Taxation in Finland 2005

MINISTRY OF FINANCE

TAXATION IN FINLAND 2005

3/2005

PUBLICATIONS

TAXATION IN FINLAND 2005

3/2005

MINISTRY OF FINANCE TAX DEPARTMENT PUBLICATIONS MINISTRY OF FINANCE Snellmaninkatu 1 A P. O. Box 28 FI-00023 GOVERNMENT Tel. +358 9 160 01 (exchange) Fax: +358 9 160 33123 Internet www.ﬁ nanceministry.ﬁ

Sales distributions Edita Publishing Ltd. Layout Ministry of Finance/ Media and Communication Unit ISSN 1459-3394 ISBN 951-804-528-3 (paperback) ISBN 951-804-541-0 (PDF) Edita Prima Ltd. HELSINKI 2005 FACT SHEET Publisher and date Ministry of Finance, October 2005

Author (s) Mr. Anders Colliander

Title of publication Taxation in Finland 2005

Parts of publication/ other versions The publication is available on Internet at the website released www.ﬁ nanceministry.ﬁ

Keywords

Publications series and number Publications, 3/2005

Identiﬁ cations ISSN ISBN 1459-3394 951-804-528-3 (paperback) 951-804-541-0 (PDF) No. of pages Language Price 196 Finnish 18,50 e

Sales distribution Edita Publishing Ltd.

Printing place and year Edita Prima Ltd, Helsinki 2005

Abstract The text describes Finnish tax system and taxes levied in Finland. All areas of taxation (with exception of customs taxation) are covered. Taxes described include income tax, VAT, net wealth tax, inheritance tax, excise duties but also many other taxes ranging from car tax to ﬁ shing management fee. The text also gives a description of prepayment of taxes, tax administration and appeals.

Preface

PREFACE

This eleventh edition of the information booklet “Taxation in Finland” takes into account all the recent changes in the Finnish tax legislation. The booklet is based on tax legislation in force in Finland as at 1 January 2005 and all fi gures refer to 2005 unless otherwise stated. A brief description of the Government’s proposals to Parliament in the autumn 2005 has been included in Appendix 13 in order to give a more update picture of the current situation. The aim is to give an outline of the principles of the Finnish system of taxation and briefl y to describe the individual taxes – how they work and how much they yield. The booklet has no binding force and does not affect a taxpayer’s rights and liabilities. As the customs legislation of European Community is directly applicable in the Member States, of which Finland is one, it was not considered necessary to explain customs matters in this booklet. The booklet was compiled and edited by Mr Anders Colliander, Consulting Offi cial at the Ministry of Finance (VM, BOX 28, 00023 Valtioneuvosto, Helsinki, Finland, telefax 358-9-16034747 or -8). The language was revised partly by Mr John Calton, Lecturer in English and partly by Mr Jarl Hagelstam, Senior Adviser, Legal Affairs, Ministry of Finance). Any comments on the booklet will be gratefully received (Internet addresses for commenting the booklet: anders.colliander@vm.fi , or VMFintaxJL@vm.fi ).

Helsinki, October 2005

MINISTRY OF FINANCE

5 6 Contents

PREFACE ...... 5 1 INTRODUCTION ...... 13 1.1 Right of taxation and enactment of tax law ...... 13 1.2 Main sources and level of taxation ...... 13 2 TAXATION OF INCOME ...... 17 2.1 Taxes imposed ...... 17 2.1.1 State income taxes ...... 17 2.1.2 Communal tax ...... 18 2.1.3 Church tax ...... 18 2.1.4 Corporate income tax ...... 18 2.1.5 Tax withheld at source from interest ...... 18 2.1.6 Health insurance contribution, etc...... 18 2.1.7 Withholding tax on non-residents’ income ...... 19 2.1.8 Withholding tax for foreign employees ...... 20 2.1.9 Maximum combined rate of tax ...... 20 2.1.10 Recipients of tax revenue ...... 20 2.2 Taxpayers ...... 21 2.2.1 Unlimited and limited tax liability ...... 21 2.2.2. Residents and non-residents ...... 21 2.2.3 Individuals ...... 22 2.2.3.1 Married persons ...... 22 2.2.3.2 Minors ...... 23 2.2.4 Corporate bodies ...... 23 2.2.5 Partnerships and undistributed estates ...... 23 2.2.6 Permanent establishments ...... 24 2.2.7 Exempt persons ...... 25 2.3 Income taxation of individuals:investment income ...... 26 2.3.1 The concept of income ...... 26 2.3.2. Deﬁ nition of investment income ...... 26 2.3.3 Interest income ...... 27 2.3.4 Dividend ...... 27 2.3.4.1 Dividend received from publicly listed companies ...... 27 2.3.4.2 Dividend received from non-listed companies ...... 27 2.3.4.3 Dividend received from non-resident companies ...... 29 2.3.4.4. Other comparable income ...... 30 2.3.5. Capital gains ...... 30 2.3.6 Investment income share of agricultural income and business proﬁ ts ...... 32

7 Contents

2.3.6.1 Agricultural income ...... 32 2.3.6.2 Income from partnerships ...... 32 2.3.7 Sole proprietors ...... 34 2.3.8 Other investment income ...... 34 2.3.8.1 Rental income ...... 34 2.3.8.2 Income from forestry ...... 34 2.3.8.3 Income from real property ...... 35 2.3.8.4 Pension or other income based on voluntary pension insurances ...... 35 2.3.8.5 Benefi t from a life insurance policy ...... 36 2.3.9 General deductions, losses and defi cit in the category of investment income ...... 36 2.3.9.1 General deductions ...... 36 2.3.9.2 Voluntary pension insurance premiums ...... 37 2.3.9.3 Losses ...... 38 2.3.9.4 Investment income defi cit and credit for the defi cit against tax on earned income ...... 38 2.4 Income taxation of individuals: earned income ...... 39 2.4.1. Defi nition of earned income ...... 39 2.4.2. Exempt income ...... 40 2.4.3 Deductions and allowances ...... 43 2.4.4 Income spreading, training fund and sportsman’s fund ...... 45 2.5 Taxation of business profi ts, etc...... 47 2.5.1 Business profi ts and income from professional activities ...... 47 2.5.2 Chargeable income ...... 47 2.5.3 Dividend received by corporate bodies ...... 48 2.5.3.1 General ...... 48 2.5.3.2 Domestic situations ...... 49 2.5.3.3 Dividend is distributed by a company resident in an EU Member State ...... 49 2.5.3.4 Dividend is distributed by a company resident outside the EU area ...... 51 2.5.4 Exempt income ...... 52 2.5.5 Participation exemption for capital gains ...... 52 2.5.6 Allowable expenses ...... 54 2.5.7 Allocation ...... 57 2.5.8 Reserves and provisions ...... 61 2.5.9 Losses ...... 62 2.5.10 Tax incentives ...... 63 2.5.10.1 Incentive for the shipping industry ...... 63 2.5.10.2 Incentives for developing regions ...... 63

