Taxi Recent developments
One issue that stands out particularly clearly in the recent developments of Finnish tax law is the ever-increasing disapproval of tax avoidance and planning, as manifested also on an international level by the Organisation for Economic Co-operation and Development (OECD) and EU actions against such activities. In addition, the reputational damage to persons and companies engaging in tax avoidance and planning has grown. Finnish persons and companies involved, for instance, in matters concerning the LGT Bank in Liechtenstein or in arrangements published in the 'Panama Papers' are likely to agree.
As a main rule, tax-related information is secret, including, for example, rulings and tax returns. However, taxable income and taxes payable (as determined in the annual tax assessment) are public information in Finland. Unsurprisingly, access to this information attracts significant media attention, and each year the media publishes listings on the income and effective tax rates of high-income people and companies. Because of the fact that not all tax-related information is public (e.g., later decisions amending the taxation of a given year remain secret) and that tax-exempt income and income routed to personal holding companies do not show in the statistics, these listings may be somewhat misleading.
The worsening of the general tax atmosphere can also be seen in that the Finnish general anti-avoidance rule (GAAR) is being applied ever more frequently. The GAAR now appears to be engaged in attacking practices that were previously widely considered acceptable. The Tax Administration is, for example, broadly questioning the deductibility of intra-group interest expenses in corporate taxation and closely scrutinising various holding and personal services company arrangements.
Another general trend in Finnish taxation over recent years is the increase of both tax rates and progressiveness. To name a few examples, the tax on capital income, which for a long time was proportional, became progressive in 2012. New tax brackets have been added at the high end of the scale for earned income, gift and inheritance tax, although all of these taxes have recently been slightly reduced.
A reverse trend can be discerned in the taxation of corporations – the corporate income tax rate has gradually decreased and the present 20 per cent rate was introduced in 2014. The focus of taxation is also shifting from taxation of income to the taxation of consumption, and the standard VAT rate is 24 per cent. Taxation with underlying environmental or health-related goals is common, for example, within excise taxation. Finland levied a wealth tax for a long time, until it was eliminated in 2006. At about the same time, the avoir fiscal dividend tax system was abolished because of its incompatibility with EC law.
Legislative amendments that enter into force in 2020 aim to better align the tax treatment of different forms of investment. The amendments include the abolishment of the possibility to withdraw invested capital from insurance wrappers without triggering taxation, the introduction of a share saving account and broad changes to the taxation principles concerning investment funds.
Finally, Finland had a parliamentary election in April 2019, which the Social Democratic Party won with a margin of just one or two seats over the more right-leaning Finns Party and the National Coalition Party. Nevertheless, the new government is much more left-leaning than its predecessor and during the negotiations to form it, even quite radical tax-related proposals were discussed. Such proposals included, for example, reintroduction of a wealth tax, abolishment of generation shift reliefs, exit tax for individuals, increased tax on dividends from unlisted companies, withholding tax targeted at foreign institutional investors, meat tax, etc. However, the governing parties could reach an agreement to advance only part of the proposals and it seems safe to assume that even less will actually be implemented.ii International agreements
Finland has a wide network of bilateral tax treaties. Finnish tax treaties typically follow the OECD Model closely and most of them provide for double taxation relief through the credit method. A number of Finnish tax treaties contain provisions that extend the taxing rights of Finland for a number of years after a Finnish citizen moves abroad.
Finland has recently renegotiated its outdated tax treaties with, inter alia, Germany, Spain and Portugal. The new treaty with Germany has been applied since 2018, and the one with Spain as of 2019. Renegotiation of the treaties, especially with Spain and Portugal, was the result of increasing media attention towards high-income individuals moving to Spain or Portugal to avoid tax on their private-sector pensions, as the relevant treaty did not allow Finland to tax such pensions. The Finnish government terminated its current tax treaty with Portugal with effect from 2019 to put pressure on the country, which was not working sufficiently to have the new treaty accepted nationally. Therefore, there is currently no applicable tax treaty between Finland and Portugal.
Finland is a signatory of the Nordic Multilateral Tax Treaty, which is a multilateral double taxation convention largely based on the OECD Model Tax Convention. Finland is also among the countries that signed the OECD Multilateral Instrument (MLI) in June 2017. Finland included most of its tax treaties as covered agreements, but made broad reservations to the applicable provisions. Consequently, it is expected that the most important practical effects of the MLI will be the introduction of the principal purpose test and mandatory arbitration procedure. The MLI will be applied as of 2020 at the earliest.
The EU's Anti-Tax Avoidance Directive (ATAD) and its 2017 amendment (ATAD II) oblige Finland to make significant amendments to its national laws. Significant amendments were made especially to the interest-deduction limitation and controlled foreign corporation (CFC) rules, which were among the rules that must be introduced as of 2019.
