Tax Residency of Corporations

The Ministry of Finland has issued a proposal (VM111:00/2019) to amend the Income Tax Act. The proposal is set to change the Income Tax Act so that foreign entities whose actual place of management is in Finland would also be considered as a domestic entity. The draft also proposes to amend the Freedom of Enterprise Act, so that a branch would also mean the actual place of management of a foreign entity located in Finland in accordance with the Income Tax Act.

The Aim

The aim of the proposal is to broaden the scope of the Finnish tax legislation and to ensure that entities with ties to Finland are considered as domestic entities and thus generally taxable in Finland. This would broaden the scope of Finland’s taxing capacity from the current one. It would also reduce the opportunities for tax avoidance and would extend the Finnish tax legislation to the corresponding levels of many tax treaty partners.

Background – Current legislation

According to the proposal, in a tax treaty concluded by Finland, the tax domicile of an entity is determined in the case of dual residence mainly by either:

1. the basis of the actual location of the entity or
2. by agreement between the competent authorities.

However, on the basis of Finnish legislation, the foreign entity has not been able to be a general taxpayer in Finland, thus, in practice, a company established/registered in Finland on the basis of tax treaties may have had its tax domicile in another country, but not the other way around. However, a foreign entity may have a permanent establishment in Finland, in which case the entity has a limited tax liability in Finland on the income related to the permanent establishment.

The Main Changes

The draft proposal proposes a new section 9 (7) to the Income Tax Act, according to which a domestic entity means an entity established or registered under Finnish law. According to the new section 9 (8) to the Income Tax Act, the place of management would be assessed based on where the entities key decisions are made.

According to the draft proposal, the actual place of management would be the place where the entity’s main activities and day-to-day management decisions are made. In practice, this would mean the place of decision of the board or other similar important decision-making body and the location of the entity’s headquarters.

Provided meetings of the board or other similar decision-making body is held in Finland and the entity is headquartered here, the decision-making place for the most important day-to-day management decisions of the entity would be considered to be located in Finland and would thus be the effective place of management of the entity. What matters is not where the entity implements the key day-to-day management decisions, but rather where the key decisions are made.

According to the proposal, the actual place of management does not actualize in Finland only on the basis that the entity is owned by a person in Finland. In addition, the proposal states that if the activity is passive ownership, which does not require active management, the foreign entity cannot be considered to have effective management In Finland. Therefore, the changes should not affect passive and holding entities.

The draft proposal mentions an exemption for funds; however, the implementation has not been considered justified in the draft proposal. Therefore, funds should consider where the key decisions of the fund are made, so that the main activities are not considered to be in Finland.

Our Associate Trainee Johan Thodén took part in writing of this article.

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