Tax treatment of employer-provided relocation services for workers sent to other countries

Date of issue
8/18/2021
Record no.
Record no of the original statement in Finnish and in Swedish: VH/2124/00.01.00/2021

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.

Background

In cross-border circumstances, it is standard practice for many employers to cover some of their workers’ expenses in addition to paying them wages and salaries.  The expenses include the extra outlays of money at the start and end of the periods of work in foreign countries. Some of the expenses are paid during the time when work is being performed. 

Travel expenses, not only for the workers but also for their family members, freight costs for personal belongings and furniture, fees that must be paid for work permits, residence permits, driving licenses, vaccinations, physician’s certificates are among typical expenses. The same goes for training courses in foreign languages, insurance premiums relating to special travel insurance contracts for posted workers, costs related to specific professional training, foreign-currency exchange, daycare and school fees for children.

Some employers pay for services known as “relocation services” that can lighten an individual worker’s burden of settling down in a new environment.  Relocation services include opening a bank account in a local bank, registration as a taxpayer (and submitting the application for an employee’s withholding allowance certificate, helping with the income tax return, etc.), getting a personal identity code, signing up for various registrations as required by local public authorities, obtaining coverage by the social-security system, buying tickets for the local mass transit, helping the employees to obtain housing and familiarise themselves with the neighbourhood and its services.

“Posting” to a different country includes both workers from other countries who come to Finland and Finnish individuals whom the employer sends to a foreign country to work. This statement does not address situations in which the six-month rule is applicable on Finnish workers posted abroad. However, it does concern situations where workers from other countries arrive in Finland to work. This statement addresses the tax treatment of employer-paid expenses, which are caused by the fact that the worker is posted to another country, and specifically, the treatment of the employer-provided coverage of relocation service fees. The act on income tax (Tuloverolaki 1535/1992 (TVL)) contains provisions that make some of the expenses paid by the employer exempt from taxes. However, many of the relocation expenses that employers customarily have paid on their workers’ behalf are not controlled by specific provisions of the act on income tax. Instead, the income-tax treatment of these transactions is based on § 29 and § 61, i.e. general provisions in the act on income tax, and also on the case-law of courts and on established tax-assessment practices.

In general, if the six-month rule under § 77 of the act on income tax provides exemption to the wages that a worker receives for their work in a foreign country, any employer-paid reimbursement for expenses, which otherwise would be subject to tax for the worker receiving it, becomes tax-exempt by virtue of the six-month rule. For more information on how the six-month rule is applied, see the Tax Administration’s Taxation of employment income earned abroad (in Finnish and Swedish, link to Finnish).

This statement does not deal with the tax consequences of employer-provided housing. For more information, see “Fringe benefits” – Luontoisedut verotuksessa and “Reimbursement for travel expenses” – Työmatkakustannusten korvaukset verotuksessa.

Background information

Applicable legal provisions:

The ‘income’ concept under the act on income tax is understood in the broad sense. Under § 29 of the act, taxable income comprises income received by the taxpayer in cash or as an in-kind benefit, with the exceptions specified in the act. Taxpayers have the right to deduct the expenses paid for the production of income or for the maintenance of income (often called “natural deductions”). Under § 61, subsection 2 of the act on income tax, earned income includes the pay received on the basis of an employer-employee relationship, and any income comparable to it. It is established practice to include in the taxable income any employer-paid living expenses, and employer-reimbursed living expenses, of a worker or family member.

The act on income tax contains specific provisions on the tax-exemption for the expenses that employer can cover. This category of expenses includes the reimbursement relating to working in a foreign country, listed in § 76 of the act on income tax. Further legal provisions that are applicable include § 69, controlling tax-exemptible fringe benefits; § 69 b, training expenses; § 69 c, moving expenses; and § 71 to § 73 that contain provisions on the reimbursements that can be paid for travelling in business.

