United States-Finland Tax Treaty
Quick Summary. Located in Europe’s Nordic region, Finland shares a border with Sweden, Russia and Norway. Officially the Republic of Finland, Finland is a parliamentary republic.
Finland obtained independence in 1917. Finland consists of five regions and approximately 310 municipalities, with a capital at Helsinki.
The Constitution of Finland provides for a representative democracy through its parliamentary republic, which established a unicameral Parliament of Finland (Eduskunta). The President serves as the head of state.
Finland’s legal system is a civil law system with an independent judiciary.
Finland recently implemented hybrid mismatch rules and mandatory reporting pursuant to the EU Directive on cross-border tax arrangements.
Finland is a member of the European Union (EU), the OECD, NATO, and the Eurozone.
U.S.-Finland Tax Treaty
- Convention between the United States of America and Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital, signed at Helsinki on September 21, 1989.
- TREASURY DEPARTMENT TECHNICAL EXPLANATION OF THE AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF FINLAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL GAINS SIGNED AT HELSINKI ON SEPTEMBER 21, 1989
- Technical Explanation of the Protocol signed at Washington on May 31, 2006 (the “Protocol”), amending the Convention between the United States of America and the Government of Finland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Helsinki on September 21, 1989.
- PROTOCOL AMENDING THE CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE REPUBLIC OF FINLAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL
Currency. Euro (EUR).
Common Legal Entities. Public and private limited liability company, general and limited partnership and branch of a foreign corporation.
Tax Authorities. Ministry of Finance, National Board of Taxes and tax offices
Tax Treaties. Concluded around 70 tax treaties. Signed the OECD multilateral instrument on June 7, 2017.
Corporate Income Tax Rate. 20%.
Individual Tax Rate. Progressive rates from 0-31.25%
Corporate Capital Gains Tax Rate. 20%.
Individual Capital Gains Tax Rate. 30%/34%.
Corporate residency. Company is resident if it is registered or otherwise established under Finnish law.
Individual residency. Individual is resident if he has a principal place of abode in Finland or spends more than six months in Finland either within a calendar year or straddling two calendar years.
Dividends. 7.5-30%. 0% for resident companies.
Interest. 30% for individual residents. 0% for companies and nonresidents.
Royalties. 20-30% for nonresidents. 0% for resident companies. Varies for individual residents based on individual tax card.
Commissions. 0% for companies. Varies for individual residents based on individual tax card. 30% for individual nonresidents.
Transfer Pricing. Tax authorities may adjust profits of Finnish companies if the conditions of a transaction between a Finnish company and a related party differ from those that would have occurred had the transaction been between unrelated parties. Any profits that the company would have accrued may be included in the company’s profits.
CFC Rules. In line with the EU ATAD, but stricter than what is required. Foreign entities are CFC if controlled by a Finnish tax resident and the effective tax rate in the foreign entity’s country is less than 12%. An entity is controlled by a Finnish tax resident if he or she owns at least 25% of the capital or is entitled to at least 25% of the yield on the entity’s assets. The net income of a CFC is taxable income for the Finnish tax resident.
Hybrid Treatment. Hybrid mismatch rules that transpose the anti-hybrid provisions of ATAD 2 into Finnish law applied starting January 1, 2020.
Inheritance/estate tax. Progressive rates up to 33%.
OVERVIEW OF TAXATION IN FINLAND
Finland imposes an income tax at the national and local levels upon net income from employment, investment, and business activities. The definition of income subject to tax within each enumerated category is, as in the United States, expansive and generally includes capital gains. The tax is computed on an annual basis, and the timing of income and deductions is generally determined by reference to commercial accounting rules. Under Finnish law, substance takes precedence over form, and artificial arrangements that have tax avoidance as a purpose may be ignored.
Individuals resident in Finland are taxed on their worldwide income. The rate of income tax imposed upon an item of income depends on its characterization as earned income or capital income.
Earned income, including salaries, wages, pensions, in-kind benefits, and certain dividends from nonlisted corporations, is taxed at progressive national rates. In addition, a municipal tax is levied at a flat rate that varies depending upon the municipality. In general, a taxpayer may deduct expenses incurred to produce income, subject to certain statutory limitations.
Capital income is any yield from capital investment, including capital gains, interest, rental income, yield from life insurance, dividends from listed companies, and certain dividends from nonlisted companies. Capital income is subject only to the national tax. Certain capital gains are exempt from tax. Capital losses are deductible only from capital gains incurred in the year of the loss or in the three subsequent years.
Income derived from a business and a partner’s share in a partnership’s income is apportioned between capital income and earned income.
Companies resident in Finland are generally subject to a national tax on their worldwide income. The gross income of a resident corporation consists of all income, including capital gain, whether or not the income is distributed to shareholders. However, capital gains from the sale of shares that are part of a corporation’s fixed assets are exempt from tax provided that the selling corporation has owned for one year or longer at least 10 percent of the share capital of the company the shares of which are sold. Similarly, dividends received by a Finnish corporation from a Finnish corporation generally are exempt from tax. In certain circumstances, including when the corporation receiving dividends owns less than 10 percent of the stock of the corporation paying dividends, dividend income is only partially tax-exempt.
Under the European Union Parent-Subsidiary Directive, withholding taxes are eliminated on dividend payments between European Union companies resident in different EU jurisdictions when the dividend recipient owns at least 15 percent of the stock of the dividend-paying company.
Although no distinction generally is made between income from domestic and foreign sources, Finland’s tax treaties provide a credit for any foreign taxes paid on income taxable in Finland. Where there is no applicable treaty, Finnish law provides a credit for foreign national taxes paid against Finnish corporate tax. Expenses incurred to produce income, including certain organizational expenses, are deductible, and depreciation and amortization of fixed assets is allowed.
Inheritance, gift, and wealth taxes
Finland levies an inheritance tax on each heir’s share of a decedent’s estate. Gifts are taxed at the same rate as inheritances. For both, these rates may be doubled or tripled depending on the degree of kinship between the transferor and transferee. The Finnish net wealth tax was abolished effective January 1, 2006.
A social security tax, which finances pensions, health insurance, and other social insurance programs, is imposed upon the income of employees. The social security tax is levied against employers as a percentage of gross wages and salaries subject to the withholding tax.
Finland imposes a value-added tax (“VAT”) upon increases in value of goods and services at each stage of the Finnish production and distribution process. The VAT is levied only on transactions that occur within Finland. A national real property tax is imposed, depending on the type of property.
Tax Treaty Network – International Tax Attorneys
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