8 Contents

2.5.11 Contributions between afﬁ liated companies(group contribution) ...63 2.5.12 Change in a company’s form, mergers and divisions ...... 64 2.5.12.1 Change in a company’s form ...... 64 2.5.12.2 Mergers and divisions etc...... 65 2.5.13 Controlled foreign companies (CFCs) ...... 67 2.5.14 Taxation of real estate companies ...... 68 3 NET WEALTH TAXATION (CAPITAL TAX) ...... 71 3.1 Rate of tax ...... 71 3.2 Taxpayers ...... 71 3.3 Chargeable assets ...... 73 3.4 Valuation ...... 74 3.5 Deductions ...... 75 4 PREPAYMENT OF INCOME TAXES AND CAPITAL TAX ...... 77 4.1 General ...... 77 4.2 Withholding and prepayment register ...... 78 4.3 Preassessment ...... 79 4.4 Use of prepaid tax ...... 79 5 INHERITANCE AND GIFT TAX ...... 81 5.1 Rates of inheritance and gift tax 2005 ...... 81 5.2 Residence ...... 82 5.3 Inheritance tax ...... 82 5.3.1 Scope of application ...... 82 5.3.2 Credit for foreign inheritance tax ...... 83 5.3.3 Exempt persons ...... 83 5.3.4 Valuation and deductions ...... 83 5.4 Gift tax ...... 84 5.5 Provisions concerning the transfer of a farm or a business ...... 85 6 INTERNATIONAL ASPECTS OF INCOME TAXATION ...... 87 6.1 Residents ...... 87 6.2 Non-residents ...... 87 6.2.1 Source rules ...... 87 6.2.2 Taxation of non residents ...... 89 6.2.2.1 Final withholding tax ...... 89 6.2.2.2 Withholding tax for foreign employees ...... 91 6.2.2.3 Taxation on the basis of assessment ...... 92 6.3 Arrangements for avoiding double taxation ...... 93 6.3.1 Act on Elimination of International Double Taxation ...... 93 6.3.1.1 General ...... 93 6.3.1.2 Credit method ...... 93

9 Contents

6.3.1.3 Exemption method ...... 94 6.3.1.4 Procedure ...... 94 6.3.2 Double taxation agreements ...... 95 6.4 The arm’s length principle ...... 96 7 VALUE-ADDED TAX ...... 97 7.1 General ...... 97 7.2 Tax system ...... 98 7.3 Persons liable to tax ...... 98 7.4 Foreign enterprises ...... 99 7.5 Taxable transactions ...... 99 7.6 Exemptions ...... 100 7.7 Construction and services related to real property ...... 102 7.8 Taxable amount ...... 102 7.9 Tax rates ...... 103 7.10 Deductions ...... 104 7.11 Refunds ...... 104 7.12 Foreign trade ...... 105 7.12.1 Place of transactions ...... 105 7.12.2 Intra-Community acquisition and supply of goods ...... 108 7.12.3 Importation and exportation...... 109 7.12.4 Warehousing arrangements ...... 109 7.13 Tax procedure ...... 109 7.14 Invoicing ...... 110 8 EXCISE DUTIES ...... 113 8.1 Arrangement for suspending duty ...... 113 8.2 Taxpayers ...... 114 8.3 Time and rate of charge of duty ...... 114 8.4 Exemptions ...... 115 8.5 Travellers’ allowances ...... 116 8.6 Declaration and payment of excise duty ...... 117 8.7 Excise duty on manufactured tobacco ...... 117 8.8 Excise duty on alcohol and alcoholic beverages ...... 118 8.9 Excise duty on soft drinks...... 119 8.10 Excise duty on certain beverage packages ...... 120 8.11 Excise duties on energy products ...... 120 8.11.1 Excise duty on liquid fuels ...... 121 8.11.2 Excise duty on electricity and certain energy sources ...... 123 8.11.2.1 Electricity ...... 123 8.11.2.2 Coal, lignite, milled peat and natural gas ...... 125 8.11.2.3 Pine oil ...... 126

10 Contents

8.11.3 Refund of excise duties on energy products to energy intensive enterprises ...... 127 9 OTHER TAXES ANDOTHER TAX REVENUES ...... 129 9.1 Road traffi c taxes and other traffi c taxes ...... 129 9.1.1 General ...... 129 9.1.2 Car tax ...... 130 9.1.3 Vehicle tax ...... 132 9.1.4 Fuel fee ...... 133 9.1.5 Road taxes applicable to motor vehicles registered abroad ...... 133 9.1.6 Track tax ...... 134 9.1.7 Tonnage tax ...... 134 9.2 Municipal tax on real property ...... 135 9.3 Tax withheld at source from interest...... 136 9.4 Tax on insurance premiums ...... 136 9.5 Tax on dogs ...... 136 9.6 Tax on honorary titles ...... 136 9.7 Transfer tax ...... 137 9.7.1 General ...... 137 9.7.2 Transfer of real property ...... 138 9.7.3 Transfer of securities...... 138 9.8 Tax on lottery prizes ...... 140 9.9 Tax on waste ...... 140 9.10 Postal fee ...... 141 9.11 Excess profi ts of Veikkaus Oy(the Finnish National Lottery Ltd) and Raha automaattiyhdistys ry(the Slot Machine Association) ...... 142 9.12 Fire insurance levy ...... 142 9.13 Pharmacy fee ...... 142 9.14 Seamen’s welfare and rescue levy ...... 143 9.15 Oil waste duty ...... 143 9.16 Oil damage duty ...... 144 9.17 Game management fee and hunting licence fee ...... 144 9.18 Fishing management fee ...... 144 9.19 Forest management fee ...... 144 9.20 Channel fee (Fairway fee)...... 145 9.21 Plant breeding fee ...... 146 10 TAX ADMINISTRATION, PROCEDURE AND APPEALS ...... 147 10.1 Income and capital tax administration ...... 147 10.1.1 Organisation ...... 147 10.1.2 Administrative procedure...... 147 10.1.3 Appeals and advance rulings ...... 150