The specific provisions on tax-exemptible reimbursement for work in a foreign country are found in § 76, subsection 5. Accordingly, the moving and travel expenses of an individual taxpayer and their family members, arising from working abroad, which are paid by the employer, and the usual cost of private service staff and children’s school fees, paid by the employer for the duration of working, are income exempt from tax. The provisions in § 76 only concern employees who leave Finland in order to perform work in a foreign country, i.e. they cannot be applied on people who arrive in Finland to work.

Some of the expenses that the employer can reimburse can be characterized as fringe benefits, when the worker works in a foreign country, as referred to in § 69, subsection 1. Under § 69, subsection 1 of the act, it is not an item of income subject to tax for the worker if the employer covers the expenses of a customary health plan, designed for all personnel, or designed for current and retired employees of the company, unless the employer pays reimbursement to the worker for their costs due to healthcare or sickness. 

In addition, in cross-border situations, the provisions of § 69 b, subsection 1 can become applicable.  Under these provisions, it is not an item of income subject to tax for the worker if the employer pays the expenses for giving training to the worker if the training serves the employer’s interests (or the interests of another company belonging to the same MNE group as the employer company).

The provisions in § 69 c of the act on income tax lay down that the moving and travel expenses of an employee and their family members, paid by the employer, are partially tax-exempt. Accordingly, 50% of the employer-paid amount is taxable for the worker when the reason for moving house is the location of the worker’s place of work. The above provisions in § 69 c are equally suited for domestic Finnish relocations and relocations to and from foreign countries.

The provisions in § 71 to § 73 control the tax-exemptions for reimbursement of the expenses caused by temporary travel in business, i.e. shorter “work trips”. The matter is discussed in more detail in Tax Administration’s guidance “Allowances for travel expenses for tax purposes” – Työmatkakustannusten korvaukset verotuksessa (in Finnish and Swedish, link to Finnish).

Whenever employers pay out other reimbursement of expenses than those specifically named in the legal provisions, the income-tax treatment depends on the general provisions in the act on income tax, on case-law, and on established tax-assessment practices. Based on case-law, the expenses that consist of travel-insurance premiums and residence permit fees are exemptible. If employers pay out reimbursement of any expenses that are considered personal living expenses, this is treated as income subject to tax for the worker concerned. Among the non-exemptible, taxable types of reimbursement are expenses for services such as the handling of personal matters and of tax affairs. Another example of an item subject to taxation is an arrangement where the employer pays for children’s daycare.

The Tax Administration’s statement

Based on the act on income tax, on the case-law emanating from court rulings, and on established tax assessment practice, we present the following statement in order to address the proper tax treatment of some employer-paid expenses. For more information on reimbursement of expenses during periods when employees work in a foreign country, see the Tax Administration’s “Taxation of employment income earned abroad” – Ulkomailla työskentelyn verotus (in Finnish and Swedish, link to Finnish).

The point in time when a taxable benefit arises is under § 110 of the act on income tax the time when the employer pays a “living expense” on a worker’s behalf. From this, it follows that the coverage of service costs relating to assistance with housing, registrations, and various personal affairs as described below becomes a taxable event when the employer settles the invoice presented by the service provider. The amount of the income subject to tax is the “fair market value”, i.e. the amount paid including VAT. Such a service is treated as an item of income subject to tax in the worker’s hands regardless of whether the employer has paid for each single service separately or bought an “outsourced package” of services.

If the employer settles the invoice after the date when the worker leaves Finland and becomes a non-resident individual taxpayer, the income is regarded as being received from a source in Finland within the meaning of § 10 of the act on income tax. In this case, if the employer is no longer paying wages to the worker in cash in the usual way, which would make it possible to withhold tax at source, the worker who had left Finland must inform the Tax Administration of the received income. After that, the Tax Administration will impose the tax.

1. Worker’s and family members’ travel costs

By virtue of the provisions in § 76, subsection 1.5, employers can cover the worker’s and his or her family members’ travel expenses through tax-free reimbursement, when work in a foreign country begins and also when the period of working there is over. Whether the worker’s work in the foreign country is performed at a primary place of work or at a special place plays no role. In the same way, no time limit has been set as to how long the worker’s period in the foreign country lasts.

