Source: https://www.vero.fi/en/detailed-guidance/guidance/49113/taxation-of-employees-from-other-countries4/
Timestamp: 2020-07-05 07:55:04
Document Index: 617443065

Matched Legal Cases: ['§ 69', '§ 69', '§ 11', '§ 10', '§ 6', '§ 5', '§ 1', '§ 18', '§ 2']

The guidance has been updated due to recent changes in a number of Finnish tax rules. We have added the new section 2.6 with information on the partial tax exemption accorded to employer-paid expenses for relocating and related travelling. A number of updates were made to section 3.1 (on the tax treatment of key employees) because of changes effective from January 2020 in the relevant legal acts. We also have added a few more illustrative examples to section 3.1. In addition, further guidance is now included on the question of when an individual’s work can be viewed as performed in Finland.
Example 1: A Finnish business hires an Estonian worker for a job to be done in Finland starting 1 September 2018, and ending 16 October 2018. It pays him the entire wages as a lump sum after the work is finished. Conclusion: the way to calculate the deduction is €510 + €272 (=16 days at €17 per day).
If a nonresident individual carries out the work or service from a fixed place of business, the trade income is subject to source-tax withholding unless the beneficiary is on the Prepayment Register. For more information on the tax treatment of nonresidents who work in Finland or pursue other activities in Finland, see the following guidance:
"Taxation of foreign operators of a trade or business" — Ulkomaisen liikkeen- ja ammatinharjoittajan tuloverotus Suomessa (in Finnish and Swedish)
2.6 Treatment of reimbursement paid to workers who move house
The expenses caused by relocation to another town, city or country are generally regarded as living expenses that the worker must pay independently and no tax-free reimbursement from the employer has been possible. However, under the new section 69 c of the act on income tax, effective from 1 January 2020, employer-provided reimbursement for moving expenses and related travel is exemptible to 50 percent; and this includes the expenses of the worker and his or her family members. The 50-percent exemption requires that the relocation is entirely due to the fact that the place where the worker is going to work is so far away that it is necessary to move house. In accordance with the text of the Finnish government’s proposal to the parliament (no HE 24/2019), all situations where an individual arrives in Finland to work here would be exemptible.
Within the meaning of the new provisions in 69 c, relevant expenses are expenses directly related to the relocation such as packing, unpacking, and transportation. Correspondingly, the exemptible travel expenses are the trips made between the old and the new home, because they are directly linked to the relocation.
It is further required that the employer make the payments directly to the providers of relocation services. If the employer were to give an amount of money directly to the worker for covering their upcoming moving expenses, it would be taxed as a payment of wages. However, if the worker presents an invoice or receipt proving that a direct expense has been paid, it is allowed that the employer covers it and 50% of such a coverage is exempt from tax. Documents, receipts and vouchers must in that case become part of the employer’s bookkeeping.
The new provisions of § 69 c only govern the situation where an employer is paying for actual expenses. The new provisions do not mean that an extended deduction would have been granted for paid expenses in connection with relocation and travel in cases where the worker pays them. These expenses continue to be treated as non-deductible living expenses even if the worker moves house in order to start living in a new location – or another country – when an employment contract begins. The above expenses are non-deductible living expenses also when the worker moves house during an ongoing employment, on his or her initiative, to start living in a new place or in another country.
Under the established practice of tax assessment, and in accordance with case-law, if the worker has moved house to come nearer to the location of the place of work because the employer has given orders to do so, or because the move has ensured that the worker can keep his/her job, employers have been able to pay the reimbursement exempt from tax. In the same way, the Central Tax Board has agreed in its ruling no 10/2006 that receipts by a worker of reimbursement of expenses were not considered earned income subject to tax because the relocation had been due to the worker’s compliance with his employer’s orders. The new provisions of § 69 c do not concern the above. In circumstances described above, if the employer pays no reimbursement, workers continue to have the right to claim their relocation costs as expenses for the production of income in their personal income taxation.
