Effects of the Coronavirus pandemic on taxes on income received under an employment contract in a foreign country (the six-month rule and forces majeures)

Date of issue
10/9/2020
Record no.
VH/6093/00.01.00/2020

Background

In spring 2020, Finland’s Ministry for Foreign Affairs recommended that everyone should refrain from all kinds of trips. This warning was given in reference to the information issued by the World Health Organization, indicating that the coronavirus is a pandemic. Many countries imposed restrictions on travel or introduced limitations for travellers to enter the country. Some countries closed their airspace completely or imposed flight restrictions.

The Tax Administration has noted in its previous statement on the coronavirus that the pandemic is deemed as a “force majeure”, an unexpected and serious reason unrelated to the employer or employee as referred to in the provisions of § 77.3 and § 77.5 of the act on income tax (Tuloverolaki 1535/1992). The statement determines that the lengths of time when the force majeure continues to affect taxation will depend on the duration of the Foreign Ministry’s travel restrictions to specified countries and regions.

In the current circumstances, as the pandemic continues, the Foreign Ministry revises its restrictions periodically, country by country. As a result, the Ministry’s travel restrictions may be cancelled for some countries. After that, individual travellers can again go to their destinations freely. It may be that restrictions are reinstated later if the pandemic gathers momentum in specific countries.

Although the travel restrictions to any one country may have been cancelled in Finland, the destination country can still keep its entry restrictions in effect. Moreover, the coronavirus still affects air travel significantly, and this may make it difficult for an individual employee to fly back to the destination as soon as the restrictions are cancelled. 

With travel restrictions being cancelled and reinstated, how long does the force majeure situation still affect taxation? What is the impact of entry restrictions imposed by destination countries, and what is the impact of the unavailability of flights and other travel services?

Background information

Wages and salaries received from employment abroad are not taxed in Finland if the following requirements under the provision of the act on income tax, known as the “six-month rule” (§ 77), are fulfilled: Wages received from work performed outside Finland are not subject to Finnish taxation if the employee stays in a foreign country for reasons relating to the work for an uninterrupted period of at least six months.  A further requirement is that the provisions of the tax treaty signed between the foreign country and Finland confer the primary right to tax wages on the foreign country where the work is done (or there is no tax treaty between Finland and the foreign country), and that the length of time that the employee spends in Finland does not, on average, exceed six days per month of work abroad.

The provision of the act on income tax contains an exception that refers to a situation of force majeure. It is not seen as an interruption if employee must return to Finland for a reason that is unexpected, serious, and unrelated to the employer or employee, on the condition that the employee eventually goes back to the foreign country in order to continue working outside Finland (§ 77, subsection 3).

In addition, the provisions that outline the above exception allow for the possibility that the employee must discontinue the performance of work outside Finland due to a reason characterised as unexpected, serious, and unrelated to the employee and to the employer. In this case, the individual’s income received for the work in the foreign country is not treated as subject to Finnish taxes despite the fact that his or her period of working in the foreign country turned out to be shorter than the estimated minimum time of six months (in reference to § 77.5 of the act on income).

The Tax Administration’s detailed guide on the taxation of income from work abroad (“Ulkomailla työskentelyn verotus” – record no VH/1007/00.01.00/2019 in original Finnish and Swedish), the outbreak of an epidemic disease is cited as an unexpected change in circumstances in the country where the employee works, amounting to a force majeure (section 4.2.3 of the guide).

Statement

Finland's Ministry for Foreign Affairs recommended in spring 2020 that everyone should refrain from all kinds of trips, regardless of destination. The Finnish Tax Administration’s opinion in spring 2020 was that because the coronavirus is a pandemic that extends itself to all continents, it is deemed a force majeure as referred to in § 77.3 of the act on income tax.

After the travel restrictions have eased, if an employee who had returned to Finland due to the pandemic has gone back to the foreign country to continue working there, the number of days spent in Finland may exceed the usual threshold. However, the reason for exceeding the threshold is a force majeure within the meaning of § 77.3 of the act on income tax. If an employee has come back to Finland for a vacation or work trip that had been planned earlier, and while in Finland, he or she decides not to go back to the foreign country where work is done, the extension of stay in Finland due to force majeure is deemed to start on the day when the employee should have gone back according to the original plans.