11 Contents

10.2 Other taxes ...... 152 10.2.1 General ...... 152 10.2.2 Administration, appellate court andadvance rulings ...... 152 10.3 Penalties ...... 153 10.4 Conﬁ dentiality ...... 153 11 THE STATUS OF THE PROVINCE OF ÅLAND ...... 157 APPENDIX 1 Rates of state income tax on earned income 2005 ...... 159 APPENDIX 2 Rates of state net wealth (capital) tax 2005 ...... 161 APPENDIX 3 Rates of inheritance and gift tax 2005 ...... 163 APPENDIX 4 Deductions and allowance 2005 (earned income) ...... 165 APPENDIX 5 Tax credits against state income tax 2005 ...... 169 APPENDIX 6 Withholding tax rates ...... 171 APPENDIX 7 Incentive for the shipping industry ...... 175 APPENDIX 8 Taxation of companies and their non-resident shareholders when there is no double taxation agreement between Finland and the state of residence of the shareholders ...... 177 APPENDIX 9 Glossary ...... 179 APPENDIX 10 Abbreviations and information concerning euro ...... 183 APPENDIX 11 Index ...... 185 APPENDIX 12 Addresses ...... 189 APPENDIX 13 The government’s proposal to parliament in the autumn 2005 ...... 191

12 1 Introduction

FINLAND

1 INTRODUCTION

1.1 Right of taxation and enactment of tax law According to the Finnish Constitution, the right of taxation lies with the State (central government), the municipalities (communes) and the local communities of the Evangelical- Lutheran and Orthodox Churches. Tax legislation is modelled along the lines of the tax legislation in the other Nordic (Scandinavian) countries.

1.2 Main sources and level of taxation The level of taxation in Finland is clearly above the average for the OECD countries. According to OECD Revenue Statistics, in 2002 the ratio of total taxes to GDP at market prices was 45.9 in Finland compared with 36.3 in the OECD area as a whole. The tax ratio was the fourth highest among OECD countries. Taxes in Finland are levied on behalf of the Government, the municipalities (local government), the Social Insurance Institution and various social security funds under some forty different headings. Payments to the local communities of the Evangelical-Lutheran and Orthodox Churches are not classiﬁ ed as taxes in the OECD’s statistics. The bulk of taxation – 70.8 per cent in 2002 – in Finland is derived from two categories of taxes: taxes on income, proﬁ ts and capital gains, on the one hand, and taxes on goods and services, on the other. In 2002 , the former category accounted for 40.6 per cent of total taxation and the latter for 30.2 per cent. The major part of the taxes on income – 77.0 per cent – was paid by the household sector. The share of income taxes paid by corporate bodies was 9.3 per cent of total taxes. According to OECD statistics, the share of social security contributions in Finland amounted to 26.6 per cent of total taxation in 2002 and was thus slightly higher than the average for OECD countries, 25.4 per cent.

13 1 Introduction

In 2003, the total tax revenue of the Government was 33,327 million euros, that of the municipalities 13,516 million euros and that of the social security funds 17,155 million euros. In terms of revenue, the most important taxes were the income and capital (net wealth) tax (12,433million euros) and value-added tax (12,455 million euros), both levied by the Government, and the communal (municipal income) tax, which accounts for most of the tax revenue of the municipalities. A further major source of tax revenue was the social security contributions paid by employers to the Social Insurance Institution and payments to the pension funds of pension insurance companies as well as to various funds and foundations organised by employers. In addition to the income and capital tax and value-added tax, which together accounted for 74.7 per cent of the Government’s total tax revenue, the Government received 4,825 million euros in the form of fourteen different types of excise duties. The Finnish pension system is based almost exclusively on statutory and compulsory pension schemes, which are a mixture of a basic public pension regime (the national pension scheme) and an employment based pensions insurance (the occupational pension scheme). The occupational pension scheme administered by pension insurance companies and pension funds and foundations organised by employers, received the bulk of the pension contributions totalling 12,847 million euros of which 9,699 million euros was paid by employers and 3,148 million euros by benefi ciaries, i.e. insured persons. Employers also paid 1,315 million euros pension contributions to the national pension scheme administered by the Social Insurance Institution. Other provisions for social security are made in the form of contributions to the national health insurance scheme and to the unemployment scheme. In 2003, employers’ contributions to the former were 949 million euros and to the latter 941 million euros. The contributions made by the insured to the unemployment scheme amounted to 108 million euros. The households’ contributions to the national health insurance totalled 995 million euros. In the OECD statistics these are classifi ed as income taxes paid by individuals and are therefore excluded from the fi gures for social security contributions.

14 1 Introduction

Budgetary cash revenue in 2003 (Source: Statistics Finland)

million euro % of total tax revenue State tax revenue 33 327 51.3 Taxes on income and capital 12 433 19.2 Income and capital (net wealth) tax 11 806 18.2 Inheritance and gift tax 411 0.6 Tax withheld at source from interest 216 0.3 Taxes on the basis of turnover 12 959 20.0 Value-added tax 12 455 19.2 Tax on insurance premiums 396 0.6 Pharmacy fee 108 0.2 Excise duties 4 825 7.4 on tobacco 593 0.9 on alcoholic beverages 1 363 2.1 on soft drinks 37 0.1 on fuels 2 832 4.4 Other taxes 2 191 3.4 Transfer tax 337 0.5 Car tax 1 207 1.9 Annual tax on diesel-driven vehicles 230 0.4 Tax on lottery prizes 120 0.2 Vehicle tax 243 0.4 Tax on waste 41 0.1 Track tax 13 0.0 Other tax revenues 853 1.3 Seamen’s welfare and rescue levy 1 0.0 Excess profi ts of Finnish National Lottery Ltd 370 0.6 Excess profi ts of Slot Machine Association 401 0.6 Game management fee, hunting and fi shing licences 20 0.0 Administrative fi nes and penalties 58 0.1 Oil waste duty 3 0.0 Tax revenue outside the State budget 66 0.1 Oil damage duty 9 0.0 Fire insurance levy 7 0.0 Emergency stocks fee 50 0.1 Municipal taxes 13.516 20.8 Communal (municipal income) tax 12.848 19.8 Tax on dogs 4 0.0 Municipal tax on real property 661 1.0 Other municipal taxes 3 0.0 Social security contributions to the Social Insurance Institution 3.259 5.0 Employers’ national pension contributions 1.315 2.0 Employers’ health insurance contributions 949 1.5 Benefi ciaries’ health insurance contributions 995 1.5 Pension insurance contributions 12.847 19.8 Employers 9.699 14.9 Employees 3.148 4.9 Unemployment insurance contributions 1.049 1.6 Employers 941 1.4 Employees 108 0.2 CHURCH TAX 800 1.2 TAXES AND FEES PAID TO EU 104 0.2 TOTAL REVENUE 64.902 100.00

15 16 2 Taxation of income

2 TAXATION OF INCOME

The Income Tax Act (1992) is a general act covering all types of income. However, the net income from agriculture and business proﬁ ts and income from professional activities are determined, for the purposes of income taxation, under the provisions of the Act on the Taxation of Farm Income (1967) and the Act on the Taxation of Business Proﬁ ts and Income from Professional Activities (1968), respectively. For a description of the special features of taxation in the Province of Åland, see Section 11.