3.1 Foreign key employees
Taxation of foreign key employees' earnings is governed by special provisions of law, laid down in Act no 1551/1995. Individuals arriving to Finland for periods longer than six months and thus becoming Finnish residents may, subject to certain restrictions, be treated as foreign key employees who only pay source tax at the 32-percent rate. Up to December 31, 2019, the rate was 35%.
The requirements for applying the provisions of Act 1551/1995 are:
The provisions of Act no 1551/1995 can only be applied on an individual who has become a Finnish resident for tax purposes. A person is regarded as a resident when they have a regular residence and home in Finland or if they continue to reside in this country for a period of more than six months (translation from Finnish, § 11, act on income tax). The period of stay is regarded as continuous in spite of any temporary absence from the country.
The provisions of the Act are applicable to the pay, on the condition that it is Finnish-sourced income within the meaning of the act on income tax. This requires that the work is done in Finland only, or mainly done here, for an employer based in Finland (translation from Finnish, § 10.4, act on income tax). In order to ascertain the place where work is done, i.e. whether or not an individual’s work has mainly been performed in Finland, the authorities look into the circumstances that prevail during each specific tax year. Because key employees have a resident taxpayer status, they are generally liable to pay Finnish tax on any income that they have received relating to work they have performed outside of Finland. For this reason, there is a difference in how often the tax authorities examine the place where the key employee mainly works compared to the treatment of nonresident individuals, because for nonresidents, the place where work is done must be established separately for every pay period (for more information, see section 2.1 of this guidance).
Under current case-law (ruling no 2943 of the Supreme Administrative Court of 11 November 2005), the provisions of the Act governing key employees, where they refer to “an employer based in Finland”, also apply to payments made by a Finnish service provider on a foreign employer's behalf. (Typically "a Finnish service provider" is an accounting firm.)
To qualify for foreign key employees treatment, applicants must submit a request to the local tax office for a tax card within 90 days of starting work as a key employee. The treatment cannot be given for longer than the first 48 months.
Example 2: The income received as a key employee amounts to €100,000 a year for an individual. This individual also receives €5,000 as wages from a second job; this amount is taxed as provided in the Finnish act on assessment procedure (Verotusmenettelylaki 1558/1995). The applicable tax rate on the 105,000-euro income is 33%. The individual will pay 32% tax on the income received as a key employee, and 33% on the income from the second job.
If during the first months of the tax year, an individual only earns income of a key employee, and later during the year, receives other earned income, at a stage when the individual’s status as a key employee is no longer effective, the amount received as a key employee will not have any impact on the income tax rate to be applied on the other earned income received later.
If the foreign individual has been taxed as a foreign key employee for the first months of the year only, and other earned income has been paid to him for the same months and he continues to stay in Finland for the rest of the year, the sum of the other earned income affects the progression of the tax rate applied to the income he gets during the final months of the year. However, the amount of the pay under the foreign key employees' tax scheme during the first months of the year does not affect the progression during the final months.
Example 3: An individual’s tax assessment has up to 31 May 2020 been based on his or her status as a key employee. The threshold of 48 months of working in Finland is reached on that date. The individual continues to work in Finland. The income received as a key employee amounted to €100,000 for 1 Jan - 31 May; starting 1 June, the salary paid to him or her will be €6,000 per month. In addition, the individual has a second job that goes on for the entire year, bringing an additional €500 per month. The conclusion is that €100,000 is taxed under the provisions of the Act governing key employees. The €48,000 (made up by €500 × 12 = €6,000 from the second job, and €6,000 × 7 = €42,000 from the main job) earned otherwise is taxed under the provisions of the Finnish act on assessment procedure.
The income earned as a key employee (amounting to €100,000) has an impact on the progression of the rate of the income tax applied on the first part of the second-job income (€2,500 for the first five months). The applicable tax rate on the 102,500-euro income is 32.5%. As for the second-job income for the entire year (€6,000) and the main-job income (€42,000) for the later months of the year, the tax rate is 21%. However, due to the fact that income as a key employee was received during the first five months, the tax rate on the second-job income for that period is 32.5%. The tax authorities impose 21% income tax on €45.500 (the income starting 1 June), and 32.5% income tax on €2,500, the first part of the income.
