Articles of tax treaties

Date of issue
5/29/2020
Validity
5/29/2020 - Until further notice

The English translation below is unofficial. It has been made for the purpose of facilitating the understanding of the Finnish tax system and legislation.

The original guidance text is released on our website in Finnish and Swedish, the official languages of Finland. 

This memorandum discusses the typical provisions of tax treaties. The aim is to provide a general description. When appropriate, the text below contains links to further information about any of the relevant types of income and their tax treatment, often available in a detailed guidance article on the Tax Administration’s website.

This memorandum follows the order of sequence in the OECD Model Tax Convention. Treaty articles and their provisions are introduced as they are in the OECD Model. However, some of the treaties that Finland has signed with other countries do not match the corresponding provisions of the OECD Model in their entirety; deviations may concern the division of how taxing rights between the Contracting States, and the order of sequence of the articles of the treaty.

1 General remarks about tax treaties

1.1 The national legislation of the Contracting State vs. the tax treaty

On the condition of reciprocity, § 135 of the Finnish act on income taxation (Tuloverolaki (1535/1992), often abbreviated as TVL), provides that the Government of Finland can enter into various agreements with other States on the issue of how taxing rights should be divided. The options are to either introduce a solution to the problem of how to divide the rights with the other Contracting State, or to give the taxpayer a full or partial exemption from Finnish taxes. The provisions in § 135 of the act on income taxation affirm that if the assessment of a taxpayer’s income taxes is carried out in accordance with what has been agreed in a tax treaty, the assessment is deemed as completed also in accordance with the act on income taxation itself. The practice in Finland is to adopt every tax treaty officially by enacting a specific legal statute. The Finnish Ministry of Finance is in charge of the talks and preparations.

One of the objectives of the treaties is to prevent double taxation in situations where a taxpayer receives income that could be subject to taxation in two countries at the same time. The treaties contain agreements upon how the taxing rights with respect to various categories of income are divided between the residence country of the beneficiary and the source country of the income. 

1.2 The principle of “lesser tax”

The extent of the taxing rights as set out in a treaty may be greater or smaller than the taxation that the provisions of national legislation would lay down. For example, there may be a treaty provision to the effect that if a beneficiary who receives pensions based on past employment is a resident of the other Contracting State, Finland is not allowed to levy tax on such pensions. However, under the Finnish act on income taxation, the taxing rights on such pensions belong to Finland. In this example, the provisions of the treaty are restrictive towards Finland’s taxing rights.

Conversely, the provisions of a treaty can give Finland the right to levy tax on interest paid to a taxpayer resident in the other Contracting State at the rate of 10% although § 9.2 of the Finnish act on income taxation provides that if interest payments are made to nonresidents, they are not subject to Finnish tax.  In these circumstances, the principle of lesser tax is applied. This means that it is possible for a tax treaty to restrict the taxation carried out in a Contracting State under its national legislation. On the other hand, it is not possible for the extent of taxation to grow greater due to provisions of a tax treaty alone.

1.3 The Model Tax Convention of the OECD

There is some variation in the provisions of the numerous tax treaties that Finland has signed with other countries. However, their content is generally quite harmonised, thanks to the efforts of the Organization for Economic Development that have had an important impact on how today’s tax treaties are laid out. Finland’s treaties on income taxation follow the guideline formed by the Model Tax Convention of the OECD. In addition to the model itself, the OECD has additionally released a Commentary, the “Model Tax Convention on Income and on Capital” (OECD iLibrary)

When various provisions of the treaties are interpreted by the tax authorities in Finland, the Commentary is in an important role as a source of guidance (as the treaties contain the same provisions as the OECD Model). We rely on the contents of the Commentary even in cases where the other Contracting State is not an OECD member. However, the reservations and notes discussed in the Commentary do not constitute, in themselves, a sufficient reason to deviate from the generally accepted interpretation of the provisions of the Model Tax Convention (for more information on this approach, see ruling no 2011:101 of the Supreme Administrative Court of Finland).

Instead, the contents of the Commentary are a source of guidance when interpretation is carried out in circumstances where the actual treaty has the same wording in the provisions as the OECD Model, and when there are no special grounds for producing an interpretation that would differ from that found in the Commentary.

In other words, the Commentary’s role as a source of guidance must have the same purpose and aim as it had at the time when the treaty was signed with the other Contracting State. It may be that the OECD rephrases some passages of its Commentary at a later stage. If this happens, but the interpretation is still the same as before, although expressed in a clearer way, the rephrased content can equally be used for guidance even if the treaty being subjected to interpretation had been signed earlier.

1.4 Limited tax treaties

Tax treaties can have a less extensive scope. In this case, the treaty only covers the necessary arrangements for mutual information exchange and a limited selection of income categories (for example, income derived from savings and from employment only, or income in the form of dividends only). If such a treaty has been signed, the benefits accorded to taxpayers by the treaty will only concern the categories of income that are covered. For this reason, this type of tax treaties do not contain the catch-all article included in full tax treaties, which covers the “items of income not dealt with in the foregoing Articles”.

1.5 The impact of the Multilateral Instrument on how tax treaties are applied

When provisions of tax treaties with other countries are applied, account must be taken of the Multilateral Instrument that Finland ratified on 13 February 2019. The Multilateral Instrument makes minimum standards, as defined in the Instrument, become part of Finland’s network of tax treaties with other countries. The minimum standards are the introductory chapter of tax treaties, which addresses the purpose of the treaty, the minimum standard for how tax evasion should be prevented, the revised provisions on the mutual agreement procedure, and the provision on corresponding adjustments related to transfer pricing of group enterprises. In addition, Finland will apply the Multinational Instrument’s provisions on arbitration.

Otherwise, Finland made reservations when ratifying the Multilateral Instrument, as listed in the Government Decree no 22/207 dated 25 April 2019. For more information, see “the Appendix to the Decree on base erosion and profit shifting” – Liite Valtioneuvoston asetukseen veropohjan rapautumisen ja voitonsiirron estämiseksi verosopimuksiin toteuttavista toimenpiteistä tehdystä monenvälisestä yleissopimuksesta (Finlex) (available in Finnish and Swedish).

The Multilateral Instrument does not have an impact on how the actual treaty is applied unless it has come into force in the other Contracting State, as well. In the same way, the Multilateral Instrument does not have an impact if Finland or the other Contracting State that is party to the Multilateral Instrument has made a reservation so as to refrain from implementing a relevant provision included in the Multilateral Instrument.

In the future, the Finlex website will post all the currently valid versions of Finland’s tax treaties with other countries. Links and further information will be available on Tax.fi, the Tax Administration’s website, on Tax treaties that Finland has signed with other countries. The OECD maintains a “matching” database where visitors to the OECD website can look up the ways the Multilateral Instrument is expected to have impact on various tax agreements.

For more information on the Multilateral Instrument, visit Tax treaties that Finland has signed with other countries.

1.6 The Vienna Convention on the Law of Treaties

The Vienna Convention on the Law of Treaties, done in 1969, is an international agreement regulating treaties between states. It establishes comprehensive rules, procedures, and guidelines for how treaties are defined, drafted, amended, interpreted, and for how they generally operate.

