Tax Liability of Foreign Companies to Change if Decisions Made in Finland
From the start of 2021, a company with its place of effective management in Finland has been generally liable to tax in Finland for its global income regardless of the country in which the company was established. Prior to this, foreign companies were always considered to have limited tax liability in Finland.
Finland is not an exception in this regard, as Norway, Denmark, Germany, the UK and the Netherlands, among other countries, all have similar legislation in force. Potential double taxation is eliminated through tax treaties binding on Finland.
The definition of the place of effective management is expansive: it is the place in which the company’s board of directors or other decision-making organ makes the most important decisions relating to the company's highest-level daily management. However, the assessment does take into consideration other circumstances relating to the business operations and organisation.
How is the Place of Effective Management Determined?
If the meetings of the board of directors are organised remotely, the place of effective management is assessed based on the location from where the meeting is joined. This being the case, if the board of directors of a company registered abroad joins a meeting from Finland, the decisions are made in Finland. If the members of the board join the meeting from several different locations, the place of effective management is assessed based on the location of the company's headquarters or other executive management.
On the other hand, the place of effective management has to be sufficiently permanent. For example, meetings held as video conferences and other temporary arrangements made due to the pandemic do not form a place of effective management in Finland as long as the arrangement, even if it proves to be a good one, remains temporary.
With respect to group companies located abroad, it is a good idea to separate the group’s highest strategic management from the daily management of foreign group companies. For example, the place of effective management of a group’s holding company could be in the Finnish parent company.
Despite New Guidance, Assessment is Always Case by Case
The Finnish Tax Administration has updated its guidance in line with the new legislation. The new guidance provides examples of how the new legislation is applied in certain situations, but the assessment must always be on a case-by-case basis. It is worthwhile to review your company’s operations in light of the new legislation to chart risks. We would be happy to assist you in this exercise.