The provisions in § 76, subsection 1.5 only concern employees who leave Finland in order to perform work in a foreign country. In the case of a worker who arrives here in order to work here, employers are only entitled to cover the worker’s travel expenses tax-free if the worker is posted to a special place of work in Finland. The exemption only concerns the travel expenses reimbursed to the worker. It does not extend to family members.

Even in cases where the worker from a foreign country arrives in Finland to a place other than a special workplace, taking account of the fact that the worker is moving house because of the location where work is to be done, as referred to in § 69 c of the act on income tax, the employer is entitled to pay out a partially tax-exempt reimbursement of the worker’s and the family’s travel expenses. More information on the circumstances where § 69 c can be applied is provided below, in the section that discusses the reimbursement of workers’ moving expenses.

As for any vacation trips made while being posted abroad, either to Finland or other destinations, the employer cannot pay any type of tax-exempt coverage.  If the worker performs their work at a primary place of work in the foreign country, and travels to a special place of work in Finland from time to time, the employer is entitled to cover the worker’s travel expenses tax-free, within the limits of the Finnish rules that control reimbursement of business travel. Also, trips to Finland can be covered tax-free if the worker works at a special place of work in the foreign country, and their job assignment is interrupted for the time it takes to make the trip to Finland. However, even in this situation, the employer cannot pay the family members’ expenses tax-exempt.

More detailed information can be found in the Tax Administration’s guidance “Reimbursement of work-related travel expenses for tax purposes” – Työmatkakustannusten korvaukset verotuksessa (in Finnish and Swedish, link to Finnish).

2. Expenses for moving house

Many employers reimburse the worker’s and family’s moving expenses when their period of working in another country begins, and when it ends. The reimbursement can include freight costs of furniture, and added expenses caused by extra luggage. The provisions of § 76, subsection 1.5 allow employers to pay the moving expenses on behalf of a worker and their family members when they leave Finland to work in a foreign country.

In cases where a worker from a foreign country comes to Finland to work, and this takes place on the employer company’s initiative and serves the company’s interests, employers are also allowed to pay the moving expenses on behalf of such a worker and their family members tax-free. The legal base for that is the advance ruling handed down by the Central Tax Board, record no KVL 10/2006.

From January 2020, the act on income tax has contained a special provision in § 69 c that controls the exemptibility of the above reimbursements: if the worker’s reason for moving house is the location of the place where the worker must work, 50% of an employer-paid reimbursement is treated as taxable income for the worker. The above concerns both workers who leave Finland and workers who arrive here. Whether the employer is sending a worker to Finland as a posted employee or whether the worker signs an employment contract directly with a Finnish employer is not important from the perspective of how the provisions of § 69 c are applied.

The provisions of § 69 c of the act on income tax become applicable if the worker’s moving expenses are not tax-free in their entirety under § 76, subsection 1.5, and the reason for the worker’s move is not the employer company’s initiative and interests that the advance ruling no KVL 10/2006 refers to. More detailed information can be found in the Tax Administration’s “Reimbursement of work-related travel expenses for tax purposes” – Työmatkakustannusten korvaukset verotuksessa guide (in Finnish and Swedish, link to Finnish).

For purposes of the above rules, the meaning of “expenses for moving house” is restricted to the direct costs of the removal. However, as an exception to the above, a ruling has been issued (KVL 41/1996) where an employer-paid reimbursement of the selling expenses of the worker’s home in the country where he worked was seen as part of the exemptible expenses under § 76, subsection 1.5 of the act on income tax.

It is noted that if the employer pays for the storage of a worker’s belongings in the home country during the period when the worker works in a foreign country, it is not a tax-exempt moving expense under § 76, subsection 1.5, or § 69 c, of the act on income tax. From this, it follows that the employer-financed storage is treated as an item of income, subject to tax for the worker.