2.1 Taxes imposed 2.1.1 State income taxes State income taxes are levied on the earned income and investment income of individuals and the estates of deceased persons. The tax on earned income is levied according to a progressive tax scale decided annually by Parliament. The rates of tax for the year 2005 are as follows:

TABLE 1. Rates of state income tax on earned income 2005 (euro)

Taxable income Basic tax amount Rate within brackets (%) 12.000 — 15.400 8 10.5 15.400 — 20.500 365 15.0 20.500 — 32.100 1.130 20.5 32.100 — 56.900 3.508 26.5 56.900 — 10.080 33.5

The state income tax on investment income is levied at a ﬂ at rate of 28 per cent.

17 2 Taxation of income

2.1.2 Communal tax

Communal (municipal income) tax is levied at ﬂ at rates on the earned income of individuals and the estates of deceased persons. Each municipal council sets the tax rate annually in advance for the following year on the basis of the municipal budget. For 2005 the rate varies between 16 and 21 per cent, the average being 18.30 per cent.

2.1.3 Church tax

Individuals who are members of either the Evangelical Lutheran Church or the Orthodox Church pay church tax. Local communities of these churches levy the church tax on the earned income of individuals and estates of deceased persons. Church tax is imposed at ﬂ at rates, which are set annually in advance for the following year in each community by the local ecclesiastical council and vary between 1 and 2.5 per cent, the average rate for 2005 being 1.32 per cent. The church tax is levied on the same taxable income as determined for communal tax purposes.

2.1.4 Corporate income tax

Corporate income tax is levied at a ﬂ at rate of 26 per cent.

2.1.5 Tax withheld at source from interest

The tax withheld at source from interest is a ﬁ nal tax levied at a rate of 28 per cent on interest received by resident individuals and domestic estates of deceased persons from domestic bank deposits and from bonds offered to the public for subscription.

2.1.6 Health insurance contribution, etc.

The health insurance contribution is collected for the Social Insurance Institution, which administers the health insurance scheme. The health insurance contribution is imposed at a ﬂ at rate set annually by Parliament. For 2005, the rate of the health insurance contribution is 1.5 per cent of taxable earned income. The health insurance contribution is levied on the same taxable earned income as that used when calculating communal tax. For 2005, the employees’ pension insurance contribution is 4.6 per cent but 5.8 per cent for persons aged 53 or more. The employee’s unemployment insurance contribution

18 2 Taxation of income

is 0.5 per cent and the co-owner’s 0.17 per cent. The contributions are deductible from the chargeable income when calculating the taxable income for state income tax on earned income, communal tax and church tax as well as for calculating social security contributions. Farmers, partners in partnerships, and sole proprietors are liable to the same contributions as employees but the percentage is substantially higher. These contributions are also calculated on the basis of earned income. For 2005, the private employers’ (including public utilities) national pension contribution is, according to the deprecation allowances, 1.366, 3.566 or 4.466 per cent. The public employers’ national pension contribution varies between 2.416 and 3.966 per cent. The average for all employers is 2.31 per cent. The private employers’ health insurance contribution is 1.6 per cent, while the public employers’ health insurance contribution varies between 1.6 and 2.85 per cent. The average for all employers is 1.69 per cent. The accident insurance contribution is on average 1.1 per cent and the group life insurance 0.08 per cent. The unemployment insurance contribution is 0.7 per cent of up to 840,940 euros of wages and salaries and 2.8 per cent of the excess (1.9 per cent for State owned business units). In the case of co-owners of enterprises the contribution is 0.7 per cent, the average being 2.17 per cent. Social security contributions payable by employers are calculated on the basis of salaries and wages. In the case of employers’ national pension contribution and health insurance contribution, salary and wages (excluding certain tax exempt expenses paid by the employer in connection with a period of employment abroad, see 2.4.2) which are exempt on the basis of the “six-month rule” (see 2.4.2), are taken into account. The private employers’ employment pension contribution is on average 16.8 per cent, in the case of short-term employments 16.9/18.1 per cent (people aged 53 or more/others) and in the case of certain artists 13.8/15 per cent (people aged 53 or more/others). The average contributions of the State and municipalities are 17.76 and 23.4 per cent, respectively. The entrepreneurs’ (farmers and sole proprietors) pension insurance contribution is 21.4 per cent or 22.6 per cent for persons aged 53 or more. The child allowance contribution is not levied in 2005.

2.1.7 Withholding tax on non-residents’ income

Most items of Finnish source income derived by non-residents are subject to a fi nal withholding tax at fl at rates of 15, 18, 28 or 35 per cent. Dividend, interest, royalty, income from employment and pension are the most common types of income that are subject to the fi nal withholding tax. For a detailed presentation, see 6.2.2.1.

19 2 Taxation of income

2.1.8 Withholding tax for foreign employees

Under the Act on Withholding Tax for Foreign Employees (1995) a withholding tax of 35 per cent is levied in lieu of communal tax and State income tax on earned income. For a detailed presentation, see 6.2.2.2.

2.1.9 Maximum combined rate of tax

If the aggregate (annual and chargeable) amount of state income taxes on earned income and investment income, state capital tax, communal tax and church tax and health insurance contribution exceeds 60 per cent of the taxpayer’s taxable earned income and investment income as determined for state income tax purposes, and including tax exempt dividend income (see 2.3.4), the amount of taxes payable is reduced to 60 per cent. The amount of state income taxes is the ﬁ rst to be reduced, if necessary by the full amount. If, after this, the combined rate of tax still exceeds the maximum, state capital tax is then reduced. The other taxes and social security contributions are always charged in full, even if the maximum rate is exceeded. The rule for determining the maximum combined rate of tax is only applicable to resident individuals and the domestic estates of deceased persons. The maximum combined tax rate for persons resident in Finland deriving pension from abroad is calculated as follows:

if a person resident in Finland derives pension from a foreign country, and the pension is subject to tax in Finland but under a double taxation agreement between Finland and the foreign country is taxable only in that country, and the person also derives other earned income which is subject to tax in Finland, and the aggregate amount of the Finnish income tax on the total earned income and the foreign income tax on the pension is higher than if the total earned income is taxable only, or may be taxed, in Finland, then the Finnish income tax is mitigated so that it corresponds to the income tax on the total amount of earned income derived only from Finland.

2.1.10 Recipients of tax revenue

As their names indicate, the state tax on earned income and the state tax on investment income are paid to the State. The communal tax and the church tax are paid to the municipalities and the local communities of the Evangelical-Lutheran or the Orthodox Church, respectively.

20 2 Taxation of income

Under the Tax Accounting Act the revenue from corporate income tax is distributed between the State, the municipalities and the local communities of the Evangelical- Lutheran or the Orthodox Church. For the year 2005 they receive 76.03 per cent, 22.03 per cent and 1.94 per cent of the tax, respectively. The latter two shares are then apportioned to the municipalities and the communities of the two churches according to fi xed shares, mainly based on the latest revenue statistics. The fi nal tax withheld at source from interest and the fi nal withholding tax on non- residents’ income as well as the withholding tax for foreign employees are paid to the State.