In any case, when foreign nationals arrive in Finland to stay longer than six months they become residents due to the length of their stay. For this reason, the tax authorities will send a Pre-Completed Tax Return also to the wage earners who had been taxed under the foreign key employees' tax scheme. They receive it to their home address in the spring of the following year. They must report their earnings taxed under the scheme (under the provisions of § 6.2, Act no 1551/1995) and their other earned income.
If the key employee has presented a tax card to the employer and the employer has withheld tax at source following the instruction on the card, even if the requirements listed above had not been met, the legal statutes on income tax assessment in domestic circumstances must be applied on the entire period when the individual works (as provided in § 5 of the Act governing key employees). In this case, the amounts that the employer had withheld as tax at source are counted towards the individual taxpayer’s assessment for the year, so that they are treated the same as domestic amounts withheld, under Prepayment Act, or the amounts may be treated as tax at source within the meaning of the act on the taxation of nonresidents' income (Laki rajoitetusti verovelvollisen tulon verottamisesta 627/1978).
If the tax card issued to a key employee continues to be in force but the individual’s tax status changes from resident to non-resident, the individual’s tax treatment will be based on the provisions of the act on the taxation of nonresidents' income starting on the day when the status had changed. In this case, the tax authority will not change the taxation that relates to the period when the individual was treated as a key employee and the status was that of a resident.
United Kingdom: Maximum length of stay is two years. The exemption is only granted to a professor or teacher, and a certificate of tax assessment in the country of residence must be presented. For example, such a certificate can be a completely filled-out Form 6159e of the Finnish Tax Administration: British teachers /Certificate of residence and tax liability for the use of Finnish tax authorities.
Example 4: A teacher from France arrives for the period starting 1 September 2016 and ending 31 December 2018 in order to teach French to Finnish students. He enjoys a tax exemption with respect to his teaching salary in the Finnish income-tax assessment for 1 September 2016 - 31 August 2018, but for any salaries that he receives the payment of from 1 September 2018 onwards he must pay Finnish income tax.
If the employment income of an individual arriving from a foreign country to Finland stays below €723.69 per month (in 2020), there is no requirement to pay the employer's health insurance and the insured party's medical-insurance premiums in Finland. Under the circumstances, the individual does not become covered by the Finnish social-security system.
Although the employer would not have to pay the employer’s health insurance contributions, the requirement to pay the following charges is always in force: the pension insurance premium (in respect of workers who are 17 years old and older), the unemployment insurance (17 years and older) and accident insurance premiums. However, the employer does not have to pay them if the individual comes from an EU or EEA country or Switzerland and presents an A1 or E101 Certificate proving coverage by their home country; or presents a similar certificate from a country that has signed a convention on social security with Finland.
Example 5: An Estonian fisherman works on board a Finnish fishing boat. His normally works three weeks at sea and then spends a week off back home in Estonia. Conclusion: he is treated as being a nonresident for Finnish tax purposes although his work would go on for more than six months as described. His seafarer's wages are subject to tax at source. He is entitled to ask for a nonresident's tax card in order to change into the progressive tax scheme.
Example 6: An Estonian driver works for a Finnish long-haul transport business. His routes are from Estonia to Germany and back. He has his permanent home in Estonia. He drives the freight truck via Hanko (Finland) on to Germany but does not spend nights in Finland. He only passes through Finland. Conclusion: He is treated as a nonresident.
The employer's responsibility to arrange for health insurance is controlled by the Health Insurance Act (1224/2004) and the act on residence-based social security in cross-border situations (Laki asumisperusteisesta sosiaaliturvasta rajat ylittävissä tilanteissa 16/2019). The rules for the payment of social security contributions are laid down in the Health Insurance Act. Health insurance coverage in Finland is based either on a resident status, or based on work done in Finland.
An employee arriving in Finland will be covered by health insurance immediately after they have moved to Finland if the monthly pay they receive for their work in Finland per month, converted into monthly income, is equal to, or more than, the basic unemployment allowance according to the Unemployment Security Act (€723.69 in 2020). The monthly income is considered to include all the income received during a calendar month. The minimum income threshold is applied separately for each individual. If the conditions set for the work are not met, the individual may be entitled to Finnish health insurance coverage if they have moved here permanently.