3. Expenses for training in preparation for the foreign work assignment, including foreign language courses

Employers can offer their worker a training program in preparation for working in a foreign country, providing instruction in cultural differences, the foreign language, and other matters. In general, the training is organised in order to serve the employer’s interests, in order to inform the worker of the demands and goals of their job assignment and to safeguard a successful posting of an individual in a foreign country. The training aims to help them to adjust to the everyday life there, including work and free time. As a result, it is justifiable to regard training programs and language courses of the above kind as employer-provided training within the meaning of § 69 b of the act on income tax. It does not give rise to a taxable benefit in the workers’ hands.

However, if the programs and courses are also offered to the workers’ family members, the part of the expenses that concerns the family is regarded as a taxable benefit, i.e. an item of income subject to tax for the worker. In a situation where no additional outlay of money by the employer is required when family members participate in the programs and courses, no taxable benefit in the worker’s hands will result.

4. Expenses associated with the education of children

By virtue of the provision in § 76, subsection 1.5 of the act on income tax, the employer’s coverage of a worker’s children’s school fees does not give rise to a benefit taxable for the worker. The above only concerns employees who leave Finland to work in a foreign country.

If an employer has a worker who arrives in Finland to work, and school fees in Finland are being paid for (to an international school in Finland), it is an item of income subject to tax for the worker.

5. Children’s daycare expenses

Expenses caused by childcare constitute a typical example of “living expenses”. The employer can pay no tax-exempt coverage for daycare fees during the worker’s work in a foreign country under the provisions of § 76, subsection 1.5 of the act on income tax. However, the provisions of § 76, subsection 1.5 allow employers to pay the cost for hiring private service staff tax-free (including a nanny who takes care of children) in countries where it is customary to organise childcare this way.

However, for workers who arrive in Finland to work, any employer-provided reimbursement for childcare costs is a taxable benefit. The only exception from the above is the employee benefit for taking care of a sick child, which under § 69 of the act on income tax is an expense exempt from tax.

6. Visas, work permits, residence permits

Workers may have to obtain visas and work or residence permits, before they can begin their work in a foreign country. Various permits are required in the country where work is done, and often, the employer is the party responsible for overseeing that the permits have been obtained. From this, it follows that it is permissible for employers to pay the expenses caused by visa applications, work permit applications and residence permit applications, and this is exemptible from taxation, both for workers leaving Finland and for workers who arrive here. The above rule is independent of whether the permits are sought for a temporary period or for a longer stay; in the same way, it is not important whether the work or residence permit only entitles the worker to be employed by the employer that paid the expense, or by any other employer (ruling KHO 2020:155). The exemption also extends to a permit for exit, i.e. for leaving the country or to a comparable de-registration expense that has to be paid when the period of work in a foreign country ends.

However, if an employer has reimbursed any of the above expenses relating to a family member of the worker, it is an item of income subject to tax for the worker.

In some countries, an individual tax number may have to be obtained in addition to the visa, work permit and residence permit. This especially concerns the construction sector where access to building sites is denied to all individuals who do not have a tax number. The employer is the party responsible for overseeing that this rule is followed. If no work can be done without the tax number, and the employer is the responsible party for overseeing the rule, it is exemptible from tax for employers to pay for the services that are necessary for obtaining a tax number.

However, employer-paid costs for requesting a passport for a worker are usually considered income subject to tax for the worker. Some circumstances may constitute an exception from the above rule. For more information on the tax treatment of employer-paid passports, see section 5.2 of the Tax Administration’s  guidance, “Fringe benefits” – Henkilökuntaedut verotuksessa (in Finnish and Swedish, link to Finnish).

In reference to the above, the concept of ‘residence permit’ does not include the registration of the right of residence of a citizen of the European Union. This means that employers are not allowed to pay the related expenses tax-free.

7. Expenses for special insurance policies for the foreign work assignment

If the employer pays for a special travel insurance policy for posted workers (komennusmatkavakuutus), no taxable income arises for the worker (ruling of the Supreme Administrative Court, 23 June 2016, KHO record no 2810). This is a travel-related insurance contract in an extended form, designed to cover not only the worker’s risks but also some of the employer’s risks. The requirements for tax-exemption have been explained in greater detail in the Tax Administration’s guidance “On the taxation of voluntary personal risk insurance policies taken out by an employer” – Työnantajan ottamien vapaaehtoisten riskihenkilövakuutusten verotus, section 4.6 Travel Insurance.