2.2 Taxpayers 2.2.1 Unlimited and limited tax liability

Individuals resident in Finland as well as resident corporate bodies and the estates of deceased persons are liable to tax on their entire income, whether derived from Finland or abroad (unlimited tax liability). Non resident individuals and corporate bodies are liable to tax on their income derived from Finland (limited tax liability). Interest derived from Finnish bonds, debentures and other mass instruments of debt, or from loans from abroad which are not considered as capital investment assimilated to the debtor’s own capital, as well as interest from deposits in banks or other ﬁ nancial institutions and from foreign trade credit accounts are exempt from income tax on the basis of internal legislation. If a person who is not resident in Finland, or a foreign corporate body or a partnership has a permanent establishment in Finland for conducting business, that person, corporate body or partnership is liable to income tax for all income attributable to that permanent establishment, whether derived from Finland or from abroad.

2.2.2. Residents and non-residents

An individual is deemed to be resident in Finland if he has his main abode in Finland or if he stays in Finland for a continuous period of more than six months. This rule implies that a person can be regarded as resident in Finland for part of the year and non-resident for the rest of the year. The stay in Finland may be regarded as continuous in spite of a temporary absence from the country. A resident national who has left Finland (and surrendered his place of main abode here, if any) is, however, considered to be resident in Finland even if he is not physically present in Finland for a continuous period of more than six months within any period of

21 2 Taxation of income

time until three years have elapsed from the end of the year in which he left the country, unless he can produce evidence that he has not maintained substantial ties with Finland during the tax year in question (the “three year rule”). Unless there is evidence to the contrary, a Finnish national is not deemed to be resident in Finland after the end of the three-year period. In addition, a Finnish national who takes up position at a Finnish diplomatic mission, consular post or special mission and who is not resident in the foreign country in question at the time when he commences the period of service, is deemed to be resident in Finland. Non-residents employed on board Finnish ships or aircraft are liable to tax only on wage income derived from work done on board and work done temporarily elsewhere for the ship or aircraft by the employer’s order, pension income which is directly or indirectly based on such wage income, as well as income derived from Finland. Foreign ships and aircraft leased with only a minor crew or without any crew (bare boat leasing) by a Finnish employer are considered to be Finnish for tax purposes. The Income Tax Act does not contain provisions deﬁ ning the meaning of “residence” with regard to corporate bodies but according to present practice a corporate body is regarded as resident in Finland if it is registered (incorporated) here or otherwise established under Finnish law. A general or limited partnership registered in Finland or otherwise established under Finnish commercial law is, following the same principle as applied in the case of corporate bodies, regarded as resident. The Income Tax Act contains express rules only on the residence of undistributed estates of deceased persons which are regarded as residents in Finland if the deceased was resident here at the time of death. A person who is resident in Finland for only a part of the year is taxed as a resident on income attributable to that part of the year and as a non resident on income attributable to the rest of the year.

2.2.3 Individuals

2.2.3.1 Married persons

Married persons are taxed separately both on earned income and investment income. If spouses run a business or a farm together, proﬁ ts from the business or income from the farm is apportioned to earned income and investment income (see 2.3.6). In such cases (excluding forestry income), both types of income are apportioned between the spouses. The apportionment of the earned income is determined on the basis of the labour contributed and of investment income on the basis of their shares in the net assets belonging to the business or farm. Both types of income are apportioned equally if no other evidence is presented.

22 2 Taxation of income

If spouses jointly practice forestry, the income from the forestry is taxed following the principles applied to partnerships for cultivating and holding real property (see 2.2.5). Persons who have married before the end of the tax year are regarded as spouses for the tax year in question. The provisions of the Income Tax Act relating to spouses do not apply where the spouses have lived the whole tax year apart or have moved to separate dwellings during the tax year in order to live permanently apart. The same applies in the case of a married couple where either of the spouses is a non-resident. Individuals living together in free union are, for the purposes of income taxation, considered as spouses if they have been married to each other previously or if they have had or are having a child together. As a general rule, deductions granted to each spouse are the same as those granted to single persons, although in areas such as interest and pension insurance deductions the marital status of the taxpayer may have a bearing on the taxation.

2.2.3.2 Minors

Minors, i.e. children under the age of seventeen, are taxed on their own income, separately from their parents.

2.2.4 Corporate bodies

The following entities are considered to be corporate bodies and as such separate taxable entities: the State and its institutions, the municipalities, joint municipal authorities, religious communities, limited companies, co operative societies, savings banks, investment funds, associations, mutual insurance companies, foundations, foreign estates of deceased persons, institutions or any other similar legal persons.

2.2.5 Partnerships and undistributed estates

General and limited partnerships established under commercial law, or other similar entities that are not based on commercial law (i.e. partnerships other than general or limited partnerships) that are formed by two or more persons (who may themselves be limited companies, partnerships or any other entities) for the purpose of conducting a business jointly on behalf of these persons (a “business partnership”) or cultivating or holding real property (a “real property partnership”), such entities are regarded as partnerships for tax purposes. However, joint ventures formed by two or more taxpayers engaged in business

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activity for performing a speciﬁ ed construction work or other similar work are not treated as partnerships. Partnerships are not regarded as separate taxable entities. The net income of a partnership is determined under the rules applicable to corporate bodies but is attributed to the partners according to each partner’s share in the partnership’s total income and must be taxed either as earned income or investment income. Resident partners of a non-resident partnership are taxed as if they were resident partners in a domestic partnership. Any losses of the partnership are deducted at the partner level. European Economic Interest Groupings are taxed as partnerships. A member’s share of the loss of the grouping is deducted from the annual income of the member in question. Undistributed resident estates of deceased persons are treated as separate taxable entities. However, if the estate is engaged in business, it is entitled to such treatment for a period of no more than three tax years following the year of death. After that period it is treated as a partnership.

2.2.6 Permanent establishments

For the scope of tax liability see 2.2.1. The term “permanent establishment” is defi ned in the Income Tax Act as a distinct place for conducting business of a permanent nature, or where special arrangements for conducting such business have been made. Examples given in the Act are: a place of management, a branch, an offi ce; an industrial plant, a factory, a workshop or a shop or any other permanent place for purchasing or selling. Other examples given are: a mine or other fi nding, a quarry, a peat bog, a gravel pit or any other similar place; in the case of sales of parcelled land or land which is going to be parcelled and whose sales are part of a business activity, the land itself; in the case of building contracts, a site of manifest building activity and, where a line service is in operation, the place for maintenance or repair of the enterprise or any other permanent and special place for the line service. If the assets of a permanent establishment in Finland cease to be assets of the permanent establishment, for example, they are transferred out of Finland, the market value of the assets must be included in the taxable proceeds of the permanent establishment. Where a corporate body has been founded in connection with a transfer of assets for the purpose of continuing the business activity of another a corporate body resident in another EU Member State and conducting business through a permanent establishment in Finland, that body is entitled to deduct the loss of the permanent establishment according to the general rules (see 2.5.9). For further details concerning permanent establishments, see 6.2.2.1 and 6.2.2.3.

