1, paragraph 6 of the Act on the taxation of non-residents’ income, a nonresident individual taxpayer can request their income to be taxed in accordance with the Act on assessment procedure, i.e. on the progressive basis. When the nonresident’s income is taxed this way, it also means that their expenses are deductible in the same way as Finnish residents’ expenses are.

Furthermore, when the nonresident’s income is progressively taxed and under the Act on assessment procedure, the exemption-with-progression method applies on the tax treatment of their foreign-sourced income and related expenses. Under § 6, subsection 1 of the Act on the elimination of double taxation, the maximum level of deductibility of expenses related to foreign income is the amount of the income itself. However, expenses that are related to income sourced to Finland can only be deducted in respect of the period when the nonresident had income sourced to Finland and subject to Finnish tax, and their tax assessment is conducted in accordance with the Act on assessment procedure.

For more information on tax treatment under the Act on assessment procedure, see section 2.3 of Taxation of employees from other countries.

3.4 Mid-year change of taxpayer status

Individual taxpayers in Finland can be treated as residents during one period within the calendar year, and as nonresidents for another period of the same year. No expenses for the production of income are deductible when the expenses are related to income received during the period when the taxpayer is a nonresident or when they support income not taxed in Finland in accordance with the Act on assessment procedure.

Example 3: An Estonian resident taxpayer arrives here, begins working for a Finnish employer, and is present here from 1 May 2022 to 31 December 2022. Due to their presence in Finland, they become a Finnish tax resident, so the wages they get from a Finnish source are subject to Finnish income tax, and the Estonia–Finland tax treaty does not prevent Finland from imposing the tax. Before arriving, the Estonian resident worked for an Estonian employer in Estonia and was treated as a nonresident taxpayer in Finland. Under the circumstances, the taxpayer can claim no deductions related to their expenses for production of the income that is taxed in Finland when the expenses are connected to work in Estonia before arriving in Finland.

However, it may also be that someone is treated as a nonresident for a certain part of the year, and during that period, they receive income sourced to Finland which is taxed in accordance with the Act on assessment procedure. If they later became a Finnish tax resident, it would be acceptable to claim deductions for expenses for the production of income for the entire length of time when they received income taxed in accordance with the Act on assessment procedure. However, the expenses that are related to income sourced to Finland can only be deducted for the period when the income is subject to Finnish tax.

3.5.1 General remarks on tax-deductible contributions paid to foreign countries

According to § 96, subsection 1 of the Act on income tax, taxpayers can deduct statutory employee’s pension contributions, unemployment insurance contributions, and a health insurance contribution (päivärahamaksu) from their net taxable earned income. Contributions paid in a foreign country are deductible on the condition that they are based on similar grounds and objectives as the Finnish contributions.

This means that health insurance contributions paid abroad are deductible in Finland for the part that is designed to cover a loss of income due to illness. The contribution known as the “healthcare contribution of health insurance” — sairausvakuutuksen sairaanhoitomaksu — is not tax-deductible.

The onus is on the taxpayer to explain the grounds for any deduction being claimed. If the taxpayer does not present information on how contributions are allocated, amounts of equal size with Finnish contributions can be accepted as deductions. However, the maximum deductible amount is the amount actually paid to the foreign country.

It may be that the individual taxpayer who works in a foreign country must pay pension contributions or premiums that are different from the Finnish ones. Examples to illustrate the deductibility of foreign-paid contributions:

