Resident and nonresident tax liability of corporate entities

Date of issue
4/1/2021
Validity
4/1/2021 - Until further notice

This is an unofficial translation. The official instruction is drafted in Finnish and Swedish languages: VH/689/00.01.00/2021.

This guide discusses tax residency and tax nonresidency in connection with corporate income taxation. The focus is on the taxpayer status of foreign organisations and the test for their place of effective management (POEM). The recently adopted legal norms, effective from 1 January 2021, and based on the Government’s proposal to the Finnish parliament no 136/2020 are covered by this guide. These norms include amendments to the act on income tax (Tuloverolaki 1535/1992; TVL), to the act on the taxation of business income (Laki elinkeinotulon verottamisesta 360/1968; EVL) and to the act governing intra-group payments of contributions and subsidies (Konserniavustuslaki 825/1986; KonsAvL). Up to 2020, all foreign corporate entities have invariably been treated as having the status of a nonresident taxpayer in Finland. Starting 2021, foreign corporate entities that have their place of effective management in Finland can be treated as Finnish tax residents, generally liable to tax. By derogation from the above start date, the newly adopted § 9, subsection 8 of the act on income tax will first be applied when taxes for the 2023 tax year are assessed for entities that fall under the following categories: undertakings of collective investment as defined in Chapter 1, § 2.1.17 of the Act on Common Funds (213/2019) and alternative investment funds founded in another EEA state, or registered in another EEA state that are referred to in Chapter 2, § 1 of the Act on Alternative Investment Fund Managers (162/2014).

1 Introduction

Under § 9, subsection 1 of the act on income tax (Tuloverolaki 1535/1992), taxpayers’ obligation to pay taxes may be either a general liability to tax (for resident taxpayers) or a limited liability to tax (for nonresidents). Corporate entities’ status has an impact on how Finland can impose taxes on the income that the entity receives.

In accordance with § 9, subsection 1, line 1, the following are resident corporate entities: domestic corporate entities, and corporate entities set up or registered in other countries that have their place of effective management in Finland. If the status of a corporate entity is “resident” i.e. having a general liability to tax, that entity must pay tax to Finland on income received in Finland and elsewhere. In other words, a resident taxpayer has tax liability to Finland on the resident’s worldwide income.

In accordance with § 9, subsection 1, line 2 of the act on income tax, other foreign corporate entities than those enumerated in the provision’s line 1 are nonresident entities. This means those that do not have their place of effective management in Finland. If the corporate entity’s status is “nonresident” – limited liability to tax, it must pay tax to Finland on the income it receives from sources in Finland. The provision in § 10 of the act on income tax contains a list of the income items that are deemed as being received from sources in Finland.

In accordance with subsection 3 of § 9 of the act on income tax, if nonresident entities operate their trade or business through a permanent establishment in Finland, they must pay tax in Finland on all the income attributable to that permanent establishment.

Finland has signed tax treaties with some 70 countries. Under those of the treaties that concern income taxes, the countries have agreed on the sharing of the rights of taxation, and on the elimination of double taxation, when an entity or taxable person resident in one country receives income from the other country. Some of the tax treaties that Finland has signed may restrict Finland’s taxing rights that would be applicable under its national legislation. However, the treaty provisions do not introduce changes to the taxpayers’ status, because that status is laid down in national legislation. However, it is possible that a corporate entity has double residence, being generally liable to tax in 2 states. The treaties also contain agreements between the Contracting States as to how the problem should be resolved. Finland’s tax treaties are based on the Model Tax Treaty of the Organisation for Economic Co-operation and Development, OECD. For a list of the tax treaties that Finland has signed, visit our tax.fi website.

2 The “corporate entity” concept

Under the provisions of § 3 of the act on income tax, “corporate entity” refers to:

  • The State of Finland and an institution belonging to the State;
  • Municipalities and joint municipal authorities;
  • Church parishes and other religious communities;
  • Limited-liability companies, cooperative societies, savings banks, mutual investment funds, UCITS funds, universities, mutual insurance companies, community grain-bank organisations, ideological or economic associations, and foundations and institutions;
  • Death estates from other countries, and
  • Other legal persons comparable to above, or other sets of assets that have been dedicated for a special purpose.

As provided in § 8 a of the act on income tax, the act’s provisions that concern Finnish limited liability companies are applied, by extension, to European Companies (SE). Likewise, the provisions on Finnish cooperative societies apply on European cooperative societies. From this, it follows that both SE’s and European cooperatives are regarded as corporate entities in Finland.

Foreign taxpayers are treated as corporate entities for Finnish tax purposes if the authorities conclude that the foreign taxpayer is an entity comparable to those listed under § 3, lines 1 to 7 of the act on income tax. When Finnish public authorities test whether a particular foreign corporate entity – or a set of assets – is comparable to the Finnish entities listed under § 3, the primary focus is whether the foreign entity’s position from a civil-law perspective is the same as that of a Finnish entity listed under § 3.

For example, companies generally deemed equal to Finnish limited liability companies (Oy) are the Swedish aktiebolag (AB) and the Estonian osaühing (Oü). In contrast, where a foreign legal person is similar to a Finnish “business partnership” referred to in § 4, subsection 1, line 1 of the act on income tax, that foreign legal person is not a corporate entity. Examples of business partnerships in Finland include “Ky” – the limited partnership, and “Ay” – the general partnership.

In most cases, foreign investment fund companies are comparable to the Finnish limited liability company, the Finnish investment fund, or consortium. If such a foreign fund is comparable to the Finnish limited liability company, investment fund or alternative investment fund, as referred to in § 3, line 4 of the act on income tax, that foreign fund is a corporate entity. However, if the fund is comparable to a partnership referred to in § 4 of the act on income tax, the status of a corporate entity for tax purposes in Finland is not accorded to it.

The form of legal entity i.e. the exact form of incorporation is laid down by the provisions of each country’s domestic law. Because there are many differences in the national provisions of law, some countries have legal entity forms available that are completely unknown under Finnish law. Examples of legal forms unknown in this country include the “trust” entity, widely used in the United States and in the UK. However, if the comparability of a foreign trust is being looked into, and it has been found comparable to any of the corporate entities listed under § 3, lines 1 to 7 of the act on income tax, that trust is deemed to be a corporate entity for tax purposes in Finland. This way, when Finland’s Supreme Administrative Court handed down its ruling no KHO 2015:9, a company from the United States, representing the legal form known as “Delaware Statutory Trust” was treated as equal to a Finnish limited liability company. However, the question of whether sufficient similarity to Finnish entity forms exists in the case of a foreign trust must be tested on a case-by-case basis.

3 The nonresidency status of corporate entities

3.1 Nonresidency, as defined by the provisions of the act on income tax

In accordance with line 2 of § 9, subsection 1 of the act on income tax, nonresident corporate entities are those that were set up or registered in other countries and have their place of effective management elsewhere, not in Finland, so they cannot be treated as Finnish resident entities.

No domestic corporate entities can be nonresidents under the provisions of the act on income tax. What is meant by “domestic corporate entity” is an entity that has been set up or registered in accordance with Finnish legislation, as provided in § 9, subsection 7 of the act on income tax.

3.2 Income received from sources in Finland

Nonresident taxpayers are only liable to pay taxes on their income earned in Finland under the provisions of § 9, subsection 1, line 2, act on income tax. A list of income items that are treated as sourced to Finland is found in § 10 of the act on income tax. Examples include rental revenues from real property located in Finland, profits from a business enterprise run in Finland, dividends received from a Finnish limited-liability company, and receipts of profit-shares from a Finnish investment fund. The list found in § 10 is not an exhaustive list; however, its content has been regarded as a complete list under standard tax-assessment practices.

However, under § 9, subsection 2, 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 it cannot be regarded as an investment in the equity of the borrower corporation.

The tax treaties signed by Finland may contain provisions that restrict Finland’s taxing rights with respect to the income received by a nonresident corporate entity.

For more information, see the Tax Administration’s Income taxation of nonresident foreign corporate entities guide.

