In the globalized world, it is more and more often that businesses reach over the borders of their country of residence to find talent and to expand their business. Foreign companies may send their employees to Finland and new talent may be hired from abroad by Finnish companies. Taxation of foreign employees in Finland is determined by several factors, including the employee's country of residence, the duration of their stay in Finland, and the nature of the income they receive. In this blogpost some key points regarding taxation of foreign employees’ employment income in Finland are discussed.
Country of residence and tax liability
Non-resident taxpayers
Non-resident taxpayers pay taxes in Finland only on Finnish sourced income if the applicable tax treaty provisions so allow, and they usually do not have a tax return filing obligation in Finland. According to the Finnish domestic tax law, foreign employees staying in Finland continuously for six months or less are considered non-resident taxpayers for the Finnish income tax purposes and are subject to limited tax liability. It should be noted that when the continuous six months are considered, temporary absences from Finland do not interrupt the continuous stay.
If the employer is a foreign company with no permanent establishment in Finland, a foreign non-resident taxpayer does not usually pay income taxes on employment income paid by the foreign employer. However, social security contributions may have to be paid in Finland if the employee is covered by the Finnish social security.
If the employer is a Finnish company or a foreign company with a permanent establishment in Finland, the employment income is taxable in Finland if the work is solely or mostly done in Finland. The tax is withheld primarily at source. The tax at source rate is 35 %, but certain deductions may apply. A tax at source card should be applied for in Finland.
In certain circumstances, the foreign employee may also apply for progressive taxation in Finland, in which case the employee’s employment income derived from Finland would be taxed the same way as resident taxpayers are taxed.
Resident taxpayers
According to the Finnish domestic tax law, foreign employees staying in Finland permanently or continuously for more than six months are considered resident taxpayers for the Finnish income tax purposes and are subject to unlimited tax liability in Finland. Resident taxpayers must file a Finnish tax return and declare all worldwide income as well as certain assets to the Finnish tax authorities. Finland has tax treaties with more than 70 countries. Tax treaties prevent double taxation by determining which country has the obligation to eliminate possible double taxation, and tax treaties also define how different types of income are taxed and which country has the primary taxing rights.
According to tax treaties, if a foreign employee is not present in Finland for more than 183 days in a specified 12-month period, Finland does not have the right to tax the employment income received from a foreign employer if the foreign employer does not have a permanent establishment in Finland – this is applicable even if the employee was a resident taxpayer in Finland and the work was performed in Finland. However, if a foreign employer has a permanent establishment in Finland, employment income is taxable in Finland from the beginning of the employment. Permanent establishment formation in Finland is discussed in more detail in this blog-post.
If, in turn, a foreign employee is present in Finland for more than 183 days in a specified 12-month period, tax treaties do not restrict Finland’s right to tax employment income received from a foreign employer for the work done in Finland regardless of whether the foreign employer has a permanent establishment in Finland or not. If the employment income is taxable, it will be taxed progressively according to the yearly progressive tax scale on earned income.
The Finnish Tax Administration will send a pre-completed tax return form to resident taxpayers in the Spring following the tax year. Whether the employee is taxed in regards of the income declared on their Finnish income tax return is a matter of tax treaty provisions, which might restrict Finland's right to tax. This means that applicable tax treaty provisions need to be considered when filing the income tax return, and if a tax treaty restricts Finland’s right to tax the income declared (e.g. the 183-day rule stated above), respective claims should be presented on the income tax return.
Employers are generally required to withhold taxes from resident taxpayer’s salary. The withholding rate depends on the individual's tax card, which is based on the taxpayer's estimated annual income and deductions.
Other matters to consider in regards of foreign employees in Finland
In addition to above explained tax rules, there are multiple other matters that should be considered and obligations that might be applicable, depending on the circumstances at hand. At least the following should be checked when sending employees to Finland or hiring foreign employees to Finland from abroad:
Special tax regime: Finland has a so-called “expat / key employee” tax regime in which the employment income is taxed with a flat tax rate of 32 %. The applicability of this tax-regime is good to check when hiring foreign employees to Finland. More can be read about this here.
Immigration: The foreign employee may have to register their stay with the Finnish Immigration Service.
Social security contributions: Foreign employees working in Finland may be required to contribute to the Finnish social security system.
Incomes Register: There might be an obligation for the employer of a foreign employee to file data to the Finnish Incomes Register regarding earnings of a foreign employee.
Leased employees: In case of employee leasing to Finland, leased employee’s employment income can be taxed from day 1 in Finland if the applicable tax treaty so allows or if there is no tax treaty in place. It is recommendable that the taxation of leased employees is checked before leasing employees to Finland.
Posted workers representative: A posted worker in Finland is an employee who is sent from abroad to perform temporary work in Finland by their non-Finnish employer. The employer posting workers to Finland is obligated to appoint a Posted Workers Representative. A representative must be appointed provided that the duration of work in Finland is more than ten days. You may read more about this obligation here.
Permanent establishment risk: If a company not resident in Finland sends employees to Finland, the risk of permanent establishment should be considered. If a foreign employer has a permanent establishment in Finland, this also affects the taxation of their employees in Finland.
Foreign employees and their employers should ensure compliance with Finnish tax regulations and seek advice from tax professionals to navigate the complexities of the tax system and to ensure compliance with Finnish tax laws and any applicable tax treaties, as the rules applicable to foreign employees may be difficult to follow without vast knowledge of the Finnish tax system. Tax matters related to international mobility can be complex and may vary based on individual circumstances and applicable tax treaties, as the same rules may not be applicable to all foreign employees working in Finland. Additionally, tax laws and regulations are subject to constant change, so it's advisable to consult the latest information from a tax advisor for the most accurate advice.
It's recommendable for foreign employees and employers as well as Finnish employers hiring foreign employees to Finland to seek advice from Finnish tax professionals to ensure compliance with applicable laws. We here at Fiscales have assisted both employees as well as Finnish and foreign employers in many cross-border mobility cases, and we have substantial knowledge of related tax issues.