Finland has ratified the Vienna Convention on the Law of Treaties. The official Finnish record can be found under no SopS 32–33/1980 (Finlex). The principles that emanate from the Vienna Convention are recognized as the authoritative guide when provisions of tax treaties are applied.

2 Articles of tax treaties

The following chapters and passages provide information on the customary setup and order of tax-treaty articles. The treaties additionally contain lists that enumerate the names of the taxes that the treaty covers. In contrast with that, the treaties normally do not contain provisions on deductions and credits. As a result, deductions and credits are only controlled by the national tax rules of the Contracting States. 

There may be provisions that deviate from the corresponding provisions of the OECD Model in any tax treaty; those deviations may have to do with how taxing rights are divided between the Contracting States, or they have to do with the order of sequence of treaty articles. The practice has been to resolve any specific tax problems on the basis of the provisions that are in place in the treaty that is in effect between the Contracting States. Among the treaties that Finland has signed with other countries there are some that contain provisions that are different from the usual provisions; for more information, see the Non-standard provisions of tax treaties guidance

2.1 Article 1 – Persons covered by the treaty

The first treaty article outlines the natural persons and legal persons that are within the scope of application. The standard provision in the first article is that treaties concern persons residing in one of the Contracting States or in both of the Contracting States.

2.1.1 The Finland–United States treaty

A special characteristic that extends the scope of the tax treaty to citizens, not only residents, of the Contracting States, is found in the Convention between Finland and the United States of America for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital. Under Article 1, chapter 4 of the above treaty, a Contracting State, by reason of citizenship, may tax its citizens as if the treaty had not come into effect.  Although the provision concerns both Contracting States, it is only important for the United States of America and the tax assessments there. This is due to the fact that taxation in Finland of individual taxpayers is not based on their citizenship.

Article 1, chapter 5 of the Finland–United States treaty lists a number of categories of income that are excluded from taxation measures based on citizenship. Nevertheless, the United States may levy tax on the income of a U.S. citizen residing in Finland, for example, if he or she has received interest payments or artist’s royalties from the United States. If it were not for the provision in Article 1, this income would only be taxed in the beneficiary’s country of residence i.e. in Finland only.

The United States relieves double taxation in cases where Finland has levied tax due to residence and the United States has levied tax only because of U.S. citizenship. The standard practice under tax-treaty provisions is that the individual’s country of residence should relieve any double taxation. The practice set out by the Finland–United States treaty is not in line with the standard practice.

2.1.2 The residency of a taxpayer for purposes of national law in a Contracting State

The national legislation of every country lays down the provisions that control the circumstances where a person is deemed a resident, liable to pay tax on worldwide income to that country. For example, the national legislation in the United Kingdom defines three separate types of tax residency: residence, ordinary residence, and domicile. Based on where an individual taxpayer is considered a tax resident, it may be possible for him or her to affect the way the authorities impose tax on an item of income because income can be treated differently if it is received within the territory of the Contracting State, as opposed to if the same item of income is received elsewhere. Accordingly, Finland’s treaty with the UK lays down provisions that an exemption can be given from Finnish taxation only if the beneficiary is able to prove that the income has gone to the United Kingdom so as to be received there.

2.2 Article 2 – Taxes covered

The second article lists the names of the taxes that the treaty applies to, separately for each Contracting State. The list of taxes is designed and understood as being an exhaustive list. For example, the part of the second article where Sweden’s taxes are listed in the Nordic Convention on Income and Capital does not include “fastighetsskatt” – a Swedish tax relating to real estate and buildings. Accordingly, this tax, if paid to Sweden, cannot be credited in Finland to a taxpayer who owns real estate in Sweden and has rented it out to a tenant, and the Finnish authorities assess tax on the rental income he or she has received. However, although it is not mentioned in the treaty, if a taxpayer has paid an amount of “fastighetsskatt” to Sweden, it can be deducted as an expense for the production of income when Finnish tax assessment is carried out (in reference to § 31.3 of the Finnish act on income taxation and § 7 of the act on the taxation of business income).

As for the United Kingdom, the tax known as “Council tax” cannot be credited in Finland if the taxpayer has paid “Council tax” in the UK because the Finland–UK treaty does not mention this tax in its second article (Council tax is not among the taxes that are imposed due to the fact that the taxpayer has received an item of income). The same applies to one of the taxes in France, namely the “taxe d’habitation”. The taxpayers of “taxe d’habitation” are people who live in France, either in an owner-occupied home or as tenants in a rented home.

As for Finland, tax treaties do not cover the worker’s health insurance contribution, the employer’s health insurance contribution, lottery tax and real estate tax that are levied by Finland. Inheritance and gift taxes are not covered by tax treaties “on income and property”. Finland has signed treaties expressly on inheritance tax with: The other Nordic countries (however, treaties on inheritance with Sweden and Norway are no longer in effect from 24 August 2007 and 22 August 2014, respectively), with France, the Netherlands, the United States of America, and Switzerland. The treaty with Nordic countries on inheritance taxes also covers gift taxes.

Although the treaty list on the taxes covered is an exhaustive list, the issue of taxes known as “new taxes” has also been dealt with. Treaties contain the following standard text after all the taxes are listed: “the Convention shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes”.

The typical list of Finnish taxes controlled by a treaty is as follows:

  • The income tax, payable to the State of Finland, levied on earned income
  • The income tax, payable to the State of Finland, levied on investment income (= on capital income)
  • Corporate income tax
  • Municipal tax
  • Church tax
  • Tax at source on interest income
  • Tax at source for a person with limited tax liability
  • Public broadcasting tax (treated the same as the income tax payable to the State of Finland)

2.2.1 Tax at source on interest income

The treaties that are in effect at the present time but were signed prior to 28 December 1990 when the Finnish act on the tax-withholding at source on interest income was adopted, do not contain any reference to this Finnish tax. However, because this tax is essentially the same as the categories of taxes covered in those treaties, the older tax treaties concern the Finnish tax at source on interest income, as well. 

In contrast, if the date when the treaty is signed is later than 28 December 1990 and the tax at source on interest income cannot be found in the treaty article listing the taxes covered by the treaty, the Finnish tax at source on interest income is not included in the scope of that treaty (e.g. the treaty with Ireland, the treaty with Switzerland). This exclusion is not important to other persons than those that are resident in the other Contracting State and still continue to be fully liable to tax in Finland, i.e. resident taxpayers in Finland. This is because the act on the tax-withholding at source on interest income only concerns Finnish tax residents.

2.2.2 Some exceptions

If the tax treaty does not cover a certain tax, the tax authority of a Contracting State can levy such a tax on a person if the national laws of that Contracting State allow that.

Some of the treaties signed by Finland do not – by way of exception – cover the Finnish church tax or municipal income tax. For more information, see the Non-standard provisions of tax treaties guidance.

2.3 Article 3 – General definitions

The third article in tax treaties contains definitions. Article 3 may contain a provision stating that “person” anywhere in the text of the treaty refers to a natural person, to a company and to other bodies of persons. If entities known as joint ventures are registered in Estonia, they are legal persons. Typically, article 3 also lays down the definitions of “company” and “international traffic”.