If the employee must stop working due to the pandemic before the date set out by the original plans for the work in the foreign country, the pandemic is deemed a reason characterised as unexpected, serious, and unrelated to the individual and to the employer within the meaning of § 77.5 of the act on income tax. Although the total length of time worked in a foreign country does not reach the planned six-month period (minimum length), the received wages will still be exempted from Finnish income taxes if the other requirements of the six-month rule are fulfilled during the period when the employee worked in the foreign country.

If an employee’s work in a foreign country was discontinued earlier than planned because of the pandemic, the length of time that the employee spends in Finland may have exceeded six days per month. Under the provision of § 77, subsection 3 of the act on income tax, the maximum number of days to be spent in advance in Finland is 60. If the employee’s presence in Finland has not gone over the threshold of 60 days and the other threshold based on the original work plans, the six-month rule can still be applied even if the number of days based in Finland would be excessive if calculated by the actual length of the work.

Example 1: A Finnish company sent their employee to Denmark to work there from 1 November 2019 to 31 May 2020. The wages are paid by a Danish payor. However, the coronavirus pandemic caused that the employee had to leave Denmark on 15 March 2020 to return to Finland. Her total count of days spent in Finland reaches 26 before she was able to go back to Denmark again. This is a higher number of days that a four-month period of working in a foreign country would allow (24 days).  If a calculation were made based on the original plan, she would have had the right to stay for a total of 42 days in Finland during her 7-month work period. The actual days she spent in Finland in advance were less than the 60 days laid down by § 77.3 of the act on income tax. Because of that, and also because she spent fewer days in Finland than the original length of her work period in the foreign country would have allowed, the six-month rule is applicable on the wages she receives for her work in Denmark for the 1 November 2019 – 14 March 2020 period. 

In general, the effective dates of the Foreign Ministry’s restrictions determine the periods when the force majeure affects taxation. As long as the Foreign Ministry’s general warning against travelling has concerned all countries of the world, the country where the employee has worked is not important. The length of time when the force majeure is deemed to apply is the same as the period of validity of the general warning given by the Foreign Ministry.

Later, when the general warning is no longer in effect, there may still be some countries and regions where the force majeure is deemed to apply if the Foreign Ministry maintains that those countries or regions should be avoided due to the coronavirus.

In general, the time when the Foreign Ministry cancels the restriction marks the point in time when the force majeure ceases to affect taxation. However, the foreign country itself may prevent citizens of other countries from entering; or it may be that travel tickets are not available. In those circumstances, the force majeure is still deemed to apply. Because information on any changes in travel restrictions is typically not received in an early stage, the employees’ personal arrangements, including flights and entry visas, for going back to the country where they should work may take time. For this reason, employees can only rarely go back to that country as soon as they receive word about a lifted restriction. In that case, taking account of the actual circumstances in every particular case, the date when the force majeure ceases to affect the employee’s income taxation must be deemed as being the date when they have a realistic opportunity to go back. It is the individual taxpayer’s responsibility to provide proof on when the actual circumstances no longer prevented his or her return to the country where the work is done.

Example 2: After having worked in China for some time, an employee has returned to Finland due to the pandemic in spring 2020. He remains in Finland waiting for the situation to change. Finland’s Ministry for Foreign Affairs has cancelled the travel restriction to China in July 2020. However, China does not allow employees from other countries to come back even if they have a valid work permit or residence permit. August 2020 is the first month when China resumes issuance of entry visas to persons arriving from certain countries who already have a valid work or residence permit for China.  The employee is issued an entry visa on 1 September 2020 and the first possible flight, where a booking can be made for the employee, leaves on 7 September 2020. The force-majeure reason for this employee’s stay in Finland continues to be in effect up to that date, i.e. 7 September 2020.