  • Taxpayers working in Norway must make a payment known as ‘trygdeavgift’ if they are covered by Norwegian social security. The ‘trygdeavgift’ covers Norway’s mandatory health care, social security and pension contributions. No further details are available as to how the payment of a ‘trygdeavgift’ is allocated between the above. The tax-assessment practice in Finland has been to allow an amount equal to the contributions collected in Finland in accordance with § 96, subsection 1 of the Act on income tax. The Nordic Tax Treaty contains a list of taxes which the treaty applies to, but ‘trygdeavgift’ is not on the list. Therefore it cannot be credited in Finnish assessment as a tax paid abroad.
  • Concerning Sweden, taxpayers covered by the Swedish social security system are liable to pay a general pension contribution from their income, which is called ‘allmän pensionsavgift’ (for more information, visit skatteverket.se). However, due to the deductions granted to many taxpayers, the majority of them do not actually need to pay the ‘allmän pensionsavgift’. If the taxpayer demonstrates that they were among them who actually paid the pension contribution called ‘allmän pensionsavgift’ to Sweden, the paid amount can be deducted.
  • In the United States of America, the rules of the Internal Revenue Service (IRS) and the Social Security Administration (SSA) require employers to withhold ‘Social Security tax’ and ‘Medicare tax’. In addition to Social Security and Medicare taxes, there are voluntary 401(k) pension plans for savings towards retirement. Deposits can be made both by the worker and the employer. Because the designated purpose of Social Security tax is to cover income losses related to the worker’s retirement and inability to work, it is deemed as being similar to Finnish contributions as defined in § 96 of the Act on income tax. As a result, the U.S. Social Security tax is treated as a deductible item. On the other hand, the designated purpose of Medicare tax is the coverage of medical costs. This makes Medicare tax similar to the Finnish ‘healthcare contribution of health insurance’ (sairausvakuutuksen sairaanhoitomaksu), i.e. non-deductible. Contributions to a 401(k) pension plan are non-deductible, because the American 401(k) arrangement is different from a pension insurance contract, i.e. it resembles a tax-deferral arrangement not an insurance contract. As a result, the conditions of deductibility of a pension insurance contract are not fulfilled.

3.5.2 Contributions to employees’ pension insurance paid by resident taxpayers 

In general, when a Finnish tax resident works in a foreign country, they are entitled to deductions for statutory pension insurance contributions paid to Finland and to foreign countries during their stay abroad. However, the contributions paid to foreign countries are not deductible unless they are similar to the Finnish statutory contributions. 

The character of these contributions as a deductible expense is different from expenses for the production of income, i.e., they fall into the category of general deductions effected against the taxpayer’s net taxable earned income. For this reason, their deductibility is independent of whether or not the taxpayer’s earned income is subject to Finnish tax.

3.5.3 Contributions to employees’ pension insurance paid by nonresidents

No deductibility of payments of statutory contributions as required by law is granted to nonresident taxpayers who receive earned income taxable in accordance with the Act on the taxation of non-residents’ income, because only the deductions allowed by § 6 of the Act on the taxation of non-residents’ income can be made.

On the other hand, in circumstances were a nonresident taxpayer’s income, on request by the nonresident concerned, is assessed in accordance with the Act on assessment procedure, the statutory contributions as required by law are deductible. However, these contributions can only be deducted in respect of the period when the nonresident was receiving earnings sourced to Finland and subject to Finnish tax, and when assessment is conducted in accordance with the Act on assessment procedure.

3.5.4 The impact on the deductions of a changed taxpayer status

It may be that a taxpayer who worked in a foreign country paid statutory contributions, relating to earnings, at a time when the individual taxpayer was treated as a nonresident. In these circumstances, the contributions may have been paid during the tax year, but before the taxpayer became a Finnish tax resident and “treaty” resident here – or the contributions may have been paid when the taxpayer had already left Finland and had become a nonresident.

No deductions can be allowed for statutory pension contributions paid to foreign countries during the time when the taxpayer is a Finnish tax resident, if the payments of the contributions were made at a time when the taxpayer was a nonresident, for work in a foreign country. During a taxpayer’s nonresidency, their income from abroad is not income subject to Finnish tax. Any expenses related to such income, and any other deduction claims relating to such income cannot be accepted against the taxpayer’s income received during the time when the taxpayer is a Finnish tax resident (the symmetrical logic of tax rules).

Example 4: During the first months of the calendar year, a taxpayer worked in a foreign country and was treated as a nonresident in Finland. When working there, the taxpayer paid contributions that are statutory in accordance with the laws of the foreign country. Part way through the year, the taxpayer returned to Finland and started working here. They became a resident taxpayer and the wage income they received became subject to Finnish tax. The foreign country issued the taxpayer a Certificate of a posted employee, and during the period when they work in Finland, they pay pension contributions to the foreign country. The pension insurance contributions paid to another country during the year’s first months – during nonresidency – are non-deductible against taxable income which was received in Finland during the period when the taxpayer was a resident in Finland. 