As for the Nordic Tax Treaty, regarding Norway, for example, “Contracting State” is defined so as to exclude Spitsbergen (Svalbard), the Bear Island (Björnö), and Jan Mayen. The above territories are outside of the scope of application of the Nordic Tax Treaty.

The Finland–Greece treaty contains definitions of “public corporate body”. Starting 1 January 2010, Finnish universities are no longer regarded, from the perspective of income taxes, as being public corporate bodies (as cited by the statement by Finland’s Ministry of Finance, issued to the fiscal council in the Parliament). However, because the Finland–Greece treaty and certain other treaties have defined “public corporate body” as encompassing Finnish universities and other corresponding institutions for higher education, for purposes of applying those treaties on tax assessments, Finnish universities continue to be public corporate bodies.

For a more extensive discussion on how the “university” concept affects income taxation and various cross-border situations, see “the amended Finnish act on universities in an international context” – Uusi yliopistolaki ja kansainväliset tilanteet, a memorandum from the Tax Administration (in Finnish and Swedish).

If any concept is left without an exact definition in the tax treaty, each one of the Contracting States is expected to define the concept by reference to its national tax laws.

2.4 Article 4 – Residency of a Contracting State for purposes of the treaty

If individual taxpayers have income sourced in other countries than their country of residence, or when individual taxpayers have property and wealth (no tax on wealth is levied in Finland (anymore)) located in other countries, it is necessary to apply the provisions of tax treaties. Income, property and wealth of this type are generally subject to tax both in the residence country and the other Contracting State. This is due to the fact that the residence (country) principle and the source (country) principle are applicable.

All countries strive after being able to impose taxes on the worldwide income and wealth of their resident taxpayers (the residence principle). In addition, all countries usually strive after collecting tax on the income sourced in their jurisdictions – and on the property or wealth located there – even if the beneficiary, or the owner of the property, is a resident of a different country (the territorial principle i.e. the source principle).

The residence country principle has been laid down in § 9, subsection 1, line 1 of the Finnish act on income taxation. An individual who has lived in Finland during the tax year, a Finnish corporate entity, a benefit under joint administration and an estate must pay tax to Finland on their income received in Finland and elsewhere (tax residency i.e. full liability to tax).

The territorial principle i.e. the source-country principle is laid down in § 9, subsection 1, line 2 of the act on income tax. Foreign corporate entities, and individuals who have not lived in Finland during the tax year, must only pay Finnish taxes on income earned in Finland (tax non-residency i.e. limited tax liability).

For a further discussion of the issue of fiscal status under Finnish law, see Tax residency and non-residency.

For purposes of the treaties, “resident of a Contracting State” means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. The provision of § 11 of the act on income tax lays down the point in time and circumstances where an individual, under domestic laws, is treated as “resident” in Finland.  When two or more countries impose a residency status on an individual simultaneously, it may give rise to double taxation because the countries are willing to apply the residence principle and levy taxes in the income received by the individual. 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 country of residence.

Example 1: A citizen of Finland goes to work in Sweden on a two-year assignment, on a temporary basis. During the entire two-year assignment, he is treated as being fully liable to tax, i.e. a resident taxpayer in Finland. Sweden, too, treats him as being fully liable to tax there because he stays in Sweden for a continuous period longer than six months. Such a Finnish citizen has “double residency”.

In general, the provisions of tax treaties are designed so that an individual cannot become a fiscal resident of more than just one Contracting State. Express provisions can be found in the treaties, addressing circumstances of “double residency”, and laying down exact rules on which one of the Contracting States is the country of residence for treaty purposes. If the taxpayer is a natural person, the State where he or she has a permanent home available is the taxpayer’s country of residence. The individual's permanent home does not have to be owner-occupied (it can be rented, as well). From the perspective of this rule, it is sufficient if the permanent home is available to the individual taxpayer permanently, and that it is not a dwelling intended for a stay of some limited length.

If he or she 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) than to economic relations.

If it is not possible to determine in which one of the Contracting States an individual has their centre of vital interest, he or she is a resident of the State where he or she has a habitual abode. If he or she spends time habitually in both States, or does not spend time in either one of them, he or she is a resident of the State of citizenship. If the prevailing circumstances should necessitate this, the competent authorities of each Contracting State can enter into a mutual agreement in order to resolve the issue of tax residency of a particular individual taxpayer.

Example 2: Let us suppose that the person staying in Sweden, as described in Example 1 above, signs a contract for renting out his apartment in Finland to a tenant. Now he has a permanent home available to him in Sweden only, and as a result, Sweden is his country of residence for treaty purposes.

As a result, Sweden will be the country that gets the taxing rights with respect to his worldwide income. Consequently, Finland can levy taxes only on any income he receives from sources in Finland. For example, Finland can levy taxes on the rent he begins to receive. Under the residence-country principle, rental income may be subject to Swedish tax as well. However, when the tax authorities eliminate double taxation, the tax he has paid to Finland on the rental income will be subtracted from the tax he must pay to Sweden on it. In contrast with the above, if he were to receive interest income from Finland, the Finnish tax authority could not levy tax on it. This is due to the provisions of the Nordic Tax Treaty where it is agreed that the country that has the taxing rights with respect to interest income is the country of residence.

If the circumstances of the above example should change so that the individual continues to have a permanent home available to him in Finland during the entire period, and if his family members continue to live there as well, the authorities would conclude that his centre of vital interests is Finland – and that would make Finland his country of residence for treaty purposes.

2.5 Article 5 – Permanent establishment

The fifth article of the model tax treaty discusses the question of when a business enterprise is treated as having a permanent establishment in the other Contracting State. Under treaty provisions, a Contracting State can levy tax on the business profits of an enterprise coming from the other Contracting State if the enterprise has conducted business through a permanent establishment located in the Contracting State.

If the enterprise has employees on its payroll, the right of the country where work is done to levy tax on wages may depend on whether or not a permanent establishment is formed there.

Regardless of whether the enterprise is treated as having a permanent establishment, the Contracting State where the enterprise operates may have the right to tax its profits by virtue of treaty provisions on other categories of income.

For more information on permanent establishments, see Income taxation of foreign corporate entities and Income taxation of foreign self-employed individuals in Finland.

2.6 Article 6 – Taxation of income from immovable property

In general, treaty provisions on income from immovable property confer the taxing rights for this income category on the Contracting State where the property is located. This instruction concerns all kinds of income from immovable property.  This additionally gives the Contracting State where the immovable property is located the right to levy taxes on income from agriculture and forestry, on income from rental contracts of real estate, and the like. If the taxpayer receives capital gains as a result of a sale of immovable property, specific provisions in treaty article 13 apply.

In most tax treaties, article 6 contains a provision that defines the concept of immovable property by reference to the laws of the Contracting State where the property is located. Accordingly, when a tax treaty is applied on a taxpayer’s tax assessment, a situation may arise when treaty provisions on immovable property must be applied on income derived from the taxpayer’s foreign-located immovable property even if represents a property type that would not be defined as immovable property under Finnish law.

