How to Start a Business in Finland III – Income and Value Added Tax

Wanting to start a business in Finland requires a detailed understanding of the tax obligations associated with entrepreneurship. While the previous articles in the series 'How to Start a Business in Finland' covered topics such as choosing the form of a business entity and the criteria for establishing a permanent establishment in terms of both VAT and income tax laws, this article is dedicated to describing the aspects of income and value-added tax in Finland that are crucial for Estonian entrepreneurs wishing to commence business activities in Finland.

Income Tax Obligations in Finland

Unlike in Estonia, in Finland, a company's annual business profit is subject to taxation. Tax-related matters in Finland are governed by the Finnish Income Tax Act, or "tuloverolaki," as well as various provisions of the Tax Procedure Act, or "laki verotusmenettelystä." The general corporate income tax rate in Finland is 20%, calculated on the annual net profit.

General and Limited Income Tax Liability

In the context of the Income Tax Act, one can talk about general and limited tax liability. Generally, the framework of limited tax liability applies to a foreign company, but there are exceptions. This is where the question of a permanent establishment comes into play, which we discussed in the article "How to Start a Business in Finland – Permanent Establishment."

The Finnish Income Tax Act uses two concepts for foreign companies: general and limited tax liability. A foreign company falling under general tax liability is taxed like other Finnish companies. Limited tax liability applies to those companies that have not established a permanent establishment in Finland according to the Income Tax Act. Under limited tax liability, companies generally do not have to pay corporate income tax in Finland. It is crucial to note that the annual report submitted in Finland must explicitly state that the company does not have a permanent establishment in Finland; otherwise, the opposite is assumed. Contracts with partners that prove this position must also be included, and these are thoroughly analyzed by the tax authorities.

It is important to know that a limited tax liability Estonian company may, under certain conditions, still be subject to Finnish income tax even if it does not have a permanent establishment in Finland. For example, the company is obligated to pay tax in Finland on business profits derived from real estate, as well as on dividend income.

The role of the Finnish Tax Administration in determining limited or general tax liability

Whether a company falls under limited or general tax liability is determined by the Finnish Tax Administration, taking into account the circumstances of the company's organization and management. For example, if it is found that the company's management makes daily decisions concerning the company in Finland, the company will have general tax liability, and it will be required to pay corporate income tax in Finland based on its annual profit.

In the case of general tax liability, it is essential to note that the company's income, both from Finland and elsewhere, is taxed. In this scenario, the same income tax rules that apply to Finnish companies are applicable to a foreign company located in Finland. If the company manages to relocate its management to Estonia, the legal aspects change, and the resulting income tax liability ceases. However, proving to the Finnish Tax Administration that the management is located in Estonia requires a separate analysis and strategy based on the specific characteristics of the company. The same applies to challenging other decisions made by the tax authorities; having a precise understanding of the tax authority's stance on the company's specifics and the context of the situation is necessary to contest such decisions.

Advance income tax

On important aspect to note is that if a company has incurred income tax liability in Finland, the Finnish Tax Administration determines advance income tax payments for the entire fiscal year. This means that the company pays income tax in advance in Finland, not retrospectively, as we are accustomed to doing in the taxation of individuals' income.

The determination of income tax is based on the taxable business profit of the company from the previous fiscal year. The amount of the advance payment dictates how often income tax must be paid in advance. There can be 2-12 installments per year, meaning companies with higher profits may pay income tax advances monthly. If the advance income tax is not paid on time, the company may be required to pay late payment interest.

For Estonian entrepreneurs wishing to start a business in Finland, it is beneficial to know that expenses incurred in Estonia to enable the company to operate in Finland can be deducted from the income earned in Finland. However, meticulous record-keeping of these expenses is essential, and they must be correctly included in the expenses made in Finland to reduce the local profit. Often, income is generated in Finland, but expenses are incurred in Estonia without proper consolidation, leading to issues at the end of the year, where the company appears to have significant taxable profit in Finland, which, when combining Finnish and Estonian calculations, might not be accurate.

Value Added Tax (VAT) Liability in Finland

The payment of VAT in Finland is regulated by the value-added tax law, or arvonlisäverolaki. The general VAT rate in Finland is 24%. A reduced VAT rate of 14% applies to food products, catering establishments, and providers of catering services. A further reduced VAT rate of 10% is applicable to accommodation services, passenger transport providers, television channels, film distributors, admission fees for cultural and recreational venues, as well as books, medicines, and services related to physical activities. Certain services are exempt from VAT, such as real estate sales and healthcare and social services.

The obligation to register as a VAT taxpayer arises when a company's turnover exceeds the threshold of 15,000 euros within a 12-month period, as well as in the case of creating a permanent establishment as mentioned in the article "How to Start a Business in Finland - Permanent Establishment." It is important to note that the obligation to pay VAT may also arise without the creation of a permanent establishment, for example, if the company uses a warehouse in Finland.

An exception applies to companies providing construction services. Thus, companies providing construction services are obliged to pay VAT even if the 15,000 euro threshold has not been exceeded, provided that the company does not have a permanent establishment in Finland.

There is no specific minimum threshold for registering as a VAT taxpayer; a company can register from its establishment. Whether this is necessary or not requires careful consideration, as the need to register as a VAT taxpayer depends on the nature of the company's activities, the industry it plans to operate in Finland, and considerations about the expenses and revenues the company expects to have.

Reverse charge VAT

A separate topic that needs to be addressed along with value-added tax is reverse charge, as in some sectors in Finland, domestic reverse charge for VAT is applied.

Domestic reverse charging is actively used in the construction sector. Since both the seller and the buyer declare the VAT, it is essential that both parties follow the same principles. Therefore, when operating in the construction sector in Finland, it is crucial to issue sales documents in accordance with the correct directive, which must also be specified on the document, such as the sales invoice.

Domestic reverse charge is entered in the declaration separately from other VAT, and it is not included in the EU intra-community reverse charge.

The importance of details in paying taxes and the consequences of errors

When paying both corporate income tax and value-added tax, it is crucial to ensure that the bank transfer details include the correct reference number. In Estonia, the tax system involves prepayment accounts, and tax distribution and refunds are managed by the Estonian Tax and Customs Board. In Finland, each tax group has its own reference number that must be entered correctly. Incorrect entry of the reference number can lead to problems. This is especially important for companies that have already reached agreements with the tax authorities regarding taxation, as an incorrect reference number may result in consequences such as the cancellation of payment schedules.

Read also other articles from the series 'How to start a business in Finland’

In this article, we focused on the principles of income and value-added taxation in Finland, paying particular attention to nuances where mistakes are more commonly observed. In the next upcoming article in the series 'How to start a business in Finland,' we will discuss registering as an employer and tax obligations related to employees. Articles on the same topic have also been published, such as 'How to start a business in Finland I – legal form of the company' and 'How to start a business in Finland II – permanent establishment'.