MAJOR DEVELOPMENTS
q Effective as of 1997, a corporation resident in the European Economic Area is entitled to a tax credit on dividends if the shares earning the dividends are actually related to the permanent establishment in Finland (see item 28);
q Effective as of 1997, if assets are no longer actually connected to a permanent establishment of a foreign company in Finland, the probable market value of those assets will be included in the income of the permanent establishment;
q It is proposed that a benefit arising from an option based on a contract of employment will be taxed as income of the recipient even if the recipient gives the option to a connected person.
INCOME TAXES ON CORPORATIONS
1. Rates
Finnish corporations are taxed on their global income (unlimited tax liability). The state income tax is levied at a flat rate of 28%. A corporation income is classified as business income or other income. Taxable income is calculated separately for each; for example, a business loss cannot offset other income.
The determination of taxable business income is based on the Business Income Tax Act of 1968, under which the expenses of acquiring and maintaining business income are deductible. The determination of other income is based on the Income Tax Act.
2. Local Income Taxes
Corporations do not pay local income taxes.
3. Capital Gains Taxes
Capital gains are taxed as ordinary business income or other income, depending on whether the property sold was held for business purposes. No special capital gains tax is levied. Capital losses on the disposition of business assets are tax deductible. However, the possibility of deducting capital losses on the disposition of assets held for other than business purposes is restricted.
4. Branch Profits Taxes
A branch of a foreign corporation is taxed on branch profits as though it were a resident corporation (see item 16).
5. Foreign Tax Reliefs
Treaties between Finland and foreign countries on the avoidance of double taxation limit Finland right of taxation. These treaties are based either on the exemption method or on the credit method. In the case of nontreaty countries, a unilateral tax credit is allowed for state income tax purposes.
6. Classification of Corporations
The main forms of incorporation are general partnership, limited partnership, limited liability company, and economic societies (e.g., cooperatives). The limited liability company is the most common form of business establishment in Finland and also the most important for foreign-controlled enterprises.
7. Payment of Taxes
Taxes are collected through a prepayment system during the tax year, and the tax is assessed during the following year (assessment year).
8. Other Matters
Controlled Foreign Companies (CFCs). The purpose of the Finnish CFC legislation is to prevent the avoidance of Finnish taxation through allocating and holding income in corporations established in ow-tax countries. Finnish residents (companies or individuals) can be taxed on their share of a CFC income, irrespective of the fact that no distribution of profits has taken place. A CFC is defined as a corporation formed in a low-tax country. The Act covers CFCs subject to an income tax level of less than 3/5 of the Finnish level of tax.
Countries where the new CFC legislation will not apply are listed in a separate decree. The following countries, with which Finland has a tax treaty in force, have not been included on this so-called white list: Barbados, Ireland, Malaysia, Malta, Portugal, Singapore, Spain and Switzerland.
The Act does not apply to corporations carrying out production activities.
INCOME TAXES ON INDIVIDUALS
9. Rates
The income of individuals is divided into capital income and earned income. Capital income is the yield on property, gains on the sale of property, and other such accruals based on property. Income other than capital income is earned income. Costs related to capital income may be deducted mainly from capital income, and costs related to earned income may be deducted only from earned income.
On capital income, the state income tax is 28%.
Taxable earned income is taxed on a progressive scale. No state tax applies to earned income less than FIM 45,000; however, local income tax does apply. On income equal to FIM 45,000, the state tax is FIM 50.
The state tax rates for 1997 are:
Taxable Income
Tax on Percentage
Over Not Over Lower Amount on Excess
FIM 45,000 FIM 61,000 &nbs
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