3.3 The income that a PE receives

If a nonresident foreign entity is treated as having a permanent establishment in Finland for the conduct of its business, the foreign entity must pay income tax on all the income attributed to this permanent establishment, the provisions of § 9.1.2 and § 9.2 of the act on income tax notwithstanding (see § 9, subsection 3 of the act on income tax). In other words, the nonresident foreign corporate entity must pay tax on all the income attributable to the permanent establishment, regardless of whether the source of that income is in Finland or any other country.

Pursuant to § 13 a of the act, “permanent establishment” is a place where a specific place of business is located for the continuous pursuit of a business, or where special arrangements have been made, such as a place where a business's management, branch, office, factory, workshop or shop or some other fixed place for the sale or purchase of merchandise is located.

A mine or any other deposit, quarry, peat bog, gravel deposit or other comparable place of extraction or, in the case of sales via business activities on property divided up or intended for subdivision, such property, and in the case of building contracts such a place, where the related contracting is practised to a considerable extent, and in the exercise of a scheduled traffic service, the maintenance place of the business, or some other, specific, permanent place of business serving traffic is also regarded as a permanent establishment.

Generally, the tax treaties that Finland has signed impose no restriction on Finland’s taxing rights on the income attributable to a PE, if the foreign corporate entity is treated as having a PE within the meaning of the treaty (Article 5 of the OECD Model Tax Convention).

3.4 The tax-assessment process in the case of a nonresident corporate entity

If the nonresident entity is treated as having a PE in Finland, the assessment of taxes is carried out in accordance with the provisions of the act on assessment procedure (Verotusmenettelylaki 1558/1995). Accordingly, the foreign corporate entity is required to submit a tax return, to inform the Finnish tax authority of the PE’s revenue and expenditure. The PE’s taxable income is assessed in a manner similar to that of the taxable income of a Finnish limited liability company. The arm’s length principle must be adhered to when attributing profits to a permanent establishment. For more information, see the Tax Administration’s General Guidelines for the Attribution of Income to Permanent Establishment.

If the nonresident corporate entity receives income from real estate or from a housing-company apartment in Finland, and the relevant tax-treaty provisions allow Finland to impose taxes on the (rental) income, the nonresident corporate entity must submit a tax return to inform the Finnish tax authority of this income and the expenses that support that income. For this category of income as well, the assessment is carried out in accordance with the provisions of the act on assessment procedure.  If any revenue and expenditure relating to real estate or to an apartment in a housing company are attributable to the foreign corporate entity’s PE in Finland, that revenue and expenditure must be included in the reporting submitted to the Finnish tax authority of the PE’s tax return.

In the case of receipts of dividends, interest and royalties by the foreign nonresident corporate entity, taxes are assessed in the form of taxation at source unless the dividends, interest and royalties are attributable to the entity’s PE in Finland. The payer of dividends, interest and royalties must withhold tax at source, which is a final tax, the size of which is determined by the provisions of domestic law of by tax-treaty provisions. For more information, see Payments of dividends, interest and royalties to nonresidents, a Tax Administration’s guide.

4 The general liability to tax, i.e. residency of corporate entities

4.1 General liability to tax or residence as defined by the provisions of the act on income tax

The following are resident corporate entities: domestic corporate entities, and corporate entities set up or registered in other countries that have their place of effective management in Finland (§ 9, subsection 1, line 1 of the act on income tax).

“Domestic corporate entity” is an entity that has been incorporated or registered in accordance with Finnish legislation, (§ 9, subsection 7 of the act on income tax). From this, it follows that entities that have been incorporated under Finnish law, including Oy’s, limited liability companies that are founded in accordance with Companies Act, are always resident taxpayers. Corporate entities of the legal forms “European Company, SE” and “European cooperative society” are treated as resident taxpayer entities in Finland if their registered corporate domicile is in Finland.

Foreign corporate entities can be resident taxpayers in Finland only if the entity’s place of effective management is in Finland. A corporate entity’s place of effective management is considered to be in Finland if its Board of Directors, etc., a body making the top-level decisions on daily management, is located here. However, when tests are carried out for POEM, other circumstances relevant to the company’s organisation and business operations are also taken into account. (§ 9, subsection 8 of the act on income tax.)

4.2 The tax-assessment process for a resident corporate entity

Resident taxpayer entities are liable to tax on both income sourced to Finland and income sourced to other countries (§ 9.1.1 of the act on income tax). In other words, the resident entity must pay tax on all its receipts of income, regardless of whether the source is in Finland or any other country worldwide.

The process of tax assessment is carried out in accordance with the act on assessment procedure. Upon submitting its tax return, the resident corporate entity must provide a full account, reporting all its income from Finnish sources and sources in foreign countries.  The amount of income subject to tax is a function of taxable revenue and tax-deductible expenditure.

The provisions of § 9, subsection 9 lay down that Finnish tax rules are applied on resident entities (those referred to in § 9.1.1. and § 9.8 of the act on income tax), which also includes the rules found in the act on income tax that are directed toward domestic, Finnish corporate entities. This means that for foreign corporate entities that are treated as resident taxpayers in Finland by virtue of POEM, the liability to pay income taxes is based on the same rules as concern other resident taxpayer entities.

When a foreign company has become a resident foreign corporate entity, the assessment is conducted according to the same provisions of the act on income tax as with domestic corporate entities. Accordingly, the same rules that control sources of income, taxability of income, and deductibility of expenses are applied. Likewise, the same rules on registration for tax prepayments, and entry into the other registers maintained by the Tax Administration concern the resident taxpayer entity as are applied on domestic corporate entities. Read more on registrations in the Tax Administration's Starting up business guide.

Some corporate entities enjoy a full exemption from income taxes under the provisions of § 20 of the act on income tax. Under § 20 of the act, and subject to certain restrictions, exemptions are also granted to investment funds within the meaning of the Act on Common Funds, special funds within the meaning of the Act on Alternative Fund Managers, and to comparable foreign funds. Entities within the meaning of §§ 21, 21 a, 21 b, 21 c and 22 of the act are partially exempted from income taxes. If a foreign corporate entity is treated as a resident taxpayer in Finland by virtue of its POEM, it may be necessary for the tax authorities to test whether the foreign corporate is comparable to a Finnish entity that enjoys full or partial exemption from income taxes.

For more information investment funds in light of the exemption rules, see “On the taxation of investment funds and the provisions of section 20a of the Income Tax Act, a Tax Administration’s guidance.  For more information on the tax treatment of nonprofit organisations, see “Tax guide for organisations promoting the public good” – Verotusohje yleishyödyllisille yhteisöille (in Finnish and Swedish).

4.3 Payments made by a foreign corporate entity treated as being a Finnish resident

The provisions of § 9, subsection 9 lay down that Finnish tax rules are applied on resident entities, which includes all the rules found in the act on income tax that are directed toward domestic, Finnish corporate entities. Under § 10 of the act, the source country of income is Finland if the payer is a Finnish corporate entity, or if the income consists of received interest, the debtor paying the interest is a Finnish corporate entity. From this, it follows, that when foreign corporate entities having their POEM in Finland pay out dividends, interests and royalties to a nonresident beneficiary, these categories of income are from a Finnish source under the provisions of § 10.

In addition, other payments made by a foreign corporate entity treated as a resident are from a Finnish source if they were held as being from Finland if a domestic corporate entity were paying them out. For example, if a resident investment fund pays out profit-shares, the receipts of that income are treated as being from a Finnish source, based on § 10, line 9 of the act on income. However, by virtue of the transition rule for § 9, subsection 8, the above rule will not be applicable on funds that have been set up in the EEA until the tax assessment for the 2023 tax year.

After a foreign corporate entity has become a resident entity in Finland, it is treated the same as a domestic corporate when the act on income tax is applied. For this reason, the distribution of dividends by the foreign corporate entity to Finnish-resident individuals is subjected to the provisions of § 33 a and § 33 b of the act.  When the calculations for corporate net worth and one share’s mathematical tax value are made, the provisions of the Finnish act on valuation of assets is applied (Laki varojen arvostamisesta verotuksessa (1142/2005)).

