Legal Alerts/11 Sep 2020

Proposed Changes to the Tax Residence of Corporations

The Finnish Government has recently issued a draft proposal regarding the tax residency status of foreign corporations. If adopted, a foreign corporation will be regarded as tax resident in Finland if its place of effective management is located in Finland. Currently, only corporations established or registered under Finnish law are considered to be tax resident in Finland.

The proposed changes would extend the geographical scope of Finnish taxation. The Government proposal should be issued to the Parliament in the autumn of 2020, and the changes are proposed to be applied as of 1 January 2021.


The reasoning for the proposed amendments is to prevent situations where Finnish tax residency could be artificially avoided even if the entity is owned and managed and its business carried out in Finland.

The proposed changes are in line with the tax residency rules applied in several other countries and also with the definition of home country used in most tax treaties.

Principal changes

  • Place of effective management in Finland would trigger Finnish tax residence for foreign corporations.
  • Tax residence would start from the fiscal year following the year when the place of effective management was transferred to Finland or created in Finland.
  • Mere ownership would not trigger tax residence, and foreign holding companies would largely fall outside the scope of this change.
  • Foreign UCITS and AIF funds would not be excluded from the application of the new rules.
  • The Finnish group contribution regime is proposed to apply to foreign entities that are tax resident in Finland.
  • Losses incurred prior to Finnish tax residence would not be deductible against taxable income generating during Finnish tax residence. However, the losses generated by a Finnish permanent establishment (PE) of the same entity would be deductible.

It should be noted that a number of technical issues have been raised in the public statements regarding the proposal, which are now under review at the Finnish Ministry of Finance. The final proposal that will be submitted to the Parliament may differ from the proposal discussed here.

Definition of the place of effective management

The place of effective management would mean the place where the entity makes key decisions affecting its daily business activities. In practice, this could mean the place where the entity’s board of directors, or a corresponding legal organ, holds its meetings or the location of the entity’s headquarters. In order to create the place of effective management, the board of directors should have the authority to resolve on the most important matters related to the entity’s daily business activities.

  • If the board holds its meetings in a jurisdiction that differs from that where the entity’s headquarters are located, the decisive factor would be the location where the board (or a similar legal organ) holds its meetings.
  • If the board only makes formal decisions based on instructions or recommendations given by the executive management, the location of board meetings should not be taken into consideration. In such case, the location of the executive management would determine the place of effective management for the entity.
  • If the meetings are held online, the decisive factor determining the place of effective management would be the location where the participants have physically joined the online meeting.

The laws of the country where the foreign entity is legally domiciled should also be taken into consideration. For example, any regulations affecting the entity’s formal decision-making in the relevant jurisdiction should be ascertained. However, the place of effective management should always be determined based on the actual circumstances affecting who is making the key decisions on the entity’s daily business activities regardless of the various legal requirements.

  • For multinational groups, each entity in the group is assessed separately. The place where group-level decisions are carried out does not affect the tax residence of a single group company. However, if vital business decisions are actually implemented by another group company, the place of effective management is considered to be in the country where these decisions are implemented.
  • The home country of the individuals participating in the decision-making does not affect the entity’s tax residency status.
  • The place of effective management is not determined based on ownership. Passive foreign holding companies generally do not have their place of effective management in Finland.

Permanent establishment or tax residence

Should the proposal be implemented, a place of management can create both a PE and tax residence in Finland. The threshold is somewhat lower for determining whether a PE exists in Finland. A PE can be created based on an overall assessment of other management activities than solely the set conditions that determine where the place of effective management is located, i.e. executive management.

As the criteria that apply to PE are not identical to the criteria set for determining the location of the place of effective management, an entity can have several places of management that result in it having a PE in that location, but the entity will nevertheless only have one place of effective management that establishes its tax residence.

  • Foreign entities in tax treaty states: in most situations, the business subject to tax in Finland is the same as or close to the income subject to tax under PE.
  • Foreign entities outside Finnish tax treaty network: the business subject to tax in Finland would include the worldwide business, capturing also activities outside a Finnish PE. The risk of double taxation is clearly higher.

Impact on certain sectors

For multinational groups, the current governance models where foreign subsidiaries are not regarded as having a PE in Finland should be maintained. Group-level management performed by the Finnish parent will not affect the tax residence of foreign group entities. Essential daily business decisions of the subsidiaries’ business should not be made in Finland.

Passive investment companies and other holding entities in tax treaty states, owned by Finnish individuals, are currently largely exempt from the risk of PE in Finland due to domestic law. The new rules would not, in principle, concern these entities, but the wording of the final proposal remains to be seen.

Foreign investment funds and their managers should consider where the key business decisions of the funds are made. What kind of role the GP and the board have outside of Finland is important, and this should also be reflected in the fund documentation. Having a Finnish management company that provides advisory services does not mean that the fund would be considered to have its place of management in Finland.

The proposal does not include an obligation to prepare Finnish GAAP financial statements. The Finnish Tax Administration’s statement proposes that this obligation be included in the final proposal. The statement also suggests that this obligation be introduced for all PEs.

Borenius’ lawyers are available to assist in addressing any questions you may have and will continue to monitor for any developments as the proposal proceeds towards implementation.

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Additional information

Heikki Wahlroos