In most countries of the world – except the Nordic countries – it is normal that apartments, units, flats or suites inside a residential building are immovable property under the definition of law. This means that an individual who is a tax resident of Finland and owns a rented-out flat in countries like Spain, France or the United States may receive rental income that is seen as subject to taxation by the country where the property is located.

Consequently, Finland has deemed it useful to reserve the taxing rights with respect to rental income derived from rented flats, apartments, suites, etc., which under Finnish law are treated as shares of a housing company, i.e. as moveable property. For this reason, the majority of Finland’s tax treaties contain a reservation in the form of additional provisions on the income of shareholders in housing companies from direct use, from renting out, or from use in any other form of the right to enjoyment of immovable property situated in Finland and held by the housing company, where such right is based on the ownership of shares. This income may be taxed by the Contracting State where the property is situated. For example, article 6, section 3 of the Nordic Convention on Income and Capital lays down provisions to that effect.

2.7 Article 7 – Business profits

Article 7 of the OECD Model Tax Convention provides that the right to levy taxes on profits belongs to the Contracting State where the business enterprise is resident. However, the profits attributable to a permanent establishment held by the enterprise in the other Contracting State may be taxed in that Contracting State as well. If business is conducted through the permanent establishment, the country of location of the permanent establishment can levy taxes on the part of the profits that are attributable to it. These profits are the profits that the permanent establishment might be expected to make if it were a separate and independent enterprise engaged in the same or similar activities. This treaty article defines the principles that must be applied in order to determine the profits that are attributable to a permanent establishment.

In accordance with the Commentary to the Model Tax Convention, the “business profits” concept extends itself to a wide spectrum. For this reason, the income received by a business enterprise is generally classified as business profits unless another income class, referred to in the relevant tax treaty, is more appropriate.

For more information on the taxation of business profits in the hands of the self-employed, see Income taxation of foreign self-employed individuals.

For more information on the taxation of foreign companies in Finland, see Income taxation of foreign corporate entities − Business income and other types of income derived from Finnish sources.

For a discussion (in Finnish and Swedish) on permanent establishments and their income, see “Introduction to how income is attributed to a permanent establishment” – Yleistä tulon kohdistamisesta kiinteälle toimipaikalle.  

2.8 Article 8 – International shipping and air transport

Profits of an enterprise of a Contracting State from the operation of ships or aircraft in international traffic can generally only be taxable in that State or in the State where the place of effective management of the enterprise is located. If the place of effective management of a shipping enterprise is aboard a ship or boat, then it will be deemed to be situated in the Contracting State where the home harbor of the ship of boat is situated – or where the operator of the ship or boat is a resident.

2.9 Article 9 – Taxation of associated enterprises

Article 9 discusses transfer pricing and the arm's length principle. It has occurred that commercial and financial terms are agreed between corporations that have an associated relationship with one another that are different from what would have been agreed between non-associated enterprises in an open market. In such a case, as provided in the ninth article, all the taxable income that would have accrued to one corporation if the terms had not been those (but which under the circumstances has not so accrued), may be treated as in fact being part of that corporation's taxable income, and be taxed accordingly.

The issue of transfer pricing is discussed in detail on the website of the Tax Administration, on the Transfer pricing pages.

2.10 Articles 10 and 11 – Dividends and interest

2.10.1 Dividends

The Model Tax Convention of the OECD gives the taxing rights of dividends to the Contracting State of which the company paying them is a resident. That Contracting State is entitled to withhold tax at the time when the company pays out the dividends; the rates vary from 5% to 15%. The shareholder can be a direct investor or a portfolio investor. In the case of dividends paid on shares held by a direct investor, the percentage of withholding in the State of source can be 0%. To have the dividends accepted as “paid on shares held by a direct investor”, it is required that the dividends go from one company to another, and that a relationship between them exists so that the shareholder company is among the owners of the company paying the dividends.

There is a restriction on tax-treaty benefits laid down by the provisions of the OECD Model, to the effect that treaty benefits can only be granted to a recipient of dividends who is a beneficial owner. Bearing in mind that there is considerable variation in the provisions on dividends found in Finland’s tax treaties with other countries  – as to how the concept of dividends is defined, and as to the percentage rate of withholding by the source State – it is strongly recommended that the specific provisions are looked up every time in the treaty concerned.  

“Dividends” is defined by the OECD Model as follows:

“The term “dividends” – as used in this article – means income from shares, “jouissance” shares or “jouissance” rights, mining shares, founders’ shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.”

Treaty provisions on the tax treatment of dividends are applied on any constructive dividends, as well (under § 3.2 of the act on the taxation of nonresidents’ income). This means that if the authorities in Finland detect that a non-resident taxpayer has received a constructive (= hidden) dividend in one form or another, the amount of tax at source, that the payor company should have withheld but did not withhold, is collected from the payor under the provision of § 8 of the act on the taxation of nonresidents’ income.

If a substitute payor effects the dividend payment to a beneficiary, this is generally not “dividends” within the meaning of the OECD Model Tax Convention. Instead, from the perspective of the relevant tax treaty and how it is applied, such a payment in the hands of the beneficiary is “business profits” as referred to in article 7, or “other income” as referred to in article 21. 

If a company pays its shareholder a refund of capital, the tax treatment is the same as that of dividends under Finnish law. The treaty article on dividends is applied (for more information, see 2.12 Article 13 – Capital gains). In these circumstances, the beneficiary who is a resident of the other Contracting States is entitled to the lower tax rate as provided by the treaty.

For lists of percentage rates to be withheld on dividends and royalties by Finnish payors that pay them out to beneficiaries in other countries, see Tax rates on dividends and other payments from Finland to nonresidents, 2020.

For more information on the treatment of nonresident beneficiaries, see Receipts of dividends, interest and royalties by nonresidents

For further guidance on the taxation of dividends, see “Taxation of dividends” – Osinkotulojen verotus (in Finnish and Swedish, link to Finnish).

2.10.2 Interest

The Model Tax Convention confers the taxing rights on the Contracting State of source. The Contracting State of source is entitled to withhold 5% to 15% of tax.

“Interest” is defined by the OECD Model as follows:

“The term “interest” as used in this article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits. In particular, “interest” means income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment must not be regarded as interest for the purpose of this article.”

In accordance with the legislation of Finland, nonresidents must pay tax in Finland on their income sourced in Finland. Finland is determined the source of interest if the debtor is a person resident in Finland or a Finnish corporate entity, a partnership, a benefit under joint administration, or an estate of a deceased individual (§ 10.7 of the act on income taxation).

Although the received interest is derived from a source within Finland, if the beneficiary is a non-resident taxpayer, no Finnish tax is usually levied due to the provision in § 9.2 of the act on income taxation. Under § 9.2 of the act, a nonresident is not liable to pay tax on interest derived from a source within Finland, if the underlying debt is a balance of accounts receivable (relating to commercial operations between Finland and other countries), a balance of a bank account or other account in a financial institution, a State obligation, a bond, debenture, other debt instrument issued to the public, or if the underlying debt has been received from a foreign country in such a way that the amount cannot be regarded as an investment, made by the debtor, in the equity of the borrower corporation.