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2.2.7 Exempt persons

The following entities are exempted from income tax: the Bank of Finland, the University of Helsinki, the Finnish Broadcasting Company Ltd, the Regional Development Fund Ltd, the Fund for Industrial Co operation Ltd (Finnfund), the Nordic Investment Bank (NIB), the Nordic Project Export Fund (NOPEF), the Nordic Development Fund, the Nordic Environment Finance Corporation (NEFCO), the Social Insurance Institution, employee investment funds, investment funds and unemployment funds, training funds and sportsmen’s funds the Government Guarantee Fund (a fund for securing stability and depositors’ claims in the deposit banks), the Finnish National Fund for Research and Development, and Ekokem Ltd (a company for treating hazardous waste). The State, the municipalities and religious communities are each liable to tax only in respect of business profi ts and income from real property used for other than public or non profi t-making purposes. As these entities do not pay tax to themselves, the tax rate is lower accordingly, i.e. for the State and municipalities 6.2322 per cent and for religious communities 5.7278 per cent. A municipality is not liable to tax in respect of profi ts derived from business conducted on its own area and real property situated on that area. Non-profi t-making organisations in the fi eld of education, science, arts, public defence, politics etc., are liable to pay corporate income tax – at the ordinary rate of 26 per cent – only in respect of their business profi ts. In addition, they are liable to corporate income tax on their income from real property used for other than public or non profi t purposes at a reduced rate of 6.2322 per cent (roughly corresponding to the aggregate of the shares of the tax distributed to the municipalities and the local ecclesiastical communities, see 2.1.10). Non-profi t-making organisations are granted exemptions from income tax on business profi ts and income from real property upon application (Tax Concession Non- profi t-making Organisations). Persons serving in Finland at foreign diplomatic missions, other similar representations or consular posts headed by career consular offi cers and persons serving in Finland as employees of the United Nations, its specialised agencies or the International Atomic Energy Association, as well as members of their families and their private servants who are not Finnish nationals, are, to a large extent, exempt from state income tax and communal tax. They are, however, liable to income tax with regard to any income derived from real property situated in Finland or income from letting a fl at held by virtue of shares in a Finnish residential housing company or other real estate company, as well as profi ts from a business carried on or income from professional activities performed in Finland, or income, including pensions, from employment in Finland not connected with their duties with the mission or post.

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2.3 Income taxation of individuals: investment income

2.3.1 The concept of income

Income subject to tax is deﬁ ned as the taxpayer’s annual receipts in money or money’s worth. In addition to this deﬁ nition, the Income Tax Act provides several examples of receipts regarded as chargeable income and of receipts not included in chargeable income. In applying tax legislation, the principle is that receipts are subject to tax unless there is explicit provision to the contrary. Thus the concept of chargeable income is very extensive. The income is taxable for the tax year in which it has been drawn by the taxpayer, in which it has been paid to the taxpayer’s account, and in which the taxpayer has received the income or the income is at his or her disposal. Capital gains are taxable for the year in which the sale or exchange or any other disposal took place. The tax is levied on net income; the expenses incurred in acquiring and maintaining income are deductible for the year in which they are paid. In certain cases the allocation principles of business taxation are also followed in the taxation of individuals.

2.3.2. Deﬁ nition of investment income

Investment income is deﬁ ned as the proceeds from capital, gains from the disposal of assets (capital gains) and other income yielded by assets. The Income Tax Act lists the following examples of investment income:

interest and rental income; interest income includes certain payments made by the original debtor of a debt to a guarantor or a surety of the debt if the guarantor or surety has deducted the corresponding amount in his taxation; dividend (for the most part, see 2.3.4); income from forestry; distributions by investment funds; income from patents or copyrights if the patents or rights have been inherited or received under a will or acquired for a ﬁ nancial consideration; income from the sale of materials taken from the ground. a money loan (shareholder loan) outstanding at the end of a tax year, if the loan has been given by a company to an individual during a tax year, and if the individual, members of his family or they together directly or indirectly control at least 10 per cent of the shares or the voting power in the company.

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In addition, the category of investment income includes the investment income share of certain types of income, such as: proﬁ ts from business (income from a partnership or the income of a sole proprietor); agricultural income.

The share is calculated annually on the basis of the net wealth of an enterprise and is at most either 10 or 20 per cent of the net wealth.

2.3.3 Interest income

Interest income is investment income. However, it is not taxed as investment income, if it is subject to the tax withheld at source from interest which is a ﬁ nal tax (levied at the rate of 28 per cent on interest on bank deposits and on various bonds, see 2.1.5 and 9.3).

2.3.4 Dividend

Taxation of dividend was reformed in 2004. The new rules are applied as of 1 January 2005. For company taxation, see 2.5.3.

2.3.4.1 Dividend received from publicly listed companies

In the case of individual shareholders 70 per cent of dividend from publicly listed companies is taxed as investment income at a rate of 28 per cent and 30 per cent is tax exempt. For 2005 a transitional rule is applied: 57 per cent of dividend is taxed as investment income at a rate of 28 per cent and 43 per cent is tax exempt. Dividend from a publicly listed company is deﬁ ned as dividend from a company the shares in which are, at the time of making decision on the distribution of dividend, publicly traded in a way referred to in the Finnish Securities Markets Act or traded on some other Finnish or foreign regulated market which is supervised by public authorities.

2.3.4.2 Dividend received from non-listed companies

An annual return of 9 per cent is calculated on the value of the shares in non-listed companies. The dividend is tax exempt up to an amount of 90,000 € of such return. The amount of such dividend that exceeds 90,000 € is taxed by applying 70/30 per cent rule

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and so 70 per cent of the dividend is taxed as investment income at a rate of 28 per cent and 30 per cent is tax exempt.

EXAMPLES: 1. Dividend received 80,000 euros Calculated return 100,000 euros, 80,000 euros is tax exempt. 2. Dividend received 100,000 euros Calculated return 100,000 euros, a) 90,000 euros is exempt b) 70 per cent of 10,000 euros or 7,000 euros is taxed as investment income (rate of 28 per cent) c) 30 per cent or 3,000 euros is tax exempt.

The amount that exceeds the 9 per cent return is also taxed by applying 70/30 per cent rule, but now 70 per cent is taxed as earned income (progressive income tax scale).