If a foreign corporate entity that has become a Finnish resident distributes dividends to its shareholders, the entity is equated with a domestic entity within the meaning of § 6 a, subsection 1 of the act on the taxation of business income. If the beneficiary of dividends is a resident corporate entity or a PE of a nonresident corporate entity, the provisions of § 6 a of the act on the taxation of business income are applied on the taxes imposed on the dividends.  For more information, see “Taxation of dividends” – Osinkotulojen verotus (in Finnish and Swedish).

Payments made by a resident entity of dividends, interest and royalties to a non-resident individual taxpayer, or to a nonresident corporate entity, are subject to withholding of tax at source. The amount to be withheld is controlled by the provisions of the act on the taxation of nonresidents' income, and additionally, by the provisions of the applicable tax treaty as the case may be. One of the factors that affects the way tax is withheld and how much should be withheld on the dividends, royalties or interest is whether Finland also is the corporate entity’s country of residence for treaty purposes (for more information, see section 7 of this guide).

Additionally, restrictions on the amount may be imposed by the Savings Directive, the Interest and Royalties Directive or the Parent-Subsidiary Directive. For more information, see Payments of dividends, interest and royalties to nonresidents.

Because it is treated as income from a Finnish source when shareholders or other beneficiaries receive profit distributions from resident foreign corporate entities, the income is taxed in accordance with the provisions of the tax treaty between the beneficiaries’ country of residence and Finland.

4.4 Being an employer

Under § 10, line 4 of the act on income tax, the pay earned in the service of an employer is regarded as Finnish-sourced income, in addition to the income within the meaning of § 3 above, if the location where the individual worked is in Finland (or mostly in Finland) and the employer is domiciled in Finland. “Employers domiciled in Finland” includes foreign corporate entities that are resident taxpayers by virtue of their POEM. Accordingly, when a nonresident individual has worked for a resident entity, and the work was done in Finland, or mostly in Finland, the wages received by him or her are sourced to Finland.

Moreover, resident entities that have their place of effective management in Finland can generally be treated as Finnish employers when Article 15 of tax treaties is applied.

When the resident entity is viewed as a domestic, Finnish employer, the information-reporting requirement set out by § 15 a of the act on assessment procedure (Verotusmenettelylaki 1558/1995) does not concern the entity. Instead, by virtue of being a “Finnish” employer, the entity has the same information-reporting requirements as other Finnish employers have.

5 Place of effective management

5.1 Test for the place of effective management, POEM

Under the provisions of § 9, subsection 8 of the act on income tax, a corporate entity’s place of effective management is considered to be in Finland if its Board of Directors or other body making top-level decisions on daily management is located in Finland. However, when tests are carried out for POEM, other circumstances relevant to the company’s organisation and business operations are also taken into account.

The basic principle is that all corporate entities must have a place of effective management somewhere. To determine where it is means that the entire perspective of facts and circumstances must be looked into. The authorities in charge of testing for the location may utilize the entity’s management documentation such as minutes from board meetings, etc.

By nature, the place of effective management must be an adequately stable location. Accordingly, even if the management actions were to concern the entire high-level direction of the company but this has only occurred temporarily, it would not give rise to the location of the place of effective management having been situated in Finland. As a result, if an entity made high-level decisions on daily management in this country on a temporary basis – because of the restrictions on international travel due to the coronavirus pandemic, for example – this, as a temporary occurrence, would not give rise to its POEM being in Finland.

Management structures are bound to have varying characteristics, depending on the country where the foreign corporate entity was incorporated and registered, and depending on its legal-entity type. The provisions of local legal norms and the corporate entity’s own statutes generally indicate who should manage the company. As a result, the authorities that conduct POEM tests must take account of the applicable provisions and corporate statutes that are in effect under national law. For some companies, no exact rules are found in the Articles or statutes on who is expected to make the decision at the highest level – and in these circumstances, it is important to rely on the provisions of domestic law.

In the majority of countries, any corporate entity’s administrative and operational management falls under the Board of Directors’ responsibilities. Consequently, this responsibility and powers are used by the Board or other body during board meetings, etc. However, there are countries where domestic law provides that corporate shareholders have responsibility for how management is run.

5.1.2 Location of the top decision-making body

When the authorities perform tests for the location of a corporate entity’s place of effective management, key importance is attached to the provision in § 9, subsection 8 that refers to the location where the Board of Directors (or other top-level body) makes decisions. However, if the board meetings where top decisions are actually made rely on video conferencing or other online technology, the tests for POEM must focus on the geographical location where the participants have joined the meeting.  If the management structure is spread out over several countries, so that board members, the main office, and the executive managers work in a number of different states, the POEM tests give primary significance to the place where the company’s board meetings are held. No POEM tests take account of the countries of residence of the individuals who are members of the Board of Directors or other similar body (page 49 of the government-proposal memorandum HE 136/2020).

Accordingly, if the board meetings, etc. are held in Finland or if the members of the board join the meeting from Finland, over an online remote connection, this is generally treated as a strong indicator that the entity’s high-level management decisions are made in Finland and the conclusion regarding the POEM is that it is located in Finland. Still, it is required that the Board of Directors or the body similar to it has the powers, which it exclusively or primarily uses during the meetings; and these powers must be related to the corporate entity’s central issues on which decisions must be made by the management, when all the facts and circumstances of the entity’s operation are considered (pages 47 to 48 of the Government Proposal).

Illustration 1:

The Swedish-registered X AB is a company operating in the construction industry in Sweden and in Finland. The entire stock of X AB is held by shareholder “A” an individual, resident of Finland. In addition to “A”, also “B”, his wife, is a board member. The board handles all the corporate decision-making in Finland, at “A’s” and “B’s” family home. In addition, “A” is in charge of X AB’s daily management, also from the family home. X AB’s place of effective management is in Finland.

If the results of a POEM test point to a conclusion that the Board of Directors’ meetings are held at a certain location just as a formality, and the actual location where decisions are made is elsewhere, relating to the entity’s high-level daily management, the actual location not the formal location must take precedence (page 48 of the Government Proposal).

In the same way, no importance is attached to the location where meetings are held also if the board members only follow the instructions they get from a third party when voting at the meetings held there. Accordingly, the decisive factor is not the identity of the party that prepares, executes or carries out the matter to be decided on. Instead, the identity of the person who makes the final decision is important. When taking account of the entire perspective of the company’s circumstances, attention must be given not only to the regular meetings but also to the events that occur in between.

Illustration 2:

The company called C Oü is registered in Estonia, and the sole owner of its corporate stock is “X”, an individual resident of Finland. The Board of Directors consists of two individual members “M” and “N” who are Estonian residents and who customarily hold the board meetings in Estonia. When the authorities look into the way C Oü makes its corporate decisions, it turns out that during board meetings, both “M” and “N” act exactly as “X” instructs them. It becomes evident that “X” sends e-mailed instructions from Finland to “M” and “N” to give them orders on what to do at the meetings. In addition, “X” has responsibility for C Oü’s daily management. Because the individual who decides on daily business management is “X”, the conclusion is that C Oü’s place of effective management is in Finland.

In many countries of the world, it is typical that corporate entities have an administrative council that exercises control, on shareholders’ behalf, over the Board of Directors. The Board, in turn, is responsible for the management of the business. The role of the above “council” or any other similar body is not important, nor is the place where the council makes its decisions, when tests for the place of effective management are conducted (page 48 of the Government Proposal).

5.1.3 Other circumstances having a bearing on corporate organisation and the conduct of business

Under the provisions of § 9, subsection 8 of the act on income tax, “other” circumstances must also be accounted for when conducting the tests. Examples of the “other” circumstances cited in the government-proposal text are main office’s location or the location where corporate executive managers work. In general, the main office is a physical site, i.e. the building where the central administration, etc. is located. Likewise, a corporate entity’s executive managers are the Managing Director or other similar directors, and their direct subordinates, whose work is closely related to top corporate management (page 24 of the Government Proposal).

For example, if the meetings are held in several different countries or if those who join them do so from several different countries, the POEM testing must take account of the place where the main office is situated, and the place where the executive managers work. Key importance is attached to the geographical location of the corporate entity’s organisational and economic centre (page 48 of the Government Proposal).

