Income Tax Law Reform – Actual Place of Management in Finland
As per the proposal given by the government on 1.10.2020, numbered 136/2020, the income tax law was amended from 1.1.2021 onwards, particularly in terms of Section 9 of the law. This clause deals, as per its title, with tax residency and non-residency in Finland. For tax resident persons, all worldwide income is taxed in Finland regardless of the country from which they are earned. For those deemed to be non-residents, only income sourced from Finland is taxed here. This new proposal is significant for those companies whose tax residency will be affected. This article only addresses the occurrence of tax residency under the revised provision and does not delve deeply into potential issues arising from the reform.
Key impacts of the amendment
A company’s actual place of management has previously been able to create Permanent Establishment (PE) in Finland, meaning the company would still be non-resident with regard income non-attributable to the PE. On the other hand, a portion of the company’s profit is allocated to the permanent establishment, and the company is treated as tax resident for that portion in Finland. The change of legislation referred herein leads to a situation where a company that was previously only tax liable to income allocated to PE due to its actual place of management, becomes wholly tax resident in the future. Practically, this expands Finland’s taxation rights significantly for such entities.
The change is likely to cause so-called dual-residency conflicts in situations where the home country according to the tax treaty has previously been unequivocally in another state. In this context, the transfer of taxation rights to Finland may trigger so-called exit taxation in the departure country. Additionally, transitional regulations regarding a possible previous permanent establishment in Finland are still somewhat unclear, for instance, from the perspective of confirmed losses.
Criteria for the scope of the amendment
In the amendment, the scope of general tax liability was extended to include “a company established or registered abroad, whose actual place of management is located in Finland.” First, since this concerns a company, the change does not primarily affect foreign mutual funds or partnerships. The concept of a company is assessed based on Finnish legislation, considering the company’s civil law status in its country of establishment. Therefore, the classification of the entity in the country of establishment does not have a direct impact. For example, trusts or Luxembourg-based SICAV entities are, in certain situations, comparable to a Finnish limited liability company (KHO 2015:9 and KHO 2010:15).
Secondly, the provision only affects the actual place of management. According to the eighth paragraph added to the section, the place of management can be “the company’s board or other decision-making body” where “the most important decisions regarding the company’s daily management are made”. In practice, for instance, an auditor, accounting services, or the company’s own rules on domicile do not determine the place of management. Generally, a supervisory board responsible for the company’s oversight and major strategic guidelines or an infrequently convened general meeting does not constitute the actual place of management. Ultimately, overall consideration can be used in assessing the place of management.
Thirdly, the aforementioned place of management must be located in Finland. If decision-making has shifted to video conferencing due to COVID-19, the location is assessed based on the geographical location from which one joins the video conference. Additionally, a certain permanence of location is required, and decision-making in an abnormal location due to travel restrictions should not yet cause the transfer of the place of management to Finland. For corporate groups, the place of management must also be considered from the perspective of where decisions are genuinely made. If a CEO residing in Finland only implements policies of a foreign parent company, the decision-making cannot be considered to be happening in Finland. On the other hand, a foreign holding company may become generally liable for tax in Finland if it is managed from a Finnish parent company.