Example 5: During the first months of the calendar year, a taxpayer lived in Finland and worked for a Finnish employer. The employer withheld the statutory contribution as required by the Finnish Employees Pensions Act (395/2006). Later in the year, the taxpayer left Finland and was now deemed a nonresident taxpayer in Finland. During the remaining months of the year, the taxpayer worked in a foreign country for a local employer. The employer withheld the statutory pension insurance contribution as required by the national laws of the country. For the taxpayer, the legally required contributions paid to the foreign country after moving away from Finland are non-deductible against the income earned during the first months of the year while being a Finnish tax resident.

4 Expenses relating to capital income (investment income)

4.1 General remarks on deductions for expenses relating to capital income

According to § 54, subsection 1 of the Act on income tax, expenses paid for the purpose of acquiring or maintaining capital income are deductible. The expenses that are related to taxable capital income are deducted against the capital income that the taxpayer acquired or maintained.  No deductions are acceptable related to items of income that are exempt from Finnish tax or items of income for which the relevant tax treaty prevents Finland from imposing taxes. In these situations, the taxpayers’ expenses can justify no allowable loss to be recorded in Finland for the capital-income category.

However, in the case of income in the form of dividends, the expenses that are related to the income are deductible in full, although dividends are subject to tax only in part, under the provisions in § 33a to § 33d of the Act on income tax. Nevertheless, if the tax treaty prevents Finland from imposing any tax on the dividends received from sources here, no deductions for the production of income are acceptable.

Examples of this include the case when a taxpayer owns securities that can be sold at a profit, but this capital gain would not be subject to Finnish tax; or it may be that the relevant tax treaty prevents Finland from imposing tax on the capital gain. However, Finland may have taxing rights in respect of the dividends the taxpayer receives by virtue of owning the securities. In this case, deductions can only be accepted for expenses related to the securities’ ongoing yield (which is capital income in the form of dividends), the taxing rights of which are not prevented by the treaty.

For more information on how expenses supporting income and yield from shareholding and the holding of other securities, see  “Tax treatment of capital gains arising from sales of securities” — Arvopaperien luovutusten verotus (section 26.1 of the in-depth guide, only available in Finnish and Swedish, link to Finnish). 

Foreign resident taxpayers can claim deductions, against their capital income sourced to Finland, for the related expenses for the production of income on the condition that the income is subject to Finnish tax, fully or in part, and on the condition that the tax treaty does not prevent Finland from imposing tax on the capital income. No restriction of the deductibility is posed by the fact that the tax treaty may set out a maximum tax (often, for income in the form of dividends, 10% or 15%).

Nonresidents may receive capital income from Finland for which the payor must withhold tax at source as required by § 3, subsection 1 of the Act on the taxation of nonresidents' income. Dividends and interest are among capital income for which tax must be withheld at source. ax at source is a final tax imposed on the gross income that the nonresident taxpayer receives, and under § 2, subsection 2 of the Act on the taxation of non-residents’ income, no deductions are allowed. From this, it follows that when capital income is subject to withholding of tax at source, no deductions can be claimed for the actual expenses that have been related to the production of the capital income.

In addition to capital income subject to the withholding of tax at source, a taxpayer may receive other items of capital income (such as rental income), which are subject to Finnish tax in accordance with the Act on assessment procedure. If so, expenses for the production of income – and interest payments connected to a loan taken in order to produce income – are deductible only against the capital income taxed in accordance with the Act on assessment procedure.

4.2 Interest on a loan relating to the production of income

Provisions controlling the deductibility of interest expenses connected to a loan the taxpayer has taken for the purpose of acquiring or maintaining income are found in § 58, subsection 1 of the Act on income tax. Under these provisions, taxpayers are entitled to deduct interest against their capital income, if the debt was related to the capital income. If the taxpayer is a nonresident and a treaty resident of a foreign country, deductions for the interest expenses can be granted only if they receive income subject to Finnish tax; and if the loan and the interest are connected to that income. In addition, the loan must be connected to the taxpayer’s income subject to tax in accordance with the Act on assessment procedure.