Illustration 3:

“X AS” is a company established in Norway, having a Norwegian trade registration. The company has its main office in Norway. The Managing Director works there, together with other executives. The Board of Directors consists of 6 members. For its meetings, it is customary that the Board rotates between Norway, Sweden and Finland. The Board of Directors makes decisions and agreements having to do with “X AS’s” high-level management of operations. Based on where the main office is and based on where the executive management works, “X AS’s” place of effective management is in Norway.

It cannot be concluded that merely the accounting or auditing function being carried out in Finland could give rise to the place of effective management being in Finland. In the same way, the handling of various recurring tasks, cash management, pay-clerk functions, etc., does not give rise to the POEM being in the country where these tasks are handled.  For example, if the corporate function simply consists of deliveries of official documents to public authorities, it does not give rise to the corporate entity’s POEM.

Even if the corporate entity’s annual general meetings (or similar meetings) were always held in a certain country, it would not mean that the place of effective management is located there. This way, when we perform tests for the POEM, no decisive role is given to whether the annual general meeting and the shareholding-based presence and voting take place at a certain location (page 49 of the Government Proposal). Nevertheless, if the shareholder actually is the party having the top-level powers in the corporate entity and the shareholder uses those powers, the place where this is done can be taken into consideration when the authorities perform the POEM testing.

Illustration 4:

Mrs “A”, a Finnish resident individual, is the sole owner of C GmbH’s corporate stock. This company is registered in Germany. Besides Mrs “A”, there are 4 other members of the Board of Directors in C GmbH. These board members are from Germany. The place where board meetings are held is Germany. Accordingly, Mrs “A” travels to Germany whenever a board meeting is held. When C GmbH has a board meeting, the Board of Directors makes decisions and agreements having to do with high-level management of operations. The main office of C GmbH is also located in Germany. The company’s Managing Director and other executive directors work in the main office. Mrs “A” makes the shareholders’ decisions, normally deliberated by the company’s annual general meeting, at her home in Finland. Conclusion: The place of effective management of C GmbH is Germany.

5.2 Special circumstances relating to the place of effective management

5.2.1 Member companies of a multinational enterprise group (MNE)

It may be that a foreign corporate entity is a subsidiary or other member of an MNE group.  The MNE group’s parent company can be in Finland or elsewhere. When the Finnish authorities have to test whether the place of effective management is in Finland, it may be difficult to tell whether the parent’s activities are simply the typical activity of a shareholder – or whether the parent company manages and controls its subsidiary. This difficulty is obvious because all parent companies are expected to exercise at least some kind of control over their subsidiaries, including reporting to the parent, etc.

When conducting a test for the place of effective management, each specific corporate entity and the management of that entity’s business operation must be in focus. Account is also taken of whether the pursued activity serves the entire MNE group or whether the activity only relates to the particular foreign subsidiary. Corporate decisions that relate to group strategy and decisions falling under the category of corporate governance and corporate administration are not important when testing for the place’s location. In this regard, it is normal procedure for MNE groups to appoint parent-company executives as board members in various subsidiaries, merely with a view to ensure that the local directors in subsidiaries follow the centralised group policy, not deviating from “code of conduct” or other accepted processes of the MNE group. This kind of board membership in the group’s subsidiary companies is not among the decision-making action that has an impact on place-of-effective-management tests (pages 49 to 50 of the Government Proposal).

5.2.2 Holding companies and investment firms

The usual meaning of “holding company” is an entity that has refrained from conducting business for itself. Instead, it serves its shareholders’ interests by taking charge of various administrative aspects relating to assets and property. The total scope of corporate decision-making in holding companies is typically much narrower than in companies that conduct business.

However, even if the overall operation of a holding company were quite passive — as decisions are only made quite rarely, i.e. “daily management” is less relevant than in companies that conduct business — that holding company’s place of effective management would still be in Finland if the decisions that are important for the holding company itself are made in Finland. If the entire activity of a holding company is to hold corporate stocks, the testing for POEM would take account of the necessary decision-making that relates to that activity’s management: – where is the location where decisions on financing the stockholding are made – where is the location where the holding company decides how it uses its shareholder’s rights in the companies in its portfolio – where decisions are made on how the holding company will invest its extra cash – and where the holding company’s decisions are made regarding profit distribution/other use of assets (page 50 of the Government Proposal).

The POEM of a foreign holding company cannot be based on ownership alone. However, if the holding company’s owner actually makes decisions that concern the company’s operation and functions, importance must be attached to the location where the owner does so, i.e. exercises the powers based on shareholding (page 50 of the Government Proposal). It does not prevent the place of effective management being located in Finland if the owner exercising the powers travels to other countries from time to time (Finance Committee report no 33/2020).

If a holding company is part of a consolidated enterprise group, and the decision-making regarding that holding company is of strategic, group-level nature or related to corporate governance, no importance should be attached to that kind of decision-making from the viewpoint of POEM testing, as discussed in the Government proposal’s “reasoning” section (Finance Committee report no 33/2020).

If a natural person or a legal person is a Finnish resident and the owner of an investment company located in another state, the POEM for that investment company is in Finland if the top-level daily management decisions are made in Finland (page 51 of the Government Proposal).

Illustration 5:

The Luxembourg-registered “X SARL” is an investment company, wholly owned by “Z”, a resident individual of Finland. The board members are “Z” himself and “Y”, her son. The place where board meetings are held is either “Z’s” or “Y’s” home in Finland. No office space in Luxembourg and no persons appointed as operative managers exist there.

“X SARL’s” operative activity consists of ownership of certain stocks, securities, and real estate. The activity is of a passive nature, so “X SARL” only makes a small number of sales and purchases of stocks, securities, real estate per year. During the entire 2021, “X SARL” only sold one real estate unit. It did not pursue any other activity.  Finland is always the place where “Z” and “Y” agree or decide on what stocks, securities and real estate to sell and buy. “X SARL's" place of effective management is in Finland.

Illustration 6:

Mrs. A, a Finnish resident, owns the entire corporate stock of “X Oü”, an Estonian-registered corporate entity active in the investment business. She is the only ordinary member of “X Oü’s” Board of Directors. She makes all the decisions on investment operations in “X Oü” at her home in Finland. “X Oü’s” place of effective management is in Finland.

5.2.3 Foreign funds

In most cases, the tax rules on the place of effective management are applied on foreign investment funds if they are corporate entities. However, there is a transition rule directed toward investment funds: the newly adopted § 9, subsection 8 of the act on income tax, enacted by statute no 1188/2020, will first be applied when taxes for the 2023 tax year are assessed for entities that fall under the following categories: undertakings of collective investment as defined in Chapter 1, § 2.17 of the Act on Common Funds (213/2019) and alternative investment funds founded in another EEA state, or registered in another EEA state that are referred to in Chapter 2, § 1 of the Act on Alternative Investment Fund Managers (162/2014).

In accordance with Chapter 1, § 2.17 of the Act on Common Funds, an undertaking of collective investment is a company that has received a permit elsewhere in the EEA than in Finland, which under the domestic law of its domicile country fulfills the requirements of the EU Council Directive on investment funds. In accordance with Chapter 2, § 1 of the Act on Alternative Investment Fund Managers, such a fund is a corporate entity or another form of collective investment that involves the pooled input of money from a number of investors, placement of that input as agreed by pre-defined policy for the investors’ benefit; and the fund does not need an authorisation within the meaning of Article 5 of the Directive on undertakings for investment.

In the same way as for other corporate entities, the place of effective management for a fund is the place where its Board of Directors or other decision-making body makes the top-level decisions on daily management. In addition, account must be taken of the fund’s organisation and other circumstances relating to its business activity (§ 9, subsection 8 of the act on income tax). Accordingly, also in the case of funds, tests for POEM must be conducted on a case-by-case basis.

There are many different possibilities to organize an investment fund’s administration and management. For example, the management and safekeeping of portfolios can be outsourced if desired. An asset-management company can take care of that function. Alternatively, some other parts of the fund’s operation can be outsourced, where appropriate, to various consultancy service firms. This may lead to a situation where the fund’s operative functions are distributed among various states. Fully in accordance with the UCITS and AIFM Directives, it may be that Finland is the country where an investment fund is managed and administered although the fund had been founded in another member state of the EU.

