How to Start a Business in Finland I – Business Entity Form

Several of our clients have approached Wisecounter with the desire to start a business in Finland. Often, by that time, they have already signed their first contracts, goods are en route to Finland, and they have people ready to provide services or sell goods. In such situations, there is often a risk that the necessary procedures for starting a business in Finland may not be completed in time. This, in turn, can lead to a situation where the Finnish client of the company turning to us withholds a portion of the payment for the work done or refuses to pay the invoice for the work altogether until the necessary registrations are in place.

Start preparing early

Our recommendation is to start preparing for the establishment of the company and the necessary procedures and registrations as soon as the plan to start a business in Finland arises, and not to leave it until the last minute.

When intending to start a business in Finland, the first step is to understand which type of business entity would be most beneficial for your situation. Although there may seem to be various options available, the final choice depends on several factors that either allow or disqualify the use of certain business entity forms. The chosen business entity form is also linked to the company's tax obligations and business risks, so it is wise to carefully consider different options before commencing operations in Finland.

The most common types of business entities

Excluding the status of a sole proprietor, the most common business entity forms when starting a business in Finland are:

1. Finnish limited liability company, known as "osakeyhtiö," abbreviated as Oy.
2. Branch of an Estonian private limited company in Finland.
3. Branch of an Estonian private limited company, also known as "sivuliike."

In Finland, the private limited liability company is the most recognized form of business entity, similar to the Estonian private limited company. The main difference is in the division of capital, which is divided into shares rather than parts. Limited liability companies in Finland are broadly divided into two categories: private limited liability companies and public limited liability companies, which can be listed on the stock exchange. A public limited liability company, known as "julkinen osakeyhtiö," is abbreviated as Oyj. The minimum share capital for a private limited liability company (Oy) is the same as that for an Estonian private limited company, which is €2,500. However, the minimum share capital for a public limited liability company (Oyj) is €80,000. While there are several other forms of business entities available in Finland, as in other EU countries, Estonian entrepreneurs typically choose among the three mentioned above to start their business in Finland.

Establishing an osakeyhtiö or Oy

If the entire company's operations will take place in Finland, it may be advisable to establish a Finnish Oy (limited liability company) immediately. A company in Finland can be established by both a natural person and a legal entity as a subsidiary or an affiliated company. As a reminder, what is the difference between a subsidiary and an affiliated company? A subsidiary is subject to the control of the parent company, whereas in the case of an affiliated company, the owner has significant influence over the company but it is not under the control of the parent company. Significant influence is presumed when the investor company directly or through subsidiary companies owns more than 20% of the affiliated company's voting rights, whereas a subsidiary is considered a company in which the parent company owns more than 50% of the subsidiary's voting rights.

A Finnish Oy can be established, meaning its owner can also be a foreign individual. The board of directors must consist of at least one member, up to a maximum of 5 members. If there is only one member on the board, a substitute member must be appointed. Both the members of the board and the substitute member can be Estonian residents. However, it significantly contributes to the efficiency of the company's operations if a person with Finnish residency is a member of the board or a substitute member. Finnish residents have a Finnish personal identification code, which provides access to various e-services necessary for the operation of a company, such as banking services, tax authorities, income register, and other agencies (such as KELA - social insurance institution, employment office, labor inspectorate, etc.). Without access to internet-based services, conducting business can be more difficult and slower, but still feasible.

Establishing a branch or subsidiary of an Estonian private limited company in Finland

If establishing independent Finnish limited liability companies is not recommended, the choice remains between opening a branch office or establishing a subsidiary of an Estonian private limited company in Finland. What is the difference between a branch and a subsidiary?

A branch of an Estonian private limited company in Finland is legally and financially part of the Estonian private limited company. This means that the balance sheet remains the same, and the accounting is shared. Although the accounting for the company and the branch can be conveniently maintained separately for clarity, from a reporting perspective, they are considered as one entity. Registering a branch in Finland is necessary when the company is structured in a way that it does not have a permanent establishment in Finland.

On the other hand, a subsidiary of an Estonian private limited company in Finland operates with separate accounting. The results, whether profit or loss, of the subsidiary are reflected in the parent company's financial statements. The subsidiary is registered as a separate entity in the Finnish Business Register, and a manager must be appointed to manage and represent the subsidiary and communicate with authorities. Generally, similar rules apply to the subsidiary as to a Finnish limited liability company. Establishing a subsidiary in Finland creates a permanent establishment for the Estonian company for tax purposes.

Both for registering a branch and establishing a subsidiary, a notice of establishment must be submitted to the Finnish Business Register before commencing operations. If the founder of the Finnish subsidiary is a foreign company, such as an Estonian entity, an application must be submitted to the Finnish Patent and Registration Office for establishment.

The difference between establishing a limited liability company and a branch or subsidiary

The significant difference in Finland between a subsidiary or affiliated company established by a legal entity and a branch or subsidiary lies in the fact that a subsidiary or affiliated company, as a separate legal entity, has its own separate share capital, whereas a branch or subsidiary does not have separate share capital. Consequently, the Estonian company is fully liable for its branch or subsidiary in Finland with its own assets, whereas in the case of a separate limited liability company, the risk is limited only to the capital of the Oy.

While a Finnish limited liability company (Oy) is generally subject to the Finnish general tax liability and must pay corporate income tax on profits earned in Finland, a branch or subsidiary of an Estonian company operating in Finland is typically subject to limited tax liability and generally does not need to pay corporate income tax in Finland.

An important factor in taxation matters is the concept of a permanent establishment. The permanent establishment is also crucial in determining VAT obligations, although it should be noted that the principles of establishing a permanent establishment in Finland are regulated somewhat differently in the Income Tax Act and the VAT Act.

Continue reading the following articles in the series 'How to start a business in Finland'

Information about the prerequisites and conditions for the emergence of a permanent establishment in both the context of VAT and income tax laws can be found in the article 'How to start a business in Finland II - permanent establishment', and about the principles of Finnish income and value-added tax in the article 'How to start a business in Finland III - income and value-added tax'. Additionally, we mention that the description in this article provides an overview of the legal framework. Furthermore, one must also consider the special rules arising from the principles of cooperation between companies, which will also be discussed in an upcoming article in the same series.