2.11 Article 12 – Royalties

The term “royalties” as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, and films or tapes for television or radio broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. It is recommended that the exact definition of “royalties” be checked in the specific tax treaty that is being applied because there are several definitions that are not always the same.

In accordance with the Commentary to the OECD Model, the income received from computer software products does not fall in the category of copyrights, etc., if the software has been supplied to its recipient or purchaser in such a way that the latter only has the right to use the software, not receive any copyright to it (for more information, see ruling 2011:101 of Supreme Administrative Court).

However, if the underlying transaction that the payment relates to is a transfer of copyright from one party to the other, it must be treated as a payment of royalty. Examples include the transfer of rights to production, distribution, program editing and public presentation that would relate to the computer software concerned. The transaction does not fall into the scope of application of article 12 – Royalties, if the contract only sets out that the right to distribute separate copies of the software is transfered to the other party, but the right to produce additional examples, or copies of the software, is not included (i.e. commercial distribution only). In the same way, the transaction and the payment is not royalty, if the original owner of the copyright hands it over to the other party entirely. In this case, the amount paid in exchange for the copyright cannot be treated as compensation relating to the use of the copyright.

The examples below are designed to illustrate situations where the definition of the royalty concept coincides with the definition found in the OECD Model Tax Convention.

Example 3: Transfering the right to use a software program to an end user

A Finnish business enterprise that owns the copyright is paid compensation for letting another party use a computer software program. The other party that pays the amount does not receive any rights or privileges over the copyright. Under the agreement that was signed, it is not allowed that the other party use the software for purposes that are not in line with the copyright – the other party cannot re-sell or re-distribute it, etc. The received amount is not royalty. Finland is the only Contracting State that can have the taxing rights with respect to the income received by the enterprise.

Example 4: Transfering the right to resell or distribute

An amount of money is paid because a commercial distributor has been given the right to re-sell the software in the country where the distributor is situated (the other Contracting State). Such a distributor buys a quantity of copies from the Finnish business enterprise, and the amount paid does not contain any part relating to a transfer of copyright. The received amount is not royalty. By virtue of being the country of residence of the business enterprise, Finland is the only Contracting State that can have the taxing rights with respect to the income received by the Finnish business enterprise.

Example 5: Transfering partial copyright

The party that pays the compensation to the Finnish business enterprise is granted permission to make use of the computer software in such a way that without such permission, the copyright for the software would be infringed. Examples of that kind of use include making multiple copies, and then distributing the self-made copies to the members of the public; editing the software code, presenting the software in a public display, making the software an integrated part of a machine and then re-selling that machine to third-party customers. This compensation is regarded as royalties. If the Contracting State of source has withheld any tax at source, it can be credited in connection with the company’s tax assessment in Finland (the country of residence).

Some tax treaties additionally define “royalties” as payments of compensation for the right to use a certain set of equipment for industrial, commercial or scientific purposes (in circumstances relating to leasing contracts). In this context, “equipment” is seen as a tangible asset, useful in an industrial, commercial or scientific process.

If the parties to a commercial agreement have signed a contract with mixed elements, the relevant parts of what is being transferred and how will determine the tax treatment with respect to such an agreement. Each part must be treated separately for tax purposes. For example, some of the related profits may be subject to taxation at source whereas the rest is not. As a result, when assessing the taxes, it is important to identify the different parts. However, in spite of the above, the commercial agreements that have a main element clearly distinct from the other elements of the agreement, the remainder of the agreement being less important or having a supporting role, taxes can be assessed and the tax treaty can be applied in accordance with the main element only.

Another type of intangible asset that can be transferred from one party to another is know-how.  The tax rules and the treaty provisions that control royalties are applicable. The definition of “know-how”, relating to industrial, commercial or scientific activity, is expertise or knowledge based on earlier experience, which can be utilized so as to receive a financial or economic benefit of some kind. The party that transfers, or gives away, the know-how does not participate in the operation aiming to receive the financial benefits, etc.  In addition, that party does not bear responsibility for the results of the operation.

However, in case the object being transferred from one party to another is services, it is not a transfer of an intangible asset and, as a result, the treaty article on royalties cannot be applied. When one party renders services to another, special knowledge, skills and expertise may be necessary. However, in the case of services, the receiving party does not obtain the knowledge, etc. and is not given the right to make use of such knowledge later. When the contract concerns a sale of services, the end result is the final purpose of the contract: this may be a blueprint, a drawing, an electrical scheme for a building, etc. In addition, the seller of the service is accountable for the end result. This is not the case when know-how is being transferred, because in that case, the party that provided the know-how does not bear responsibility for the results of the operation.

Some tax treaties contain an article on royalties that contains additional provisions on the issue of technical services and how they are compensated; those treaties usually have the words “Royalty or Fees for technical service” as the heading of the article. This way, the Model Tax Convention of the OECD is adhered to even in those treaties, and the definition of “royalties” remains the same. The article on royalties simply contains an additional set of provisions on the tax treatment of fees paid for technical services.

Example 6: An intercompany agreement with mixed content, including the provision of a service

The parent company called “A Oy” has made a franchising agreement with its overseas subsidiaries. The agreement lets the subsidiaries make use of the proprietary business concept of “A Oy”, its trademark, and it also provides that the subsidiaries have the right to receive certain intercompany services that “A Oy” provides.  Insofar as compensation is paid for “A Oy’s” trademarks, logo and concept, the provisions of the tax treaty indicate that this must be treated as royalties.

In addition to the above, the agreement also contains provisions on support services, and the compensation paid for them cannot be regarded as relating to intangible rights because the intercompany services are typically of a general, administrative character. There is not transfer of an intangible right. This group company should maintain a separation of agreements that concern intangible rights and other agreements; when compensation is being paid relating to intangible rights and when other compensation is being paid, they should be separated.

2.12 Article 13 – Capital Gains

In general, when a taxpayer has owned immoveable property and sells it at a profit i.e. receives a capital gain, the Contracting State where the property is situated is the country that has the taxing rights. When moveable assets are sold or transferred and the seller makes a profit, this capital gain is generally only taxed in the seller’s country of residence. In contradistinction with the above, the majority of Finland’s treaties contain a provision that when a taxpayer sells (transfers, alienates, conveys) the shares of a housing-company apartment, the capital gain may be taxed in the country of residence of the housing company. For example, article 13, section 2 of the Nordic Convention on Income and Capital (the Nordic tax treaty) lays down this provision. Taxes on capital gains are assessed as provided in the national rules on capital-gains tax of the Contracting State where the immoveable property is situated.

The Finland–Germany treaty allows for taxation of capital gains (the appreciation of value up to the time when the taxpayer moves away from the apartment, to live in another location) in the country of residence of the housing company, if the taxpayer receiving the gain has lived for at least 5 years in that country. The Finland–Netherlands treaty and the Nordic Convention on Income and Capital also lay down provisions to the same effect. In spite of the provision found in the tax treaty, Finland does not levy tax on a non-resident taxpayer on such a gain because under § 10 of the act on income taxation, the gain is not from a Finnish source. In the reverse case, Sweden would have the right to tax the capital gain by virtue of its national law, and Finland would apply the credit method in order to relieve double taxation.