The conduct of business in the funds sector requires that a high number of different decisions are made, and there are many parties within the structure of a fund that have responsibility for such decision-making. Decisions relating to investment operations include the selection of investment strategy, changes of the strategy, direct decision-making on purchases and sales and their preparatory measures that must be carried out before the fund conducts the purchase or the sale. Decisions such as selecting the providers of various services to the investment fund are among administrative activities. When we focus on the question where the fund’s top decision-making is taking place, we must take account of the provisions of national legislation in the country where the investment fund was set up and the fund’s Articles of Association, i.e. its own statutes, found in the Charter, Shareholders’ Agreement or other documents (pages 25 to 26 of the Government Proposal).

As for decisions concerning the fund’s investment strategy, it is typical that the most senior management makes them even though the fund’s operative activity had been outsourced or otherwise contracted out to external service providers as permitted by the provisions of the UCITS Directive and the AIFM Directive. According to the above line of reasoning, the management of investment portfolios that complies with the senior management’s instructions cannot be treated as high-level management activity. Meanwhile, it is probable that various decisions are being made on an ongoing basis, concerning the portfolio’s purchase and sale decisions, and the preparation of the same (page 26 of the Government Proposal).

The general principle is that the POEM rules of § 9, subsection 8 of the act on income tax are rarely applied on foreign investment funds (page 26 of the Government Proposal). With this in mind, it may still be that a foreign investment fund’s high-level business decisions, including decisions on investment strategy, are made in Finland. In this case the foreign fund’s place of effective management may be Finland.

Even in this case, and even if the fund became a resident entity in Finland, it may have a full exemption status from income taxes if it fulfills the relevant requirements listed in § 20 of the act on income tax. For more information, see On the taxation of investment funds and the provisions of section 20a of the Income Tax Act, a Tax Administration’s guidance.

5.2.4 Trusts

Legal persons having the form called “trust” can be set up, under the rules of local national law, in the United States, the UK and other countries. Trusts can be characterised as economic structures created between 3 parties: the settlor, the trustee and the beneficiary. There is an arrangement, to which the trustee has consented, between the settlor and the beneficiary: the property and assets controlled by the “trust” are transferred to the trustee, so that the latter has the ownership and other rights over them. The above structures i.e. trusts are not provided for in the legislation of Finland.

However, if a trust set up in a foreign country is deemed as comparable to a Finnish corporate entity within the meaning of § 3 of the act on income tax, the trust can become a resident taxpayer entity if its POEM is in Finland, i.e. its decision on top-level daily management are made in Finland. The points most relevant for any POEM testing in the case of a trust are: – who can decide how the trust invests its money – who decides how the trust uses the money, property or assets – who decides on any distributions of assets – where is the place where the above decisions are made (page 50 of the Government Proposal).

5.2.5 Operations of maritime shipping companies

Usual corporate income taxes can be replaced by a tonnage-tax regime as provided in the relevant legal act (Tonnistoverolaki; tonnageskattelagen (476/2002)). In accordance with § 1 of the act, a resident limited-liability company operating maritime transport on international routes has the option to pay tonnage tax, based on the displacement tonnage of its maritime vessels as an alternative to paying income taxes on the profits from the maritime transport.

The tax rules on the place of effective management are also applied on foreign corporate entities that engage in shipping. A foreign shipping company is treated as a resident entity in Finland (under § 9.1.1. of the act on income tax) if its POEM is in Finland.

In accordance with § 2 of the Finnish tonnage tax act, Finland must be the country where the shipping company is managed. If a foreign shipping company is a resident, by virtue of its POEM, it has the option to select the tonnage tax regime on the condition that the other requirements for it are fulfilled.

For more information, see the Tax Administration’s guidance on tonnage tax - Tonnistoverotus (in Finnish and Swedish).

5.3 Drawing the line between the POEM and the management office that gives rise to a permanent establishment

Foreign corporate entities may be treated as having a permanent establishment in Finland if they have a place of management (§ 13a of the act on income tax). In addition to the Finnish act, also the Model Tax Treaty of the OECD provides that a permanent establishment can be formed on the basis of the place of management (Article 5, paragraph 2 of the Model).

It should be noted that the two places of management are different: the place of management giving rise to a PE is different from the POEM concept. While there may be a number of PEs in many countries — as the corporate entity has many places of management, each one of them creating a permanent establishment — there can only be one place of effective management. The basic principle is that all corporate entities must have a place of effective management somewhere. The company’s place of effective management is where its most senior directors such as board members convene to make high-level decisions, but the place of management giving rise to a PE may be a location also for other executive managers to make decisions (page 15 of the Government Proposal).

If it is evident that a foreign corporate entity has a place of management in Finland, we must first find out whether it is the place where the corporate entity’s top-level decisions concerning daily management are made, i.e. the POEM. If the answer to the question is that the entity’s POEM is in Finland, the corporate entity is a resident taxpayer. If a foreign corporate entity’s country of residence is Finland, also for purposes of applying the tax treaty, there is no need to test whether a place of management exists that can give rise to a PE. However, if a foreign corporate entity is treated as being a resident taxpayer in Finland but for purposes of the treaty, it is not a resident, a PE may still be formed.

If the foreign corporate entity has a place of management in Finland but it is not the place of effective management, it may be that the place of management gives rise to a permanent establishment in Finland. In this case, the foreign corporate entity is a nonresident in Finland.

Illustration 7:

The Swedish X AB, a limited-liability company, conducts business in Sweden and in Finland. X AB has a Country Manager in Finland. Her job involves making active, independent decisions on how X AB carries out its business activity in Finland. For the entire X AB company, the top-level decision-making on daily management issues is handled by X AB’s Board of Directors during its meetings held in Sweden. Sweden is also the country where X AB’s main office is located.

The results of POEM testing show that X AB’s place of effective management is not located in Finland because no top decision-making on daily management goes on here. Nevertheless, because of the employment duties of the Country Manager, X AB has a place of management in Finland that makes X AB treated as having a permanent establishment here. X AB is a nonresident taxpayer in Finland, and it must pay Finnish tax on all the income attributed to its PE. Additionally, it may also be that a PE is formed for X AB in Finland because of the business it conducts in Finland, which is other than the managerial duties the Country Manager handles.

The amended provisions of § 9 of the act on income tax went into effect as the Act no 1188/2020 was adopted, outlining changes to the act on income tax. Foreign corporate entities had always been treated as nonresident taxpayers in Finland before the legal changes. This meant that a foreign corporate entity could not be treated as a resident taxpayer although its POEM would have been located here. In such a case only a permanent establishment would have been formed. It is possible that a place of management that previously gave rise to a PE for the foreign corporate entity is now, as referred to in § 9, subsection 8 of the act, a place of effective management, fulfilling the relevant requirements. This would change the tax status of the foreign corporate entity from nonresident to resident taxpayer, starting from the 2021 tax year.

6 Notes on special circumstances relating to foreign entities’ residency

6.1 Start date of the company’s residency status

Under § 9, subsection 8 of the act on income tax, the date when a foreign corporate entity starts being treated as a resident taxpayer is either the date it was incorporated or registered, or the date when its place of effective management was formed in this country. The point in time when corporate entities are incorporated and registered is defined as being the time when the entity submits a notice of registration, on its initiative, for the part regarding its POEM, in order to be entered in the Finnish Tax Administration’s registers (page 51 of the Government Proposal). 

The point in time when a POEM is formed for a corporate entity is defined as the time when based on an appraisal of all the facts and circumstances, the POEM in Finland is deemed to exist. Foreign corporate entities are treated as Finnish resident taxpayer entities starting when the POEM was formed if the entity has not submitted, on its initiative, a notice of registration to the Tax Administration regarding its POEM. However, the earliest tax year when a foreign corporate entity can have Finnish tax residency is the 2021 tax year.

