Permanent establishment
Typical trigger points
Remote working – Home office
Sales personnel in Finland – Expanding business
Management in Finland
Assembly or supervisory services
Important exception(s) – Auxiliary and preparatory services
Although the Finnish Tax Administration generally follows OECD commentaries, reports and statements in its tax treaty interpretation, some differences in procedure and interpretation can be observed in the Tax Administration’s published guidelines and legal precedents.
In Finnish case law, particular emphasis is placed on how central or important the activity is to the company’s business operations. For example, in the case KHO 1991/4893, it was determined that active participation in sales activities and customer relationship management was not considered auxiliary activity because these were essential parts of the company’s business operations.
In another relatively recent case, KHO 2021:171, it was ruled that the tasks performed by employees in Finland were so limited and minor in nature that a permanent establishment was not created, even though those tasks formed parts of the company’s core businesses. In this ruling, the Supreme Administrative Court seemed also to take into account activity outside the potential home office, which deviates from the attribution logic typically followed in OECD commentary. It is also worth noting that in the absence of a tax treaty, when national permanent establishment rules apply, there are no exceptions for auxiliary or preparatory activities.
Remote working – home office
A home office does not often lead to the creation of a permanent establishment, especially if working from home is solely due to the employee’s personal reasons. However, we have observed that, particularly after the Covid-19 pandemic, the Finnish Tax Administration has increasingly challenged the creation of permanent establishment on the grounds that work performed from an employee’s home indirectly benefits the employer.
In these cases, the employer’s benefit may be seen in reduced travel time to clients or lower office rental costs. The circumstances are assessed holistically, and factors such as whether the employer pays rent for the use of the employee’s home can also play a role.
Generally, occasional remote work from employees’ home is not sufficient to create PE; the work must be continuous and closely tied to the company’s core business activities. A home office does not, however, create a permanent establishment if the work is of an auxiliary or preparatory nature.
Sales personnel in Finland – expanding business
Permanent Establishment in Finland can be incorporated through a dependent agent, even if the company does not have a permanent business location in Finland. A dependent agent is a person or entity that actively concludes contracts on behalf of the principal. This does not require formal authority to sign contracts; it is sufficient if the agent accepts orders that the principal routinely approves.
A dependent agent could be, for example, a sales representative, and their activities may create a permanent establishment for the principal if their actions are not merely auxiliary or preparatory. The activities must be an essential part of the principal’s business operations in Finland.
On the other hand, an independent agent, such as a commissionaire or broker, does not create a permanent establishment if they operate economically and legally independently and bear their own business risks.
Management in Finland
A place of management can establish a permanent establishment if active and independent business decisions are made there. This is particularly relevant when management decisions are made, for example, from a home office. An example of this is a Supreme Administrative Court ruling (KHO 1999/1031), where a permanent establishment was created, even though the place of management was located on another company’s premises.
A place of management requires adequate permanence and must be a location where decisions concerning the entire company, or a part of its operations are made. The meeting location, such as where board meetings are held, is not decisive. Especially in smaller companies, such as one-person enterprises, work done from the manager’s home can easily create a permanent establishment if the activities are ongoing and decision-making occurs regularly from that location.
In addition to a place of management, a company may also establish an effective place of management in Finland, resulting in world-wide tax liability rather than only creating permanent establishment. The threshold for establishing an effective place of management is higher than for a “regular” place of management leading to a permanent establishment.
Assembly/supervisory and/or commissioning services – Shipyards and construction sites
In recent years, the Finnish Tax Administration has placed special scrutiny on the construction sector, particularly shipyards. Practically every worker entering a construction site is required to have a photo ID card that displays, among other things, their tax number and employer information. In practice, posted workers must visit a local tax office and register themselves in order to obtain such an ID card.
During that visit Tax Administration collects information on employers, employees, and their stay in Finland. Based on our experience, the Tax Administration also uses data from other sources and combines key figures using some level of artificial intelligence. This usage of “artificial intelligence” also seems to create sometimes “false red flags” which we are familiar to deal with.
It is important to note that in situations where no tax treaty applies, there is no specific minimum duration required for the establishment of a permanent establishment. Even among tax treaties, the required period typically varies between 6, 9, and 12 months.
PE under Finnish domestic legislation
Although the Finnish Tax Administration generally follows OECD commentaries, reports and statements in its tax treaty interpretation, some differences in procedure and interpretation can be observed in the Tax Administration’s published guidelines and legal precedents.
In Finnish case law, particular emphasis is placed on how central or important the activity is to the company’s business operations. For example, in the case KHO 1991/4893, it was determined that active participation in sales activities and customer relationship management was not considered auxiliary activity because these were essential parts of the company’s business operations.
In another relatively recent case, KHO 2021:171, it was ruled that the tasks performed by employees in Finland were so limited and minor in nature that a permanent establishment was not created, even though those tasks formed parts of the company’s core businesses. In this ruling, the Supreme Administrative Court seemed also to take into account activity outside the potential home office, which deviates from the attribution logic typically followed in OECD commentary.
It is also worth noting that in the absence of a tax treaty, when national permanent establishment rules apply, there are no exceptions for auxiliary or preparatory activities.