Finland has an agreement with the US to exchange information under the US Foreign Account Tax Compliance Act. Finland has also agreed on automatic exchange of information in the context of the OECD Common Reporting Standard (CRS), implemented at the EU level through the DAC2 Directive (2014/107/EU). Finland is among the countries that started reporting in 2017. Since 2017, Finland requires, based on OECD and EU transfer pricing initiatives, multinational groups with revenues exceeding a certain global threshold to file country-by-country reports. In addition, the DAC6 Directive rules on mandatory disclosure will set an obligation for taxpayers and intermediaries to report, in particular, tax-driven cross-border arrangements with the first exchange of information taking place in late 2020.
In 2016, in a case related to the LGT Bank/Liechtenstein tax affair, the Supreme Administrative Court ruled that documents received from a foreign authority may be taken into account as evidence, even if it is possible that the documents were obtained through a criminal act.iii Income tax
Two categories of tax liability exist in income taxation: unlimited and limited tax liability. People that reside in Finland (as defined in the Income Tax Act) are subject to unlimited tax liability and pay tax on their worldwide income. Conversely, people who do not reside in Finland are subject to limited tax liability and pay Finnish taxes solely on their Finnish-sourced income, as defined in the Income Tax Act.
A three-year rule applies to Finnish citizens when they move abroad. Under the rule, a Finnish citizen is considered a Finnish tax resident during the year of emigration and for the subsequent three calendar years, leading to tax liability for both Finnish and foreign-sourced income. However, if the person establishes, to the satisfaction of the tax authority, that no 'close ties' to Finland remain, Finnish tax non-residency (and limited tax liability) may begin before the end of the three-year period. This three-year rule does not apply to foreign citizens.
Taxable income is calculated separately for earned income and capital income. Capital income is income generated through the possession of wealth and earned income is defined as all other income. Earned income is typically salaries, directors' fees or benefits in kind and is taxable at progressive rates of up to approximately 55 per cent. Capital income is taxable at a rate of 30 per cent up to €30,000 per calendar year and the excess at a rate of 34 per cent.
Taxable income for all entity types is assessed separately under three different acts, depending, among others, on if the source of the income is employment, business or farming. Losses from one source of income may not be offset against another source of income, apart from in rare exceptions. The system will be simplified somewhat by taxing most corporations exclusively under the business income source as of tax year 2020.
Capital gains are generally taxable at the capital income tax rate of 30 or 34 per cent. Some capital gains are exempt, including the sale of a house or apartment that has been used as a permanent home for two consecutive years.
The extensive taxation of capital gains creates an incentive for persons with inherent capital gains to move abroad and realise the gains while no longer subject to Finnish unlimited taxation, or at least resident in another state under the applicable tax treaty. However, moving abroad before realising a significant capital gain requires careful examination of the applicable tax treaty and tax law provisions, including the above-mentioned three-year rule.
Interest income is also taxable at the capital income tax rates. However, interest paid on deposits in Finnish bank accounts and Finnish bonds is subject to a final tax at source at a flat rate of 30 per cent. As far as interest expenses are concerned, deductions are generally granted only where interest is paid with an aim to obtain taxable income. The interest on loans to buy a permanent home was, however, fully deductible until 2012, when the deductible portion started a gradual decrease and there are now plans to remove the deduction entirely in the future.
The taxation of dividend income is very complex, and the tax rates range from approximately 7.5 per cent to above 55 per cent. These discrepancies highlight the importance of careful tax analysis, but may also offer significant tax advantages. Examples of factors that may have an impact on the applicable tax rate are whether the company distributing the dividend is listed, the value of the company's net assets, the place of incorporation and on what basis the amount of the dividend is determined.
As far as natural persons resident in Finland are concerned, the least tax is payable when receiving from an unlisted company a dividend that meets two conditions: it equals less than 8 per cent of the shares' calculated mathematical value and is less than €150,000 in a calendar year. When these requirements are met, 75 per cent of the dividend is exempt and 25 per cent is taxed as capital income, leading to a tax rate of around 7.5 to 8.5 per cent. At the other extreme are, among others, dividends paid in place of wages and dividends paid by companies in non-EU/EEA and non-treaty countries. Such dividends are fully taxable as earned income at progressive tax rates of up to approximately 55 per cent.
Limited liability companies and certain similar types of companies are subject to 20 per cent corporate income tax on their profits. Cross-border restructurings may trigger exit taxation where assets are, in one way or other, transferred outside the reach of Finnish taxation. In the case of exchange of shares, the tax deferral allowed is forfeited, if a person who has been granted shares in consideration moves his or her residence, as intended in the relevant tax treaty or national laws, outside the EEA within five years after the end of the year in which the exchange of shares was carried out.