Starting from the time when Finnish residency begins, any PE within the meaning of § 13 a of the act on income tax and the foreign corporate entity are subjected to assessment of taxes as if they were one single taxpayer entity. The PE’s economic results are thus part of the foreign corporate entity’s profits and losses, within the meaning of § 1, subsection 1 of the act on the taxation of business income, starting at the point of time when the entity’s Finnish residency begins (§ 51 g of the act on the taxation of business income).  From this, it follows that if the entity’s status change from nonresident to resident occurs mid-year, its profits or loss subject to Finnish income taxation will be formed as a combined sum total of the PE’s profits – during the first part of the tax year – and the entity’s own profits – during the latter part of the tax year.

Foreign corporate entities that are interested in finding out whether the Finnish tax authority will, in the upcoming future, treat them as a resident taxpayer entity, may submit an application for an advance ruling. For instructions on how to apply for an advance ruling, see the Finnish Tax Administration's “Applying for an advance ruling and the decision issued on the matter” guide - Ennakkoratkaisuhakemuksen tekeminen ja siihen annettava päätös (in Finnish and Swedish).

6.2 Valuation of corporate assets at the start of the residency status

6.2.1 Valuation of assets when residency is moved from another country to Finland

Foreign corporate entities may have had a resident taxpayer status in another country before they become a resident entity in Finland. After the Finnish residency is granted to a foreign corporate entity, its domicile is treated as having been moved to Finland. In these circumstances, the corporate entity’s assets and property must be evaluated in some way, i.e. their total value must be determined. The way the valuation is carried out has an impact on the entity’s rights to deduct depreciation expenses, going forward. In the same way, valuation has an impact on how capital gains will be calculated if the corporate entity is to sell any of its assets.

The rules that govern valuation at the beginning of Finnish residency are not the same for the foreign corporate entities that arrive in Finland from other EU member states as for those that arrive from non-EU countries. Additionally, another factor affecting valuation is whether the country from where the corporate entity comes from has included the probable selling price of the assets in the corporate entity’s taxable income.

The Finnish rules on valuation, applicable to corporate domiciles that are transferred to Finland from another EU member state, are found in § 51 f, subsection 1 of the act on the taxation of business income. Under these rules, the assets’ acquisition cost is treated as being the value affirmed by the authorities of the member state of departure, within the meaning of § 51 e, subsection 3, if the valuation carried out in the member state executing the transfer has matched the value referred to in the 3rd subsection of § 51 f.

Under § 51 e, subsection 3 of the act on the taxation of business income, the value of the assets on the date of exit is the amount that sellers and buyers in the market would accept if a direct business transaction were made, assuming that these sellers and buyers are not associated as referred to in § 18.2, lines 3 to 5 of the act on the taxation of business income.

Under § 51 f, subsection 2, in case a corporate entity, which is a previous resident of a non-EU state, becomes a Finnish resident within the meaning of § 9.1.1. and § 9, subsection 8 of the act on income tax, the acquisition cost of its arriving assets and property will be the residual undepreciated value remaining in the state from which the transfer was considered made. If that state has treated the assets’ exit value, referred to in § 51 e, subsection 3, as taxable income in that state, the Finnish authorities will treat that amount as the assets’ and property’s acquisition cost upon arrival. However, the provisions on valuation found in § 52 f, subsection 2 of the act on the taxation of business income are not applied on the assets and property that belong to a permanent establishment (under § 13 a of the act on income tax) that had been located in Finland before the foreign corporate entity became a Finnish resident.

If the corporate entity had a PE (under § 13 a of the act on income tax), any of the PE’s undepreciated acquisition costs and other expenses not yet deducted in taxation will be deducted, when the foreign corporate entity’s taxes are assessed, in the same way as they would have been deducted in a tax-assessment process that concerns the PE (§ 51 g of the act on the taxation of business income).

For more information on asset valuation in cross-border circumstances, see “Exit taxes” – Maastapoistumisverotus, the Tax Administration’s guide (available in Finnish and Swedish).

6.2.2 Valuation of assets if the corporate entity is a Finnish resident since it was founded

It may be that the Finnish authorities treat a foreign corporate entity as a resident taxpayer, including residence also for tax-treaty purposes, ever since the foreign corporate entity was set up according to the provisions of the laws of its country of incorporation and registration. In such a case, the corporate entity has no history of having been a resident taxpayer entity elsewhere than in Finland. This means that no other country has determined any acquisition cost or exit value, etc. for the entity’s assets and property.

In these circumstances, the valuation of assets and property is carried out in the same way as for Finnish corporate entities when they start up business. In other words, the assets’ and property’s acquisition costs will be determined as provided in the act on the taxation of business income, in the act on income tax, or according to the act on tax on agricultural income.

6.3 Allowable losses from previous years

6.3.1 Losses from previous years, allowed by the other state’s tax authority for carryover

It may be that in the past, a foreign corporate entity had a residency status in a country other than Finland, for example, in some other state where it had been treated as having the POEM, or in its state of incorporation and registration. After that, it has received its resident taxpayer status in Finland. In these circumstances, the foreign corporate entity may have had to pay tax on its worldwide income elsewhere before the time when the Finnish authorities started treating it as a resident taxpayer. Losses from the entity’s business may have been recorded by the tax authority of the previous country of residence as losses allowed for carryover to future tax years.

Allowable losses that arose before the time when the foreign corporate entity became a resident taxpayer in Finland are not tax-deductible in Finland in the way the deductibility of past losses is regulated by the “V” Section of the act on income tax (page 29 of the Government Proposal). The above is based on the case-law from the European Court of Justice; case-law has been formed that takes a negative stand regarding deductibility of any previous years’ allowable losses when the country of tax residence has moved from one member state to another. Ruling no C-405/18, Aures Holding, of the European Court of Justice sets out that no allowable losses originating in the earlier member state of residence need to be approved in the destination member state where the corporate entity arrives. The reason for this view is that the destination member state, where the company’s POEM is now located, cannot have an obligation to grant deductions for economic losses that had occurred before, because the tax periods when they occurred were outside of the destination state’s taxing rights.

Illustration 8:

The German “A GmbH” was considered a nonresident corporate entity in Finland in 2015, 2016, 2017, 2018, 2019 and 2020. During these years 2015 – 2020, “A GmbH” had no permanent establishment in Finland, nor did it have any Finnish-sourced income. As a result, for the 2015 – 2020 period, the Finnish tax authority never assessed any taxes for “A GmbH”. Instead, “A GmbH” was a resident taxpayer entity in Germany, and the German tax authority recorded an allowable loss for it, amounting to €200,000 in total for the years 2015 to 2020.

For tax year 2021 and onwards, “A GmbH” is treated as a resident entity in Finland because its place of effective management is now in Finland. As of 2021, “A GmbH” must pay tax to Finland on its worldwide income.

The business profits of “A GmbH”, treated as subject to tax in Finland, amount to €300,000 for the 2021 tax year. However, in its Finnish tax assessment, “A GmbH” cannot deduct the “German” allowable losses for 2015 – 2020 from its taxable business profits.

6.3.2 Losses attributable to a permanent establishment

It may be that a foreign corporate entity has had a PE in Finland before the time the entity becomes a resident in Finland. During those years, the entity has been treated as a nonresident taxpayer in Finland, and it has had to pay tax on all the income attributed to its PE. The Tax Administration may have assessed the taxes and allowed losses for carryforward to next years for the PE.

If a resident corporate entity has previously had a permanent establishment in Finland, i.e. before the entity became a resident, and allowable losses have been recorded for the permanent establishment, these losses are allowed for carryforward in the manner laid down in the act on income tax so that the resident corporate entity can deduct them. This deduction right cannot be granted unless the foreign corporate entity has given a statement proving that the Finnish-located permanent establishment’s losses had not been deducted against the entity’s taxes imposed in its home country of residence. (§ 123c of the act on income tax.)

If the method employed in the resident entity’s home country of residence has been the credit method, to relieve double taxation for permanent establishments, the primary way to deduct the Finnish-located permanent establishment’s earlier losses is to have the allowed losses deducted in that country. From this, it follows, that generally the permanent establishment’s earlier losses can only be deducted in Finland if the exemption method has been employed in the home country of residence.