3. Dividend received 10,000 euros Calculated return 6,000 euros, a) 6,000 euros is exempt b) 70 per cent of 4,000 euros or 2,800 euros is taxed as earned income (progressive income tax scale) c) 30 per cent of 4,000 euros or 1,200 euros is tax exempt. 4. Dividend received 140,000 euros Calculated return 100,000 euros, a) 90,000 euros is tax exempt, b) 70 per cent of (100,000–90,000) 10,000 euros = 7,000 euros is taxed as investment income (rate of 28 per cent) c) 30 per cent of 10,000 euros or 3,000 euros is tax exempt, d) 70 per cent of 40,000 euros or 28,000 euros is taxed as earned income (progressive income tax scale) e) 30 per cent of 40,000 euros or 12,000 euros is tax exempt.

The value of the shares is deﬁ ned as the mathematical value based on the Net Wealth Tax Act. If a company’s shareholder who is not regarded as an employee of the company (a person in a leading position) has used a ﬂ at belonging to the company’s assets as his own

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or his family’s dwelling, the value of the ﬂ at is deducted from the value of shareholder’s shares when the annual return is calculated. If a company conducting business gives a money loan which is a part of the company’s assets, to a shareholder or to a member of his family, and the shareholder alone or together with members of his family control at least 10 per cent of the shares or the voting power in the company, the loan is deducted from the value of his or his family members’ shares when the annual return is calculated. In 2005 a transitional rule is applied: 57 per cent of dividend is taxed as investment income at a rate of 28 per cent and 43 per cent is tax exempt. In the case of disguised dividend 70 per cent of the dividend is taxed as earned income (progressive income tax scale) and 30 per cent is tax exempt.

2.3.4.3 Dividend received from non-resident companies

Dividend received from a non-resident company is taxed in the same way as domestic dividend (see 2.3.4.1 and 2.3.4.2) if:

1) the distributing company is a company mentioned in Article 2 of the EU Parent– Subsidiary Directive (90/435/EEC, for details, see 2.5.3.3), or 2) between Finland and the country of residence of the distributing company there is in that tax year in force a tax treaty, which is applied to the dividend distributed by that company.

The only difference is that the annual return is calculated (according to the Net Wealth Tax Act) on the basis of the market value of the shares at the end of the year preceding the year in which the dividend is distributed. In all other cases dividend is fully taxable. Thus it is taxable income if it is distributed by a company resident in a non-EU Member country with which Finland does not have a tax treaty in force. It is also taxable if a tax treaty cannot be applied, for instance on the basis of a provision limiting the beneﬁ ts of the treaty. Moreover, it is taxable if the distributing company is not a company mentioned in Article 2 of the EU Parent–Subsidiary Directive but in that case also a tax treaty may be applicable and thus the dividend may be taxed in the same way as domestic dividend. Also in this case in 2005 a transitional rule is applied: 57 per cent of dividend is taxed as investment income at a rate of 28 per cent and 43 per cent is tax exempt.

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2.3.4.4 Other comparable income

The rules concerning dividend are also applied to interest paid on the participation capital of a co-operative society, proﬁ t paid on the basic reserves of a savings bank, interest paid on the investment in the additional reserves of a savings bank, interest paid on the guarantee capital of a mutual insurance company or insurance association. For individuals and estates of deceased persons 70 per cent of such income is taxable (as investment income) if the amount of such income exceeds 1,500 euros in a tax year. If such income received by the taxpayer is business income or agricultural income the tax exempt part is attributed to personal income, agricultural income and business income in that order. Substitute dividend is treated in the same way as ordinary dividend.

2.3.5 Capital gains

Capital gains are regarded as investment income in all cases. The taxable capital gain is calculated by deducting the acquisition costs and sales costs from the sales price. A minimum deduction of 20 per cent of the sales price is applied. If the property has been held for at least ten years, the minimum deduction is 40 per cent. Capital gains are tax-exempt in the following case:

a taxpayer disposes of real property used in agriculture or forestry, a share in a general or limited partnership or shares in a company giving the right to at least 10 per cent ownership in the company; the real property or shares have been owned for more than ten years by the taxpayer or the taxpayer and the person from whom the taxpayer received the property without a ﬁ nancial consideration; the recipients are certain close relatives.

If the relative concerned disposes of the real property or shares to another person within fi ve years of the date of acquisition, the exemption is lost. The exchange of a convertible promissory note for shares and the exchange of shares are not deemed to be alienations of assets. The gain arising from a standardised forward contract is treated as capital gain (and the corresponding loss is deductible). A capital gain derived from the sale of shares in a company carrying the right to the enjoyment of a fl at or the sale of a house which for at least two years prior to the sale has served uninterrupted as the owner’s or his family’s permanent home, is entirely exempt from tax if the fl at or house is used mainly (at least 50 per cent) for residential purposes.

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If less than 50 per cent was used in such a way, the exemption is correspondingly partial (and thus also applied to co-owners). The annual gain from the disposal of household effects is exempted if it does not exceed 5,000 euros. Capital gain derived by an individual or an estate of a deceased person is not taxable income, if the aggregate transfer price of property disposed of in a tax year are at most 1,000 euros. If real property is alienated by an individual either to the State, a municipality or a joint municipal authority, or if the recipient of the real property would have had the right to expropriate the property, the acquisition cost is deemed to be 80 per cent of the proceeds. The acquisition cost of a share that the taxpayer has acquired earlier is not taken into account when the corresponding cost of a subscription right, convertible bond, option loan or an option is determined. As far as the computerised trading system (trading in book-entry system) of the Helsinki Stock Exchange is concerned, the securities, mostly shares, are deemed to be sold in the order in which they have been acquired unless otherwise shown. This rule is also applied to alienation of shares in an investment (or mutual) fund. Special rules are applied in situations where the property has been received partly or wholly as a gift or where such property is forwarded. If the property has been received without fi nancial consideration, the acquisition cost is the value which has been used in determining inheritance and gift tax. However, if the benefi ciary disposes of such property before one year has passed after the donation, the donor’s acquisition cost is deemed to be also the benefi ciary’s acquisition cost. If the price used in the alienation of a property is 75 per cent or less of the market value, the alienation is partly an assignment for consideration, partly a gift. The acquisition cost of the part that is deemed to be assignment for consideration is the share of the whole acquisition cost which corresponds to that assignment. Capital losses may only be set off against capital gains arising in the same year and the following three years. Unlike capital gains, they are not taken into account when calculating the balance (i.e. defi cit) in the category of investment income (for further details, see 2.3.9.4). Losses arising from the disposal of the permanent home are not deductible if the capital gain from such a disposal would have been tax exempt (see above). Losses arising from the disposal of household effects are not deductible. If the aggregate transfer price of a property disposed of in a tax year is at most 1,000 euros and if the aggregate acquisition cost of the property is at most 1,000 euros, losses arising from those disposals are not deductible. In the case of individuals and undistributed estates annual foreign exchange gains not relating to the acquisition of taxable income are tax exempt up to 500 euros.