The health care contribution withheld from insured employees in 2020 is 0.68% of the earned income taxable in municipal taxation and of other payment criteria referred to in the Health Insurance Act (Gov. Decree, § 1, subsection 1). The daily allowance contribution withheld from wage-earners in 2020 is 1.18% of the wage income. However, the daily allowance contribution is not withheld from wage-earners whose annual wage income and business income in total is less than €14,574 (Health Insurance Act, § 18, section 15 (3); and Gov. Decree, § 2, subsection 1). If the earned income and business income in total is €14,574 or more, the daily allowance contribution is withheld from the entire income amount.
Example 7: A professor from the Russian Federation is invited as a guest lecturer at a university in Finland for two days. The fee paid for the two days is €800. Because the income exceeds €723.69 per month (the 2020 threshold), the professor is covered by Finnish health insurance.
The professor does not receive any other income from Finland during the calendar month in question, and their income is less than €14,574 per year. On account of this, no daily-allowance part of the insurance contribution is withheld from the lecture fee, but the part relating to healthcare must be withheld.
The employer's health insurance contribution is provided by the act on the employer's health insurance contribution (Laki työnantajan sairausvakuutus­maksusta 771/2016). In case the employee is covered by the Finnish health insurance system under the Health Insurance Act, the employer must pay the employer's health insurance contribution to the Tax Administration.
An employee may receive income from several employers, and one employer does not necessarily know of the other employers and the wages they pay. The employer cannot be considered to have neglected the withholding of the daily-allowance part of the employee’s health insurance contribution if they cannot have known that the employee’s total income during the year exceeds €14,574. Further, the employer cannot be considered to have neglected payment of the healthcare part of the contribution, if the minimum income threshold (€723.69 per month), relating to health insurance, has been exceeded due to wages paid by other employers and the employer has had no knowledge of those wages.
The health insurance (contributions consisting of a part relating to daily allowances and of a part relating to healthcare) is either included in the withholding rate or added to the source-tax rate of withholding. When the income serving as the base is taxable within the source-tax regime, both the health insurance contribution and the medical-insurance premium of the insured are paid on the gross amount from which the 'source tax deduction' is not yet subtracted.
Finland has a bilateral convention in force on social security with: the United States of America, Australia, Canada (and separately the province of Quebec), China, Chile, South Korea, India, and Israel. The conventions signed with the USA, Quebec and Israel are the only ones that contain provisions on health insurance premiums of the insured party and on the employer's social security contributions. The practice to follow with other countries than USA, Quebec and Israel is therefore the same as with countries that have no convention at all.
Sometimes it may at first seem that a foreign employee’s monthly income will not exceed the threshold (€723.69 in 2020) so that they would be insured in Finland based on work, and they are not insured based on residence, either. In this case, the employee’s health insurance contribution is not withheld from the wages, and the employer's health insurance contribution is not paid. However, the situation may change in such a way that the employee’s income per month exceeds the monthly threshold and they receive Finnish health insurance coverage based on work for the whole month.
For correcting and reporting the employer's health insurance contribution, see Reporting data to the Incomes Register: international situations, section 3.6.3.)
Reporting data to the Incomes Register: mandatory and complementary data on earnings payment reports
In exceptional circumstances it may be that the worker does not perform work in the service of the party giving the fringe benefit at all; instead, he or she only works in the service of their foreign employer company. In this case, if the party giving the fringe benefits passes on the expenses associated with them to a foreign company by issuing invoices to it, the tax office will consider the fringe benefits as being given by the foreign employer company instead. Then the Finnish business is not under the obligation to pay the employer's health insurance contribution. However, in its capacity as a 'substitute payer' (sijaismaksaja; ställföreträdande betalare), the Finnish business is the party with the obligation to file earnings payment reports. Read more: Reporting data to the Incomes Register: payments made by substitute payer.
Page last updated 1/22/2020