As noted above in 2.10 Articles 10 and 11 – Dividends and interest, when a company distributes a refund of capital to its shareholders, it is taxed under Finnish tax rules as dividends are taxed. By derogation from the above rule, and subject to a number of preconditions set out in the act, when a distribution of retained earnings (= unrestricted equity) is carried out to company shareholders, it is seen as a transfer of property subject to capital-gains tax.  If there is a refund of capital, effected in such a way that the Finnish tax authorities apply the Finnish legal provisions on capital-gains taxation on it, the treaty article to apply on such income is article 13 – capital gains.

2.13 Article 14 – Independent personal services

In general terms, income from independent personal services is only taxed in the country where the individual who exercises the profession is resident. However, if he or she is treated as having a fixed base in the other Contracting State, through which he or she exercises the profession or trade, the part of their income that is attributable to that fixed base may be taxed in that other Contracting State. Examples of a “fixed base” include an artist’s atelier, and a physician’s office where patients can be examined.

The fourteenth article – Independent personal services – is deleted from the latest OECD Model Convention. As a result, when new tax treaties between Contracting States are made out, the issue of taxing rights with respect to income from independent personal services is resolved by reference to treaty article 7 (on the taxation of business profits).

For more information on the taxation of the self-employed, see Income taxation of foreign self-employed individuals.

2.14 Article 15 – Income from employment

When an individual taxpayer receives wages for employment, it must usually be taxed in the Contracting State where the individual taxpayer has worked i.e. exercised the employment.

By derogation from the main rule above, the “mechanic’s exception” provides that the country where employment is exercised does not always have the taxing rights. The mechanic’s exception lays down that although the taxpayer has performed work in the other Contracting State, the only state that has the taxing rights is the country of residence on the condition that the following requirements are met, fully and simultaneously:

(a) the person is present in the other State for a period or periods not exceeding, in the aggregate, 183 days in any continuous 12-month period or during the calendar year or fiscal year concerned, and

(b) the wage is paid by, or on behalf of, an employer who is not a resident of the other State where the person works; and

(c) the wage is not borne by a permanent establishment or a fixed base the employer has in that State.

If any of the three requirements is not fulfilled, the main rule is invoked; i.e. the wages must be taxed in the Contracting State where the individual taxpayer has worked i.e. exercised the employment. As for the Nordic countries, the Nordic Convention on Income and Capital provides that the country where employment is exercised always has the taxing rights on wages, regardless of the requirements listed above, if the arrangement coincides with the definition of employee leasing (article 15, paragraph 2 d)) or if the individual taxpayer’s country of residence treats the wages as exempt income (article 26, paragraph 3).

Example 7: During the period that began 1 February 2018 and ended 30 October 2019, Mr A, a citizen of Finland, stays in Sweden together with his family and works for a Swedish employer. One full week out of every calendar month during this period, Mr A, being employed by the same Swedish employer, performs work in Finland. There are no other periods of presence in Finland. The house in Finland that Mr A with his family had lived in is rented out to a tenant for the entire period. For purposes of the Nordic Convention on Income and Capital, Mr A is a resident taxpayer of Sweden; however, under the Finnish act on income taxation, he is a resident taxpayer of Finland. The count of days when Mr A is present in Finland goes over the threshold of six days per month on the average. For this reason, the Finnish tax treatment of the wages cannot be based on the six-month rule that would otherwise grant an exemption from Finnish income taxation. 

However, under the circumstances, Finland cannot levy tax on the wages received from a Swedish employer due to the provisions of the Nordic Convention on Income and Capital. This is because Mr A is a resident of Sweden for treaty purposes, and his employer is Swedish (no permanent establishment in Finland), and Mr A is not present in Finland for longer than 183 days in a 12-month period. In this example, the 15th article prevents taxation in Finland and allows for taxation only by the country of residence for treaty purposes, i. e. by Sweden.

2.14.1 Leased employees

Employee leasing refers to a contractual arrangement by which a business (leasing company) leases employees to another business against a charge. The leased workers – or employees – perform work for the other business (the service recipient company).  This way, a contractual relationship is established between the leasing company and the service recipient.

In accordance with § 10.4c of the act on income taxation, Finnish-source income taxable by Finland includes wages paid by a foreign employer for work performed in Finland, if the foreign employer has leased the worker to a service recipient in Finland. The wording of the provision in § 10.4c does not contain a definition of the “employee leasing” concept. However, according to the legislator's comments to the act before it was adopted as law, the Finnish act on income taxation refers to “employee leasing” in the same way as that concept is defined in the relevant tax treaties signed by Finland.

Wages earned from work performed in Finland by leased workers who live abroad and have a foreign employer may be taxed in Finland, if there is a tax treaty between Finland and the worker’s country that does not prevent Finland from taxing the worker’s wages. Some of Finland’s treaties contain a special provision that controls employee leasing: it allows Finland to levy tax by virtue of being the Contracting State where the work is done, regardless of the length of the worker’s presence in Finland. In general, if the relevant treaty has no special provision as described above, the treaty article to be applied on the taxation of leased workers’ wage income is article 15 i.e. the article that contains provisions on “income from employment”.

Usually, the countries of residence will also levy tax on the worldwide earnings of their residents according to their own laws. For this reason, the worker’s pay from work done in Finland can also be taxed in the worker’s country of residence. Any double taxation is relieved in the worker’s country of residence, according to the provisions of the tax treaty between that country and Finland, or as provided by the national laws of the country of residence. The wages of a leased worker are taxed by Finland if he or she comes from a country that does not have a tax treaty with Finland.

For a more elaborate discussion on employee leasing, see Leased employees from other countries and taxation in Finland.

For further guidance on the six-month rule, the mechanic’s exception, and other special rules that apply on tax assessment when work is done in a foreign country, see Taxation of work abroad. For further guidance about various cross-border circumstances, see Taxation of employees from other countries

2.14.2 Cross-border commuters

Provisions on the tax treatment of workers who commute from one Nordic country to another are found in the VI Paragraph of the Nordic Convention on Income and Capital (Finlex). Subject to certain conditions, the treatment is different from the general guidelines and principles of international practice as established by tax treaties. The wages received by cross-border commuters are taxed by their Nordic country of residence only.

The special rules that control the wages received by cross-border commuters only concern individuals who live in a municipality located next to the border between Finland and Sweden – or the border between Finland and Norway (and Sweden and Norway) – and they work in another municipality, situated next to the same border in the other country. If all the three requirements are satisfied, the wages are only taxed by the country of residence.

For more information, see Taxation of cross-border commuters

2.14.3 Preliminary survey, study or utilisation of hydrocarbon deposits

Article 21 of the Nordic Convention on Income and Capital lays down a number of provisions relating to working and the operation of business in the sectors of preliminary survey, study or utilisation of hydrocarbon deposits.