8. Vaccinations, medicines and physician’s checkup fees

Entry into some countries is subject not only to visa, work permit or residence permit but also to requiring proof from the individual worker that certain vaccinations or medical examinations have been taken. For other countries, there are recommendations for vaccinations or medication before arriving there. If the employer pays for workers’ vaccinations, medicine, checkups, as described above, it is done in order to fulfil the requirements for starting work in the country concerned. Accordingly, the coverage of the expenses does not give rise to taxable income for the worker.

As a rule, the employer cannot pay tax-exempt reimbursement of the expenses relating to a worker’s family members that arise due to vaccinations, purchases of medicines, or due to medical checkups. However, in an exceptional situation, the tax authorities can approve of tax-exempt coverage for family members as well, if such coverage is customary and justifiable in the local circumstances in the place where the work is done. The circumstances in countries where specific vaccinations or medications (against malaria, etc.) are mandatory or necessary for a safe stay would make it customary and justifiable.

More information on staff healthcare expenses during periods of work in a foreign country is provided in section 3.2.5.9 of the Tax Administration’s guidance, “Fringe benefits in taxation” – Henkilökuntaedut verotuksessa (in Finnish and Swedish, link to Finnish).

9. Currency exchange

Currency exchange fees in a foreign country when working there is part of the worker’s living expenses. No tax-free reimbursement from the employer is possible. However, to exchange euros into foreign currency because of a business trip, in order to pay for travel tickets or hotel accommodation (for example, to pay a fee to a currency-exchange office when buying a ticket or a fare), is a cost related to the travel which can be reimbursed tax-free by the employer.

10. Handling various registrations and tax affairs

Many employers purchase a service from an outside provider that consists of the management of various obligations towards local public authorities, etc. For example, the service provider completes application forms for registration (or for requesting a local personal identity code, tax identification number, social security number, etc.) or handles various tax affairs for the worker.

The expenses, covered by the employer, relating to the assisted preparation of the worker’s tax return are income subject to tax for the worker (ruling KHO 20 April 2016, record no 1508). The Finnish Supreme Administrative Court’s ruling was made with the reasoning that the expense of completing one’s tax return must be treated as part of the worker’s living expenses because when completing the tax return, the worker is discharging an obligation that concerns them personally. Another ruling, no KHO 2020:155, of the Supreme Administrative Court contains a conclusion that an employer-paid “relocation package”  is part of the worker’s income subject to tax. The package consisted of the management of various local registrations, of social-security issues, and of taxes.

The case-law that emanates from the above makes it evident that an employer-paid “package” of relocation services results in a taxable benefit, i.e. an item of income subject to tax. By extension, if the employer also pays for similar services on behalf of the worker’s family members, that part of the paid amount is also an item of income subject to tax for the worker.

11. Making various personal arrangements such as finding a place to live in, opening a bank account, buying tickets for mass transit, etc.

Some service providers not only deal with public authorities on the worker’s behalf but also give assistance in matters relating to their personal circumstances. The assistance may consist of helping the newly arrived worker to find housing, make a rental contract, open a bank account, get a ticket for mass transit, a library card, insurance, etc. (even a contract with the local power company), and helping them to get to know the neighbourhood and its local services.

The service provider involved in the Court case no KHO 2020:155 of the Supreme Administrative Court sold the employer company a relocation package that contained similar help as described above: assistance with housing, rental contracts, bank and insurance, registration, social security and taxes. The Supreme Administrative Court ruled that when an employer offers such a package to the worker, this amounts to paying for some of the worker’s living expenses on their behalf. As a result, to offer it is to provide an item of income subject to tax.

The service provider in the above Court case first helped the worker find a place to live, and then the worker and the landlord made a rental agreement between one another. In an alternative scenario, if the worker were to start living in an employer-provided rented apartment, for which the employer has signed the rental agreement, the costs related to finding the apartment and to drawing up the contract would simply be the employer’s. There would be no taxable benefit for the worker.