Provided that the exemption method is employed, the revenue and expenditure of the permanent establishment have not been included as being part of the principal entity’s revenue and expenditure. In that case, the previous, home country of tax residence of the corporate entity has not imposed any tax on the Finnish-located permanent establishment’s income, and if the permanent establishment suffered losses, none of the losses have been deducted against the entity’s profits. Only a small number of the tax treaties that Finland has signed with other countries provide for employing the exemption method as the main method discussed above. However, it may be that the foreign entity’s country of residence has employed the exemption method by virtue of its national tax rules.

Illustration 9:

The foreign corporate entity called X was deemed as a nonresident corporate entity in Finland in 2015, 2016, 2017, 2018, 2019 and 2020. During those 6 tax years, X was treated as having a permanent establishment in Finland. Consequently, the Finnish authorities imposed taxes on the income attributed to the permanent establishment. However, also an allowable loss was endorsed by the tax authorities relating to the 2015–2020 tax years, amounting to €200,000.

In 2015–2020, in its country of tax residence where X was founded, it was an entity with unlimited tax liability, i.e. a resident. The country has employed the exemption method in order to relieve double taxation of the income attributable to permanent establishments.  As a result, no deductions of the allowable Finnish losses have been made against the taxable income of X. Moreover, no other treatment of the losses attributable to the permanent establishment was put into effect in X’s tax assessment there.

For tax year 2021 and onwards, X is treated as a resident entity in Finland because its place of effective management is in Finland. As of 2021, X must pay tax to Finland on its worldwide income.

For tax year 2021, X’s taxable business profits stand at €300,000. The allowable losses relating to the 2015–2020 tax years amounting to €200,000 can now be deducted in X’s tax assessment. This means that for tax year 2021, X’s income subject to tax equals €100,000 as the allowed losses have been deducted.

If the requirements set out by § 123 c of the act on income tax are fulfilled and the resident entity gets the right to deduct the previous years’ losses of its permanent establishment, the deductions are given according to the same rules as when domestic corporate entities deduct their losses. Among the domestic rules that apply are the restrictions, linked to changes of stock ownership in the corporate entity, which may prevent deduction. Additionally, the provisions of § 119 and § 120 of the act on income tax apply, so that the past losses relating to different sources of income can be carried forward for deduction during the 10 years that follow the year when the losses were made. More information about changes of stock ownership and their impact on the deductibility of past losses is available in the Tax Administration guidance on allowable loss and change of ownership - Vahvistettu tappio ja omistajanvaihdos (available in Finnish and Swedish).

6.4 Paying group contributions from one company to another

By virtue of the provisions of the act governing intra-group payments of contributions and subsidies (KonsAvL), one group company’s loss can be deducted against another group company’s profits. From this, it follows that member companies of a group have the opportunity to select which one of them will be paying most tax on the year’s income. Subject to the restrictions provided in the KonsAvL act, the subsidiary that pays out a contribution can deduct it as an expense, and then, in turn, the other subsidiary that receives the contribution must include it in the total of its taxable income.

As provided in § 2, subsection 2 of the act, the rules concerning Finnish limited liability companies and cooperative societies, found in subsection 1, also apply on a resident corporate entity within the meaning of § 9.1.1 of the act on income tax that has been deemed similar to the Finnish limited liability company or cooperative referred to in § 3, line 4 of the act on income tax. If a resident foreign corporate entity is similar to the Finnish limited liability company or cooperative, it can pay out group contributions or receive them if the other preconditions laid down by the KonsAvL act are satisfied.

There must be a relationship between the payer and beneficiary that coincides with the definition of § 3 of KonsAvL, i.e. both must be members of an enterprise group. This relationship is formed if a domestic limited liability company or cooperative (the parent) owns at least 90% of another domestic limited liability company’s or cooperative’s stock (i.e. of the subsidiary’s stock). In addition, a limited-liability company or cooperative society that is indirectly held by the parent is seen as a subsidiary entity if the parent, together with one or more of its subsidiaries, owns at least nine tenths of the stock.

Under § 7, subsection 1, line 1 of the KonsAvL act, the relationship defined in § 3 must have been effective through the entire tax year. Under § 7, subsection 2, for a foreign corporate entity treated as being a resident, the relationship is deemed as only having been effective during the period of the foreign entity’s Finnish residency status.

It may be that a foreign corporate entity has had a PE in Finland before the time the entity becomes a resident in Finland. However, under § 7, subsection 2 of the KonsAvL act, when the authorities determine for how long the relationship has been effective, referring to § 7, subsection 1 of the act, the existence of a PE in Finland is not relevant.

Under § 5 of the KonsAvL act, taxpayers paying out money to other group companies have the right of its deduction as an expense only if the company paying and the company receiving the money have entered reciprocal revenue and expense records in their respective accounting books. The above rule requiring consistent accounting entries also applies on resident foreign corporate entities that give or receive amounts as a group contribution. When the authorities check the linkage to the profit-and-loss accounts of the payer and beneficiary companies as explained above, they apply the same principles on foreign companies as on domestic, Finnish companies (page 32 of the Government Proposal). If the payer company is unable to make an accounting entry that has a link to its profit-and-loss account – for reasons including local restrictions on how the annual closing of accounts must be made – it will not be possible to grant a tax deduction to the payer company.

For more information, see the Tax Administration’s guide on group contributions – Konserniavustus (in Finnish and Swedish).

6.5 Applying the provisions of the Act on the Taxation of Shareholders in a CFC

Under the Finnish controlled-foreign-company legislation, the shareholders or other beneficiaries in Finland that receive income from their CFC, controlled foreign company, must pay Finnish taxes on that income if certain conditions are fulfilled. If the CFC is one that matches the definition laid down in the Act on the Taxation of Shareholders in a CFC, the Finnish tax authority can impose income tax on the CFC’s shareholder or beneficiary.

However, if a foreign corporate entity is regarded, under § 9, subsection 1 of the act on income tax, a resident entity in Finland, it cannot be held as a controlled foreign company. In this case, the entity must independently pay tax on its worldwide income, so its income cannot be subject to tax in the hands of shareholders or other beneficiaries as in the case of a CFC.

By extension, if a foreign corporate entity is a resident in Finland and it owns a CFC, it may have to pay Finnish tax on the income it receives from the CFC. In other words, if a resident corporate entity is a shareholder or beneficiary in a foreign company that is a CFC within the meaning of the Act on the Taxation of Shareholders in a CFC, the income from the latter can be taxed in Finland, as referred to in the Act on the Taxation of Shareholders in a CFC.

For more information, see the Finnish Tax Administration’s guide on the tax treatment of controlled foreign companies – Väliyhteisötulon verotus Suomessa (in Finnish and Swedish).

6.6 Relief for international double taxation

It may be that another country (the source country) besides Finland imposes taxes on the receipts of foreign-sourced income in the hands of a resident corporate entity, invoking the national legislation of that country and the provisions of the applicable tax treaty that accord the taxing rights to the country of source. In this case, one item of income becomes subject to economic double taxation because both the country of residence and the country of source are imposing taxes. In general, the tax authorities of the country of residence will in that case give credit for the tax paid to the country of source.

If within the meaning of Article 4 of the treaty, signed between Finland and the country where a resident corporate entity was founded and registered, the country of residence for tax-treaty purposes is Finland, and the entity has received income from the country where it was founded and registered, that country will be treated as the country of source for the income.

The treaties signed by Finland contain agreements with other Contracting States on how double taxation will be eliminated. Accordingly, the method for eliminating double taxation is either the credit or the exemption method, depending on the provisions of the applicable treaty. More precise rules on how double taxation is relieved are found in the act on the elimination of international double taxation (Kansainvälisen kaksinkertaisen verotuksen poistamisesta annettu laki (1552/1995)). This act is applied on situations where a tax treaty is in force, and its provisions can only be applicable if the tax treaty allows it. If the country of source and Finland have no tax treaty with one another, the provisions of the act on the elimination of international double taxation are applied exclusively.

For more information on how double taxation is relieved, see "Relief for international double taxation" - Kansainvälisen kaksinkertaisen verotuksen poistaminen yhteisöjen verotuksessa (in Finnish and Swedish).

6.7 End date of the residency status

If the circumstances based on which the place of effective management was deemed to be located in Finland no longer exist, the place of effective management can no longer be considered to be in Finland. Starting on the date when management changes, the corporate entity can no longer be treated as a resident due to its place of effective management not being located in Finland.

