Legal Alerts/2 Sep 2022

Upcoming Changes to Finnish Taxation to Enter into Force in January 2023

The Finnish Ministry of Finance has recently issued a number of new proposals regarding taxation as a part of the current Government’s programme.

These changes include, among others, new rules that allow for the taxation of capital gains arising from indirect real estate investments, a new exit tax imposed on wealthy people moving out of Finland, and the concept of an economic employer. Below, we will summarise the main contents of these proposals and discuss the effects that they will have on businesses and private individuals.

Capital gains tax on indirect real estate investments

The Finnish Ministry of Finance issued a draft the government proposal concerning capital gains taxation on 3 August 2022. The aim of the proposal is to enable capital gain taxation of indirect real estate investments, which has not been possible under the current legislation.

If the proposal is accepted, it will allow the taxation of capital gains accrued by foreign investors who have invested in Finnish real estate indirectly via another company. When this foreign investor sells the entity that owns the Finnish property, the profit will be subject to Finnish capital gains tax. The capital gains tax will be imposed regardless of the length of the ownership chain and will also apply in situations where a foreign holding company, which indirectly owns Finnish real estate, is subject to sale.

However, the capital gains tax will be triggered only if more than 50% of the underlying assets of the sold entity consist of Finnish real estate on the date of sale or at any point during the 365 days before that date. The real estate includes any real estate properties as well as shares in housing companies and mutual real estate companies.

It is worth of noting that the new rules do not apply in all situations. Only half of the tax treaties Finland has concluded with other countries allow for the taxation of indirect real estate investments. The tax treaties signed with Ireland, Germany, Switzerland, the UK, and other Nordic countries, to mention a few, enable the taxation of capital gains arising from indirect real estate investments.

The remaining treaties that do not allow for the taxation of indirect real estate ownership include, for example, the tax treaties concluded with Luxemburg, France, the Netherlands, Italy, Belgium, Estonia, and Austria. Tax treaties may also impose other restrictions. For example, the Nordic Tax Treaty enables taxation only if more than 75% of the underlying assets consist of Finnish real estate.

The new rules will not be applied to foreign entities that can be considered comparable to Finnish tax-exempt entities. Furthermore, shares in entities that are listed on a stock exchange are exempted. As such, the proposal should be borne in mind when planning new real estate structures in Finland. Foreign investors located in countries whose tax treaties enable the taxation of indirect real estate investments should also prepare to be affected by the increased tax burden when disposing of their indirectly owned real estate assets in Finland.

Exit tax for individuals

The Finnish Ministry of Finance issued a draft government proposal for an exit tax for individuals on 12 August 2022. The proposed exit tax aims to extend Finland’s taxation right to encompass any increase in the assets’ value that has accrued while the individual in question has resided in Finland. The new exit tax will be triggered even if the assets are sold after the person has moved to another country.

The aforementioned exit tax would be applied to individuals with unlimited tax liability in Finland, whose country of residence, pursuant to the applicable tax treaty, has been Finland for at least four years during the ten years preceding the move to another country. This four-year period does not have to be one continuous period. The proposed regulation would cover movable assets such as shares, mutual fund units, bonds, and virtual currencies.

However, certain thresholds limit the application of the new exit tax. If the market value of the relevant movable assets is less than EUR 500,000 or if the realised capital gain is less than EUR 100,000, the exit tax will not be triggered. The exit tax will also be imposed only on that part of the capital gain in question that exceeds EUR 100,000.

These proposed legislative changes would increase both the tax burden as well as the administrative burden of wealthy individual taxpayers who have moved out of Finland in 2023 or later. It is the taxpayer’s obligation to report any assets subject to the exit tax annually to the Finnish Tax Administration until the assets are sold or until the reporting obligation ends. The Finnish Tax Administration may also demand a security deposit in situations where the taxpayer moves outside of the EU or certain countries belonging to the EEA.

Economic employer

The first draft government proposal received a considerable amount of criticism, and amendments were made as a result. A second draft government proposal and a third slightly amended draft government proposal were issued on 28 April 2022 and 23 June 2022, respectively. These proposals discussed the implementation of the concept of an economic employer.

The proposed changes would extend Finland’s taxation right to encompass situations where an employee retains a formal employer abroad, but where the employee carries out work for a Finnish employer that can be considered to constitute this employee’s economic employer. We have discussed the main features of this new concept in our previous Legal Alert on the topic here.

The most relevant amendment in the latest drafts compared to the first draft is the so-called minimum time limit that applies in situations where the foreign employer and the Finnish economic employer are related companies. Where this is the case, a non-citizen with limited tax liability would be exempt from tax if they work a maximum of 15 consecutive working days or a maximum of 45 working days during the calendar year in Finland. Furthermore, the significance of work management and supervisory rights in situations involving group companies has been emphasised in the latest drafts when assessing whether the criteria of an economic employer are met.

The new concept of an economic employer will result in additional administrative and reporting obligations for Finnish companies that receive employees from abroad and for foreign companies that send employees to Finland. These companies should familiarise themselves with the latest version of the proposed changes. It should also be noted that the effective date of the suggested changes has been postponed by a year in the latest drafts, meaning that the changes will apply starting from the tax year 2023 if the proposal passes into law.

What comes next?

The changes are planned to enter into force at the beginning of 2023, given that the Parliament approves them. Borenius will continue to monitor for any developments as the proposals proceed towards implementation. If you have any questions regarding the proposals, please feel free to contact any of the Borenius attorneys listed in this alert or those with whom you usually work.

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Additional information

Heikki Wahlroos



Anna Tallgren