Finland originally introduced a CFC rule in 1995 and an interest-deduction limitation rule in 2014, which were both tightened as of 2019 owing to the ATAD. Under the current CFC rule, Finland taxes the income of a foreign entity if a Finnish taxpayer, either alone or together with its related parties, has, directly or indirectly, at least 25 per cent of votes, ownership, right to capital or right to profits or assets, and the foreign entity's effective tax rate is less than three-fifths of that calculated under the Finnish rules. An entity within the EEA may escape the CFC rule if it carries out actual economic activities. An entity outside the EEA may also escape the CFC rule, but it must meet more criteria.iv Gift and inheritance tax
Inheritance or gift tax is payable, if the place of residence of the decedent or donor, or the place of residence of the beneficiary or donee, was in Finland at the time of death or donation. In addition, tax must be paid on Finnish real property and on shares in any corporate body in which more than 50 per cent of the assets consist in Finnish real property, even if both the decedent or donor and the beneficiary or donee resided overseas. Only inheritances that are at least €20,000 and gifts that are at least €5,000 are subject to tax.
Inheritance tax is assessed on each beneficiary's net portion of the estate. Tax is payable on portions that are at least €20,000, but widows may deduct an additional €90,000 and minors in immediate lineal descent an additional €60,000 from their portions.
For the purposes of both inheritance and gift tax, the value of any rights of possession is deducted from the beneficiary's portion, if such a special possession has been provided for in a will or a deed of gift. The value of the right of possession is not as such taxable, but income derived from the right of possession constitutes taxable income. For example, the title of a house may be donated to person A, but the donor may retain the right to use the house. In this case, person A is taxed on the value of the house less the value of the possession right (calculated according to a formula) and the donor is taxed only on income received from the right of possession (e.g., rental income). However, person A may deduct as their acquisition cost the value of the house including the value of the possession right in the capital gains taxation upon a subsequent disposal.
Both gift and inheritance tax have two brackets – the lower tax bracket I applies to close relatives and the higher tax bracket II applies to more distant relatives and to beneficiaries and donees that are not relatives of the decedent or donor. The taxes are progressive within both brackets. As an example of the applicable rates in 2019 in tax bracket I, the tax payable on an inheritance portion of €200,000 is €21,700. An inheritance portion of €1 million is subject to a tax of €149,700 at the lower limit of €1 million and at 19 per cent on any part exceeding €1 million. In tax bracket II, rates are roughly double those of bracket I.
The Inheritance and Gift Tax Act leaves considerable room for tax planning. It may, for example, be wise to pass down property to a greater number of beneficiaries to multiply recipient-specific allowances and thresholds, but also to mitigate progressivity. The same goals may be obtained by skipping generations by willing or donating property to, for example, grandchildren. Rights of possession are also frequently retained to lower the valuation of the donated property and hence the payable gift tax.
There are, however, rules aimed at curbing tax planning. Gifts received from the same donor during a three-year period are aggregated. Loans with no intention to pay back and sales at less than 75 per cent of fair market value are subject to gift taxation. There is also an exception to the general rule, according to which the donee may use the gift tax value as their acquisition cost – if the donee disposes of the gift within one year from receipt, the acquisition cost will be the donor's original acquisition cost. Also, in inheritance taxation the value for inheritance tax purposes becomes the beneficiary's or heir's acquisition cost, but there is no one-year rule, such as the one in gift taxation.
The media regularly brings to the public's attention cases where people move abroad with the aim to avoid gift or inheritance tax. Finland's neighbours Sweden and Norway, which levy neither inheritance nor gift tax, are particularly attractive from this point of view. However, among others, the tax provisions concerning Finnish real property and Finnish real estate holding companies place hurdles for such tax planning strategies.
The Income Tax Act and the Inheritance and Gift Tax Act provide for relief for certain transactions that aim at passing a business or a farm to the next generation. The relief is implemented, for example, through favourable valuations in inheritance and gift taxation, non-taxation of capital gains, allowing sales at 50 per cent of fair market value without triggering gift taxation or longer tax payment times. The types of relief depend on the way in which the change of generation is carried out and on whether relief is granted under the Income Tax Act or the Inheritance and Gift Tax Act.
Relief is subject to various conditions, which include that at least 10 per cent of the activity is transferred and the activity is continued by the transferee after the transfer. A further sale of a company, farm or other business that has been transferred to the next generation in a transaction enjoying change of generation relief leads to forfeiture of the relief and to a penalty payment if the sale occurs within five years of the purchase agreement or the tax assessment in which the relief was granted. The tax provisions on change of generation transactions are a politically highly sensitive topic in Finland.v Property and transfer taxes
Owners of real property pay real estate tax, which is typically around 1 per cent of the value of the real estate per year. When acquiring real estate, a transfer tax of 4 per cent is payable by the purchaser. The transfer tax rate applicable to housing and real estate companies is 2 per cent, in which case the tax base also includes certain loans of the company, and 1.6 per cent for other shares. No transfer tax is generally payable on listed shares or assets received as a gift or inheritance.