Legal Alerts/9 Apr 2014

Legal Alert – Budgetary Framework and General Government Fiscal Plan for 2015-2018

On 24–25 March, the Finnish Government has agreed on the central government spending limits and the general government fiscal plan for 2015–2018. In addition to the measures already adopted with a net impact of EUR 6.6 billion in 2017, the measures decided on in March 2014 will have a net impact of EUR 2.3 billion in 2018. The objective of the fiscal and economic policy is to strengthen the financial foundation of the welfare society and conditions for growth to ensure that public finance is on a sustainable basis. Measures regarding direct taxes consist mainly of increases in the taxation of earned and capital income.

The key points of the fiscal plan are presented below.

Tax on earned income

The limit of the highest income class of the progressive income tax scale will be lowered to EUR 90 000 (EUR 100 000 until 2015). This adjustment will remain effective until 2018.  Taxation of lower incomes, however, will be eased by raising the basic and earned income deductions. Earned income taxation will also be increased by not making adjustments for the earnings level and inflation. These measures will reduce income differences and increase tax revenue by around EUR 155 million.

Tax on capital income

Taxation of capital income will be increased so that the income limit of the higher tax rate will be lowered to EUR 30 000 and the higher rate increased from 32% to 33%. No changes regarding the lower tax rate were presented. For example, if the capital income is EUR 100 000, the capital income tax will be increased by EUR 900. The changes made to capital income taxation will increase tax revenues by EUR 28 million.

Inheritance and gift taxation

Inheritance and gift taxation will be increased by raising all marginal rates in tax scales by 1%. In addition, the tax class of gifts and inheritances over EUR 1 million will become permanent from 2016. After the increase the highest tax rate in tax bracket I will be 20%, and the corresponding percentage in tax bracket II will be 36%.

Energy taxation

The Government is steering environmental taxation and subsidies in a significantly more sustainable direction. By increasing the general electricity tax class I, energy taxation will be tightened by EUR 120 million. In addition, the carbon dioxide tax on heating, power plant and working machine fuels and tax on transport fuels will be increased. However, the tax increase imposed on peat earlier will be cancelled in order to improve the competitiveness of domestic forest chips.

Increases will also be made to energy taxation as regards mining industry. It is anticipated that the electricity tax rate for the mining industry will be increased and at the same time mines would be excluded from the scope of the energy tax cutter the aim of which is to support companies operating in energy-intensive branches. However, if enacted these changes may increase the energy taxes paid by the mining industry in the forthcoming years.

Additional changes

The upper and lower limits laid down for general real-estate tax and for the real-estate tax on permanent residential buildings will be raised.

The annual motor vehicle tax on cars and vans will be increased by EUR 150 million, from the beginning of 2016. Moreover, the car tax reduction on taxis (excluding specially equipped taxis) and on cars imported as removal goods will be abolished.

The right to deduct interest on home loans will be reduced during the whole spending limits period by a further 5 percentage points annually. Only 50% of the home loan interest would be deductible in 2018. In addition, the right to deduct commuting expenses will be reduced by raising the co-payments portion for commuting expenses to EUR 750.

Fees levied by the central government will be adjusted and social and health care customer fees increased. In addition, the tobacco tax will be increased from the beginning of 2016.

It should be noted that the decisions made by the Finnish Government may still change and no precise information is available at the moment.

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