Interest expenses on a loan relating to the production of income are deductible although a tax treaty may restrict Finland’s taxing rights to a maximum amount or although other rules are in effect making the item of income only partially subject to tax. From this, it follows that the deduction rights also concern interest expenses of a loan taken for the purpose to receive dividends; the interest can be deducted although income in the form of dividends is partially tax-exempt under the provisions in § 33a to § 33d of the Act on income tax, or although the relevant tax treaty restricts the maximum tax to be imposed on the dividends.

When a taxpayer is receiving capital income subject to tax treatment under the Act on the taxation of nonresident’s income, no deductions are granted for interest expenses connected to a loan taken for a purpose that supports the production of the capital income, because the tax treatment under the said Act allows no deductions against capital income. Furthermore, interest expenses described above are also non-deductible against other capital income which is taxed in accordance with the Act on assessment procedure.

4.3 Capital losses

4.3.1 Deductibility of a capital loss

Under § 50, subsection 1 of the Act on income tax, a capital loss that results from a sale of property can be applied against the taxpayer’s capital gains, as they accumulate from other selling of property, during the tax year when the transaction is made, and carried forward to five subsequent years. If a taxpayer who is a natural person or an estate of a deceased person still has a remaining amount of capital losses after having applied them against the taxpayer’s all capital gains, such a remaining amount can be deducted from the taxpayer’s other capital income. This must be done before carrying out the taxpayer’s other deductions from the other capital income.

For more information on capital losses, see the Tax Administration’s guidance (available only in Finnish and Swedish, links to Finnish):

Taxpayers have the right to deductions in the form of claiming the capital loss, sustained as a result of a sale of property, on the condition that a capital gain in similar circumstances would be subject to Finnish tax and on the condition that the relevant tax treaty allows Finland to impose tax on such a capital gain.

In accordance with § 10, paragraph 10 of the Act on income tax, capital gains resulting from sales of immovable property including housing-company shares are deemed income sourced to Finland.  Taxes on such income are assessed in accordance with the Act on assessment procedure. The majority of the tax treaties Finland has signed with other countries do not prevent Finland from imposing tax on gains resulting from the sales of immovable property located in Finland or housing-company shares. However, among the treaties that Finland has signed there are some that contain provisions that are different from the usual; for more information, see Non-standard provisions of tax treaties. In addition, when a resident of a foreign country has sustained a capital loss as a result of a sale of immovables, the foreign resident can deduct the capital loss in their Finnish tax assessment if the relevant tax treaty does not prevent Finland from having the taxing rights in respect of capital gains.

However, Finland’s national legislation poses restrictions, which affect the tax treatment of nonresident taxpayers’ capital gains that arise from sales of movable property. Finland’s national legislation also poses restrictions concerning taxes on capital gains from the sale of corporate stocks, shares or other rights of corporate entities, of partnerships and of contractual totalities of assets, when 50% or less of these entities’ assets, directly or indirectly, on the day of sale or during preceding 365 days, consisted of immovable property located here, of a building/structure situated on land belonging to another party, or of various rights to possess or receive proceeds from them or the land. Capital gains that arise from the types of property listed above are not deemed income sourced to Finland on the basis of the provisions of § 10, subsection 10, paragraph (a) of the Act on income tax. Furthermore, based on the same § 10, subsection 10, paragraph (a) of the Act on income tax, capital gains arising from sales of listed-company stocks, of the corporate stocks of other comparable entities, and of other types of shares are not deemed income sourced to Finland, and if a resident of a foreign country received such gains, they fall outside of Finland’s taxing rights.

In addition to the above, the treaty article concerning capital gains generally only provides that when a taxpayer has owned moveable property and sells it at a profit, i.e. receives a capital gain, the Contracting State where the taxpayer is resident is the country that gets the taxing rights. For the above reasons, Finland cannot impose tax when a resident of a foreign country receives capital gains such as those arising from the sale of Finnish listed-company shares.