If, after its resident status ends, the corporate entity is still considered to have a permanent establishment in Finland, as referred to in § 13 a of the act on income tax, the entity is treated as a nonresident entity based on the permanent establishment. Then the permanent establishment can deduct the allowable losses that the Finnish tax authorities endorsed for the entity during the tax years when it had the residency status.

Under § 51 e, subsection 1, line 3 of the act on the taxation of business income, if the country of tax residence of a foreign corporate entity treated as a resident in Finland is changed to another country in accordance with Finnish legislation or in accordance with a tax treaty, the value of the transferred assets on the exit date, net of their undepreciated acquisition cost, is considered to be taxable income for the corporate entity, with the exception of assets that are still actually related to the entity’s permanent establishment in Finland. For more information, see the Tax Administration’s “Exit taxes” – Maastapoistumisverotus guide (in Finnish and Swedish).

7 Impact of tax treaties on how taxing rights are divided between Contracting States

7.1 Country of residence determined under treaty provisions in effect

The taxing rights that Finland has are based on national legislation, and the rights cannot be amplified by provisions of a tax treaty. Treaty provisions can only have the effect of restricting the taxing rights of a Contracting State. An example of circumstances where the provisions of a treaty can restrict Finland’s taxation is a situation where “for treaty purposes”, a Finnish-resident entity is a resident taxpayer of the other Contracting State.

When the tax authorities apply the provisions, an agreement must be reached on which one of the Contracting States should be the entity’s country of residence – and which one is the country of source. Tax treaties contain lists of different types of income and definitions as to whether the source country has the taxing rights or whether only the country of residence has them. After the corporate entity’s country of residence has been determined, it also resolves the question of which one of the Contracting States should eliminate double taxation.  If the country of source, under provisions of the relevant tax treaty, has the rights to impose tax, the general rule is that the taxpayer’s country of residence must take action to relieve double taxation on the income.

The 4th Article of the Model Tax Treaty of the OECD lays down the provisions that control the way the country of residence is determined “for treaty purposes” and the way the Contracting State being the source country of income is determined. Under Article 4, paragraph 1 of the OECD Model, “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. However, “resident of a Contracting State” does not comprise any person who is liable to tax in that State solely on the basis of income received from sources in that State or income or assets in that State.

This means that when treaty provisions are applied, the first assumption is that corporate entities are residents of the country that is the entity’s country of residence under national legislation in that Contracting State. This is the country where the entity is liable to pay tax on its worldwide income. Accordingly, corporate entities resident in Finland are treated as being residents “for treaty purposes” when the provision found in Article 4, paragraph 1 of the Model Tax Treaty is applied.

If just one of the two Contracting States, invoking its national legislation, declares that it is the corporate entity’s country of residence, that State is treated as being the country of residence for treaty purposes. However, it may be that one corporate entity is a resident taxpayer in both Contracting States, liable to pay tax on worldwide income under the respective national legislations. For example, one of the States is the country where the entity was incorporated, and the other State is where the place of effective management is located. This is a situation of “double residency”. This means that the question must be resolved of which one of the two States is the entity’s country of residence when applying the tax treaty.

Illustration 10:

The Swedish “X AB” is treated as a resident entity in Finland because its place of effective management is in Finland in accordance with the provisions of the act on income tax. Based on Swedish national legislation, “X AB” is also treated as a resident entity because the company was founded and registered in accordance with Swedish law.

Under Article 4, paragraph 1 of the Nordic Tax Treaty, when the authorities apply the treaty’s provisions, “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.

Based on Treaty Article 4, paragraph 1, “X AB” is seen as a resident entity of both Sweden and Finland. As a result, the X AB company has “double residency”.

7.2 The impact of double residency on determining the country of residence

If the Contracting States have not agreed upon how the taxing rights are divided between them, or if no tax treaty is in effect, the worldwide income of corporate entities having double residence is taxed in both of the 2 countries. In general, the provisions of tax treaties include a specific rule that controls how the question of an entity’s country of residence is resolved in circumstances where national legislation of both Contracting States has treated the entity as resident. As for the OECD Model Tax Treaty, the above rule is found under Article 4, paragraph 3, in the provisions governing the residency of other than individuals.

According to Article 4, paragraph 3 of the 2017 Model Tax Treaty, where by reason of the provisions of paragraph 1, a person other than an individual is a resident of both Contracting States, the competent authorities of the Contracting States shall settle the question by mutual agreement and determine the mode of application of the tax treaty to such person. However, Article 4, paragraph 3, before the change was made to the 2017 version of the Model, laid down that if a person other than an individual is a resident of both the Contracting States, that (legal) person is only resident in the Contracting State where its POEM is located.

The corresponding provisions and rules in the tax treaties that Finland has signed in other countries are divided as follows: thirty-six of Finland’s treaties lay down that the double-residency question is resolved by location of the POEM, another thirty-six of Finland’s treaties lay down that the Contracting States settle the question by mutual agreement between competent authorities, and one of the treaties lays down that the entity is resident in the country where the entity had been founded. Additionally, one of Finland’s treaties lays down that if the country of residence must be resolved, the approach must implement the order of criteria found in the treaty Article on Residency of a Contracting State. If the variant where the Contracting States settle the question by mutual agreement between competent authorities is applied, no adherence to the various definitions of domestic laws is necessary when discussing the key concepts.

Illustration 11:

Above in illustration no 10, the Swedish “X AB” is seen as a resident entity of both Sweden and Finland based on Article 4, paragraph 1 of the Nordic Tax Treaty. According to Article 4, paragraph 3, where by reason of the provisions of paragraph 1, a person other than an individual is a resident of several Contracting States, that (legal) person is only resident in the Contracting State where its POEM is located. Because “X AB’s” place of effective management is in Finland, the conclusion is that “X AB” is a Finnish resident entity for treaty purposes.

If the Contracting States interpret treaty provisions in different ways and this has caused taxation not in line with the treaty, and if treaty provisions set out mutual agreement between the Contracting States’ competent authorities as the way to resolve double-residency conflicts, a mutual agreement procedure can be initiated for that purpose when the taxpayer submits an application for the procedure.

For more information, see International tax dispute resolution procedure, a Tax Administration’s guide.

Illustration 12:

The Estonian “Y Oü” is treated as a resident entity in Finland because its place of effective management is in Finland. Under the national legislation of Estonia, “Y Oü” is also regarded as a resident there.

Under Article 4, paragraph 1 of the Finland–Estonia tax treaty, when the authorities apply the treaty’s provisions, “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, place of incorporation, or any other criterion of a similar nature.

Based on Treaty Article 4, paragraph 1, “Y Oü” is seen as a resident entity of both Finland and Estonia. “Y Oü” has “double residency”.

According to Article 4, paragraph 3, where by reason of the provisions of paragraph 1, a person other than an individual is a resident of both Contracting States, the competent authorities of the Contracting States shall settle the question by mutual agreement and determine the mode of application of the Agreement to such person. Where the mutual agreement is not in existence, the person is not held as a resident of the other Contracting State in neither one of the States.

If the taxpayer entity submits an application, the competent authorities in Finland and Estonia can resolve the question of which one of the Contracting States should be “Y Oü’s” country of residence when the treaty is applied. If the view of “Y Oü” is that its double residency has caused a tax assessment that contradicts the provisions of the tax treaty, “Y Oü” is entitled to submit an application to ask for a mutual agreement procedure to be initiated before 3 years have elapsed from the date when “Y Oü” became aware of the measure carried out by a tax authority that caused the taxation against treaty provisions.

It may be that a foreign corporate entity is treated as not being a resident of Finland, although under Finnish national legislation, by virtue of its place of effective management being located in this country, the entity is a resident. This may occur both in the case of a tax treaty that aims for settling the “double residency” issue by mutual agreement, and in the case of a tax treaty that settles “double residency” based on the country where the place of effective management is. In this case, the foreign corporate entity is a Finnish resident but Finland can generally only impose tax on the income received by the entity when the income is derived from Finnish sources or if a permanent establishment exists.