This article controls the circumstances where an individual is a tax resident of one of the Contracting States and is employed by and receiving wages from an employer that conducts a business operation within the continental shelf of another Contracting State. The employer’s activities are related to the preliminary research, study and exploitation of hydrocarbon deposits (i.e. oil and gas). 

2.15 Article 16 – Directors’ fees

Director’s fees and comparable amounts received by a person residing in a Contracting State by virtue of being a member of a Board of Directors, etc., can usually be taxed by the Contracting State where the registered domicile of the corporation is situated, regardless of the place where the meetings of the Board, etc. are held. For example, there is no treaty article at all on Directors’ fees in the Convention between Finland and the United States of America for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital. When assessing the taxes, Finnish tax authorities have applied article 15 of the Finland–United States treaty.

For more information on how executive compensation is taxed, see “Tax treatment of amounts and fees paid to Managing Directors, Board Members etc.” – Hallintoelimen jäsenen ja toimitusjohtajan palkkion verotus (in Finnish and Swedish)

2.16 Article 17 – Entertainers and sportspersons

This article provides that the fees paid to sportsmen, athletes, etc., to performing artists, entertainers, etc., may be taxed by the Contracting State where these individuals exercise their personal activity. This principle is usually also applied on arrangements where the fees paid do not go to the natural person – i.e. the sportsperson, entertainer, etc. as an individual taxpayer – and the fees are paid to a foreign company (such as a sports management company) or to a sports club.

If the performance given by an artist (or sportsperson) is paid for by a public corporate body, the practice has been to apply article 19 instead of article 17 when the relevant tax treaty is one of the older ones among Finland’s tax treaties, unless there are other, express provisions of the treaty. There may be a difference in the treatment of amounts paid by a public corporate body, on the one hand, and amounts paid by a business entity belonging to a public corporate body, on the other hand. For this reason, care must be taken when determining the nature of the fees.

Historically, the OECD Model Tax Convention referred to, in its article 19, paragraph 3, to treaty articles 15, 16 and 18 as the ones that must be applied when income has been received from a public corporate body. The 1995 Model Tax Convention contains a revision; reference is now made to article 17. The more recent tax treaties that Finland has signed with other countries contain an article 19 formulated in the same way as the 1995 Model. If article 19, paragraph 3 of the relevant treaty contains a reference to article 17, the practice is to apply article 17 on the taxation of the fees paid by a public corporate body to sportsmen, athletes, etc., to performing artists, entertainers, etc., for their personal activity.

For more information, see Taxation of income received from sports in international situations.

2.17 Article 18 – Pensions

From the perspective of how various tax treaties can control the taxation of pensions, the important factors include whether or not the pensions are based on past employment with a public corporate body or a private-sector employer, and whether the payor is a provider of retirement benefits that are not related to the person’s past employment. Many tax treaties additionally contain specific provisions on Government benefits that are paid to the pensioner due to national legislation on social security. Another factor that can have an impact on the taxation of pension is the citizenship of the pensioner.

For more information on the tax treatment of pensions, see “Taxation of pensions in cross-border circumstances” – Eläketulojen verotus kansainvälisissä tilanteissa (detailed guidance in Finnish and Swedish; link to Finnish).

2.18 Article 19 – Government service

Payments such as salaries and wages – not pensions – received from the State, central or local government, from other public corporate bodies, must be taxed by the paying State only. The above general rule extends itself to remuneration paid to other persons than civil servants, i.e. to persons who receive wages from a public payor based on a contract of some kind.

However, under the provisions found in many treaties, such pay can only be taxed in the Contracting State where the work is done if the person or employee being the beneficiary it is a resident of that country; and

(a) the beneficiary is a citizen of the Contracting State where work is done, or

(b) the beneficiary has not become a resident taxpayer of that Contracting State only due to the work itself and for no other purpose.

The Nordic Convention on Income and Capital confers the taxing rights on the Contracting State where work is done even in cases where the Contracting State that pays the remuneration cannot levy tax on it because of its national rules.

The extent of the “public corporate body” concept for purposes of these provisions can only cover the legal persons that, by reference to the national legislation of the Contracting State concerned, have been incorporated or formed as public corporate bodies in that State. When taking account of the way a corporate entity has been created, by reference to civil law and contract law, its structure does not coincide with the meaning of “legal person” in article 19. Limited liability companies are corporate entities formed on principles emanating from civil law and contract law. This is not changed by the fact that the corporate stock of a limited liability company is entirely or almost entirely held by the State of Finland.

A number of tax treaties provide that if a person has worked for an entity that operates a business – and the entity is owned by a Contracting State, a local government unit of the Contracting State, or by a public corporate body – the treaty provisions of article 15 must be applied on the taxation of the remuneration paid to the person.

2.19 Article 20 – Students, trainees, teachers and scientific researchers

2.19.1 Students

The usual provisions in tax treaties simply lay down the rule that when a student is present, on a temporary basis, in the other Contracting State, any income they receive from sources outside that Contracting State is not taxable in that Contracting State. In these circumstances, the issue of how taxing rights should be divided between the Contracting States is resolved by reference to treaty articles 15 and 19 in the usual way. Additional provisions are found in some treaties that allow for various forms of relief from taxation with respect to wages earned by a student in the other Contracting State.

In some treaties, article 20 lays down provisions on the right to levy tax on any grants and scholarships received from the Contracting State where the student is pursuing studies. If there are no references to grants and scholarships in the treaty, the right to tax them – when they are received from the Contracting State of study – is controlled by the treaty article on other income (i.e. treaty article 21).

For more information, see Taxation of students and trainees in international situations.

2.19.2 Teachers and scientific researchers

The majority of Finland’s tax treaties contains no treaty article that would expressly control the taxation of teachers’ and researchers’ income. If the relevant tax treaty does not have the article, the taxation of teachers’ and researchers’ income falls under the treaty articles 15 or 19 depending on the type of the of teacher’s or researcher’s employer.

However, some of the older treaties still contain provisions on exemptions to be granted to teachers and researchers. The usual provisions on exemption concern an individual who is present in the other Contracting State for a certain maximum period, typically 2 years, as a teacher or as a scientific researcher working for an institution of higher education. The exemption makes the teacher’s/researcher’s income from that activity tax-free in the Contracting State where he or she is present. In most cases, the teacher or researcher will lose the exemption if the presence turns out to be longer.

For more information about tax reliefs granted to teaching and research staff, see Taxation of employees from other countries.

2.20 Article 21 – Other income

If income is received by a taxpayer but it does not fall into any of the categories of income covered by the treaty articles, such items of income are usually taxed in the Contracting State where the taxpayer is a resident.

Among the treaties that Finland has signed with other countries there are some that confer the taxing rights, by way of exception, on the Contracting State of source, as well; for more information, see the Non-standard provisions of tax treaties guidance. 

2.21 Article 22 – Capital

The type of tax that is levied on the basis of property, assets, capital, etc., in the ownership of a taxpayer, i.e. wealth taxes, has been abolished since 2006 in Finland. As a results, the treaty provisions on such taxes are not important from the perspective of tax assessment in Finland.