The legal provisions governing non-deductible capital losses are found in § 50, subsection 2 of the Act on income tax. Accordingly, no deduction is granted if a taxpayer suffers a capital loss due to selling their home (on which exemption from capital gains tax would apply), due to selling the movable property of the home, or due to selling other similar personal property. In addition, another legal provision lays down that any losses arising from sales amounting to less than €1,000 a year are non-deductible.

The provision of § 50, subsection 3 additionally restricts the deductibility of capital losses by setting out a rule concerning derivative contracts: if such a contract is voided or a loss is caused by a derivative contract, the loss is non-deductible if the contract was subject to trading outside of regulated securities markets within the meaning of the Act on Trading in Financial Instruments (1070/2017).

No specific legal rules are included in the Act on income tax that would address the deductibility of capital losses in international situations where Finland has no taxing rights on the matching capital gains, which could have arisen instead of the capital losses. From the perspective of the logic of tax rules indicated by the Act on income tax, and because any losses directly comparable to a tax-exempt gain are non-deductible, the Finnish Tax Administration can allow a deductible capital loss for a resident of a foreign country only if they sell property located in Finland, the capital gains from which are subject to Finnish tax, and which also for treaty purposes are taxable in Finland.

Example 6: A taxpayer who lives in the United States of America, a U.S. resident individual, sold some of his holdings of Finnish listed-company stocks. The sale resulted in a capital loss of €10,000. The USA – Finland tax treaty prevents Finland from imposing tax on capital gains if a U.S. resident sells Finnish listed-company stocks and makes a profit. From this, it follows that the U.S. resident who sustained a capital loss of €10,000 cannot be granted an allowable loss in their Finnish tax assessment because Finland would not have the taxing rights in respect of the capital gains that would arise when someone sells Finnish listed-company stocks and makes a profit.

For the kind of capital losses for which a matching capital gain would not be subject to Finnish tax – or for the kind which for treaty purposes cannot be taxable here – no deductibility is available. For this reason, a resident of a foreign country cannot apply such a capital loss against a capital gain, subject to Finnish tax and, also in accordance with the tax treaty, taxable in Finland.

Example 7: An individual taxpayer who is a tax resident of France sold their holding of Finnish corporate stocks in listed companies. The sale resulted in a capital loss of €30,000. The taxpayer also sold immovable property located in Finland, and the result was €20,000 of capital gains.

The treaty between Finland and France prevents Finland from imposing tax on capital gains arising from Finnish listed-company stocks. However, the treaty poses no restriction for Finland for imposing tax on capital gains from the sale of immovable property located here.

As a result, the Tax Administration assesses that the taxpayer received taxable capital gains amounting to €20,000. The taxpayer cannot claim a deduction based on the loss from the listed stocks to lower the gains of €20,000 related to the sale of immovable property.

4.3.2 Changed taxpayer status or changed “treaty” country of residence

In accordance with § 50, subsection 1 of the Act on income tax, the taxpayer must first offset an allowable capital loss against gains that have arisen from other sales, etc., and then, offset the remainder against the taxpayer’s other capital income. If it is impossible to claim the capital loss during the tax year, it becomes an allowable loss, to be claimed later as capital gains arise for the taxpayer and as other capital income arises. Carry-forward is available for 5 years after the end of the tax year.

If a Finnish resident taxpayer leaves Finland to start living in a foreign country, they will not lose their right to claim allowable losses that have arisen during the time when the taxpayer in question was a Finnish resident and also a “treaty” resident in Finland. This means that even after moving away, they still continue to have the right to claim the capital losses for purposes of Finnish tax assessment.

The tax authority does not grant an allowable loss to the taxpayer if the loss arose when the taxpayer was a nonresident in Finland or treaty resident of a foreign country, and a matching capital gain would not have been subject to Finnish tax or a matching capital gain would not have been taxable in Finland due to the tax treaty.  Accordingly, no offset of such capital losses is allowed in Finnish tax assessment when the taxpayer moves to Finland.

Page last updated 12/18/2023