However, the six-month rule can only be applied in circumstances similar to the above where the provisions of § 77.3 and § 77.5 are invoked if the country where the work is done has the right to tax the wages earned for the work done in that country. In addition, it is important to note that the tax-exemption accorded by the six-month rule does not apply to any work done in Finland because the rule only concerns work carried out in foreign countries. Accordingly, an employee’s income from work done in Finland is subject to Finnish tax (including any arrangements to work from home over a remote connection), unless the provisions of an applicable tax treaty prevent Finland from imposing tax on that income. If an employee spends a paid vacation in Finland, the income attributed to the vacation days can be exempted under the six-month rule. This requires that the vacation had been earned during a period of work in a foreign country covered by the six-month rule.

Both employers and employees must make the necessary checks in order to ascertain whether the legal provisions on the six-month rule allow for the tax exemption in circumstances where the threshold of days spent in Finland is exceeded because of various restrictions.

Example 3: An employee received a foreign assignment to go to Germany and started working for a German employer on 1 October 2019. It was planned that her assignment would end on 31 August 2020. According to the provisions of the applicable tax treaty, she is regarded as a tax resident of Finland during the entire assignment. Due to the pandemic, she returns to Finland in order to continue the assignment from a location in Finland from 15 March to 31 May 2020. After 31 May, she is able to go to Germany again. She works there from 1 June to 31 August 2020. The six-month rule is applicable on the wages she receives for her work in Germany for the 1 October 2019 – 14 March 2020 period, and for 1 June 2020 – 31 August 2020 as well, if the warning given by the Foreign Ministry is in effect during the entire period she spends in Finland from 15 March to 31 May. The six-month rule applies even though the count of days spent in Finland is higher than usual due to the pandemic, because in this case, Germany is the country that has the taxing rights on the wage income received for work done in Germany. The wages the employee receives for her work done in Finland are only taxed in Finland.

Example 4: An employee had signed an employment contract for 1 November 2019 to 31 May 2020 with his Danish employer company. However, the coronavirus pandemic made him leave Denmark on 15 March 2020. He arrives in Finland and continues to do his work from a location in Finland. The employee had not visited Finland since the start of his contract with the Danish employer. Denmark has the taxing rights with respect to the wage income received for the 1 November 2019 – 15 March 2020 period. The six-month rule can apply on the tax treatment of the employee’s wages even though the period when he worked in a foreign country is shorter than six months, because the actual circumstances are as referred to in the provisions of § 77.5 of the act on income tax. The wages the employee receives during the time when he works from a location in Finland are only taxed in Finland.

Example 5: An employee is on the payroll of a Swedish company, on an employment contract with no end date. He works in Stockholm where he also has his permanent home. However, due to the pandemic, he returns to Finland to work from home. He does that from 1 April 2020 to 31 August 2020, using a remote connection in his summerhouse. Sweden is his country of tax residence for the purposes of the tax treaty. In accordance with Article 15 of the Nordic tax treaty, if the Swedish company is not treated as having a permanent establishment in Finland and if the employee spends less than 183 days in Finland during a 12-month period, Finland cannot impose tax on his wages for the period when he works from the summerhouse. If the above conditions apply, the employee’s wage income is only taxed in Sweden.

The coronavirus pandemic does not affect the way the tax authorities determine an individual taxpayer’s status. Tax status in Finland (resident or non-resident) is determined in accordance with the provisions found in § 9 and § 11 of the act on income tax. Likewise, the pandemic does not affect the way the tax authorities determine the country of residence for treaty purposes, the way they determine how to interpret the articles of tax treaties on employment income, or how to interpret the articles on the avoidance of double taxation. The country of residence for an individual taxpayer is determined in accordance with the treaty article on residency (i.e. article no 4 in the Model Tax Convention of the OECD). Taxing rights with respect to wages are divided between Finland and the other Contracting State of a tax treaty in accordance with the treaty article on employment income (article no 15 in the OECD Model). The way double taxation is avoided is agreed in the treaty article that sets out the method of removal of double taxation (article no 23 in the OECD Model).