2.22 Article 23 – Methods for elimination of double taxation

2.22.1 Methods for elimination

If the Contracting State of source, under provisions of the treaty, has the right to levy tax on the income, the general rule is that the taxpayer’s country of residence must employ the credit method or the exemption method in order to relieve double taxation. It may be that a treaty provides different methods for elimination, depending on categories of income, when income is sourced in a Contracting State.

Some of the treaties Finland has signed have a provision that grants Finland the right to levy tax, any other treaty provisions notwithstanding, on the income of Finnish citizens who also are tax residents of Finland although they might, for treaty purposes, be residents of the other Contracting State. For more information, see the Non-standard provisions of tax treaties  guidance.  If the above provision is in place, it facilitates the taxation by Finland of capital gains received by Finnish citizens.

For more information on how double taxation is relieved, see Relief for international double taxation.

2.22.2 Conflicts of qualification

When applying the provisions of various tax treaties, an important additional consideration is the impact of any conflicts of qualification and the principle of giving priority to the source state (see the Commentary to the Model Tax Convention, article 23 a and b, part I.E). If an issue at hand gives rise to more than one interpretations, in reference to the provisions of the tax treaty, and the Contracting States have made alternative, differing interpretations, which both are in line with the relevant treaty, the primary way to resolve the issue is to give priority to the interpretation presented by the Contracting State of source.

The principle of giving priority to the source state must be applied, for example, if the “royalty” concept is defined in a more extensive way in the Contracting State of source and if in addition, the definition of royalty in the relevant tax treaty is more extensive than the definition found in the OECD Model. Nevertheless, it is required that the interpretation proposed by the Contracting State of source is based on legal provisions of law, in force in that Contracting State. If it is only based on a national “reservation” text in the Commentary of the OECD Model, i.e. a reservation that a Contracting State has put forth, it does not qualify as a reason to accept the interpretation that the source state should have priority, because a reservation made by a State is not legally binding (for more information, see ruling 2011:101 of the Supreme Administrative Court of Finland).

It is not regarded as a conflict of qualification if, for example, the difference in interpretation is due to a different conclusion, inferred from a set of facts and circumstances that has been different, i.e. not due to an interpretation that was carried out in a different way. In that case, the approach towards resolving the difference would be to work together in order to clear up all the facts and circumstances that have importance. The outcome may very well be that the other Contracting State finally approves of the views presented by the Contracting State that brought up the matter. As a result, the taxation will be adjusted in that Contracting State. However, if the outcome is a continued difference between the Contracting States, the way to move forward is to lodge an appeal in the usual way in one of the Contracting States or to resort to the Mutual agreement procedure (for more information, see the chapter in this guidance with the heading “Mutual agreement procedure” and the Commentary of the OECD, articles 23 a and b, part I. paragraph 32.5).

2.23 Article 24 – Non-discrimination

The standard provision in tax treaties against discrimination means that a Contracting State is prevented from levying tax on the income of the citizens of the other Contracting State so as to receive more tax revenue from them than from its own citizens. In other words, Finland would not be able to levy a higher tax on a citizen of Switzerland residing in in Finland than on a Finnish resident taxpayer in Finland.

However, it is not seen as a breach against the non-discrimination rules that the Finnish tax authorities levy taxes differently when the taxpayer is a resident – without regard to the taxpayer’s citizenship – than when the taxpayer is a nonresident.

2.24 Article 25 – Mutual agreement procedure

The taxpayer can submit a request that a Mutual agreement procedure be started if the taxpayer is of the opinion that the tax levied was contrary to the provisions of the applicable tax treaty. When the Mutual agreement procedure is used, the authorities of the Contracting States can negotiate with one another and agree on the elimination of double taxation.

For more information, see International tax dispute resolution procedure.

2.25 Article 26 – Exchange of information

It is normal procedure for Finnish tax authorities to send information to other countries, and conversely, to receive tax information from the authorities of other countries. They exchange tax information as agreed in a number of pre-negotiated plans and conventions. Finland receives information on foreign taxation only from the countries with which a tax treaty is in place. The confidentiality requirements that apply to domestic information on taxpayers’ taxes are applied on any internationally exchanged information as well.

This guidance – Kansainvälinen tietojenvaihto discusses the exchange of tax information between Finland and other countries in the case of natural persons, i.e. individual taxpayers.

2.26 Article 27 and Article 28

The final part of tax treaties addresses fiscal issues connected with diplomatic privileges, extent of the geographical scope, the time when the treaty goes into effect and ceases from being in effect.

2.27 Article 29 – Entitlement to benefits and rules on anti-abuse

Article 29 contains limitations on the benefits accorded by the tax treaty. From the perspective of how Finland’s treaties are applied, the 9th paragraph of this article is probably the most important. This paragraph lays down the general provision against tax evasion. In substance, the provision in the 9th paragraph is similar to the corresponding provision found in Article 7, paragraph 1 of the Multilateral Instrument (MLI). The rules set out by the Multilateral Instrument must be applied insofar as this is necessary with regard to cross-border circumstances. The Multilateral Instrument lays down the following provision:

Notwithstanding any provisions of a tax treaty, a benefit under it should not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the tax treaty.

The aim of the provision is to prevent tax evasion before it is attempted, because tax evasion has sometimes occurred in circumstances where a tax treaty is applied on the taxation of the taxpayers’ income. The aim of the Principal Purpose Test (PPT) is to combat abuse of tax treaties. There may be circumstances where the PPT provision applies although the person is regarded as the beneficial owner of the income. The taxpayer may be given the benefits accorded by the tax treaty that would have been given if the transaction or arrangement had been carried out in such a form that the PPT provision would not have been applied to it.

Regardless of whether the relevant tax treaty contains this provision or not, the aim and purpose of all Finland’s treaties is that the authorities have an opportunity to intervene if abuse of the treaty is detected. This approach is fully in line with the aim of article 1 of the OECD Model Tax Convention as it has been discussed in the Commentary (Improper use of the Convention, OECD iLibrary).

Tax evasion rarely occurs in such a way that it would be related to provisions of a treaty and to the fact that a treaty is being applied. It should be noted that each case that falls in the scope of the anti-abuse rules has its specific characteristics. For this reason, it may not be feasible to compare one case with another in order to make any uniform conclusions about the issue of tax evasion. To draw the line between abuse and non-abuse, it may be useful to study the examples listed in the Commentary, under comments to article 29, paragraph 9.  If the taxpayer is uncertain as to whether the authorities wish to apply an anti-abuse rule because of the taxpayer’s actual circumstances, we recommend that a request be submitted for an advance ruling in order to clear up the situation.

When the authorities undertake to apply the anti-abuse rules, it is important to be aware that it can prevent the taxpayer from successful dispute resolution through an arbitration process in connection with a Mutual Agreement Procedure – or it may even prevent the Mutual Agreement Procedure itself – if a Contracting State has a reservation to its tax treaties to that effect. In these circumstances, relief from double taxation can only be obtained by resorting to national methods for safeguarding legal certainty and due process.