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2.3.6 Investment income share of agricultural income and business proﬁ ts

Agricultural income and business proﬁ ts (partnerships and sole proprietors) are calculated separately and the losses of previous years are deducted correspondingly separately. The results are then apportioned to investment income share and earned income share. The maximum investment income share is 20 per cent of the net assets of the business or agriculture at the end of the year preceding the tax year. However, taxpayer may claim that the investment share is at most 10 per cent of the net assets. In the calculation of the net assets, the values determined by the Net Wealth Tax Act are mainly used. When calculating the investment income share of agricultural income or business proﬁ ts, 30 per cent of the wages and salaries subject to withholding of tax and paid (by farmers, partnerships or sole proprietors) in the 12 months preceding the end of the tax year is added to the net assets.

2.3.6.1 Agricultural income

The taxation of agricultural income is governed by the Act on the Taxation of Farm Income. Farm income is deﬁ ned as the total net income from agriculture including auxiliary activities which do not constitute a separate business. Farm income is mainly determined according to similar principles as those applied in determining business proﬁ ts. In the case of dividend 70 per cent of all dividend (the character of the distributing has no relevance) received on the basis of property being part of agricultural assets is taxable. Capital gains from securities relating to a farmer’s agricultural assets form the minimum of investment income share. Agricultural assets do not include cash and claims. Certain other assets such as gravel and sand pits are also excluded if they are used for non-agricultural purposes.

2.3.6.2 Income from partnerships

As mentioned in 2.2.5 the net income of a partnership is attributed to the partners according to each partner’s share in the partnership’s total income. It is then taxed either as earned income or investment income. The main rule is that at most 20 per cent of the partner’s share in the net assets of the partnership is investment income. This rule is applied to business income and agricultural income. If a business partnership has income other than business income, it is calculated separately. Partner’s share of the other income is taxed wholly as investment income.

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Capital gains from real property and securities belonging to the ﬁ xed assets of a business partnership form the minimum of the investment income share. In business partnerships losses are deducted at the partnership level. In business partnerships dividend is treated as follows:

1) When the business income or agricultural income of a business partnership is calculated, dividend received by the partnership is considered to be totally included in that income. 2) When that income is attributed to a partner, the tax exempt (on the basis of Act on the Taxation of Business Proﬁ ts and Income from Professional Activities or the Act on the Taxation of Farm Income) part of the dividend included in his share is deducted from his share. If the share is not big enough, the deduction is made from the share within the same income source and in the same partnership in the ten subsequent years when income arises. The deduction is made before calculating the amounts of investment share. 3) When the other income of a business partnership is determined, dividend received by the partnership is not taken into account. Dividend is attributed to a partner according to his share in the partnership’s income and dividend is deemed to be his income according to those rules of Income Tax Act which are applied to the partners.

Remuneration paid at the normal going rate to a partner for services rendered to the partnership is deductible from the partnership’s income (and taxed as the income of the partner). When property or rights are used by a partner for investment in a partnership, this investment must be valued at the market price in the taxation of both the partner and the partnership. When real property, buildings or securities are transferred from a partnership to its partner (a “transfer to private use”) the market price must be applied (regulated reorganisations are excluded from this provision). If the transfer involves other assets, services or benefi ts, whichever is the lower, the book value or the market value, must be applied. These principles are also applied whenever a partnership is dissolved. If the assets of a business partnership include a fl at used as a dwelling of a partner or his family, the value of the fl at is deducted from the partner’s share in the net assets. A loan taken out by a general partner in order to acquire a share of a general or limited partnership is deducted from the general partner’s share in the business assets of the partnership. The interest on such a loan is deducted from the general partner’s business profi ts share from a business partnership before calculating the amount of investment share. Claims from partners are not deemed to be business assets.

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In real property partnerships losses are attributed to the partners. A partner’s interest expenses relating to agricultural activity and his losses from the partnership from previous years are deducted before calculating the investment income. If a real property partnership has income other than income from agriculture, the partner’s share of the other income is taxed wholly as investment income.

2.3.7 Sole proprietors

Capital gains from the disposal of real property and securities belonging to the ﬁ xed assets of a sole proprietor form the minimum of investment income share. The use of a replacement reserve lowers the minimum.

2.3.8 Other investment income

2.3.8.1 Rental income

Rental income is taxed as investment income.

2.3.8.2 Income from forestry

The taxpayer is nowadays (the last tax year for taxation on the basis of estimated forestry income is 2005) liable to pay tax on actual income, in other words income from the sale of timber which is deemed to be investment income. In order to calculate the investment income share, the value of logging and hauling work carried out by the farmer and his family is deducted from the sales price. An individual, an estate of a deceased person, or a real property partnership whose members are individuals or estates of a deceased person are entitled to a forest deduction before expenses incurred in acquiring and maintaining income from forestry are deducted. The deduction is at most 40 per cent of the annual investment income from the forestry. During the period of ownership such a taxpayer has a right to deduct at most 50 per cent of the acquisition cost of the forest. The annual minimum deduction is 1,500 euros. The above-mentioned persons are also entitled to form a cost reserve on the basis of investment income from forestry if the forest is part of a farm and is not used as part of a business. The reserve is at most 15 per cent of such income after the forest deduction has been made. The reserve is taxed as income for one or more of the subsequent tax years (at the latest for the sixth year) depending on the geographical area in which the farm is located.

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The deductible expenses in this form of taxation include all the necessary costs of practising forestry.

2.3.8.3 Income from real property

The Income Tax Act does not operate with the concept of income from real property (except in the case of non-proﬁ t-making organisations, see 2.2.7). What may elsewhere be understood as residual income from real property, may, in Finland, be treated as business proﬁ ts or rental income or income from agriculture or forestry. See also 2.5.14 concerning Finnish real estate companies and their taxation.

2.3.8.4 Pension or other income based on voluntary pension insurances Pensions and other payments paid on the basis of a voluntary pension insurance (supplementary personal pension scheme) taken out by a taxpayer or his spouse are taxable investment income. Also family pensions are investment income, if the beneﬁ ciary is the policyholder’s direct heir, spouse or spouse’s direct heir. Pensions based on a single- premium insurance are earned income. A voluntary pension insurance means old-age pension insurances and family pension insurances as well as disability pension insurances and unemployment insurances relating to these insurances. Pensions paid on the basis of voluntary pension insurances must be paid periodically half-yearly or more often during the remaining lifetime of the policyholder or beneﬁ ciary or during at least two years. The amount paid is deemed to be investment income and increased with 50 per cent, if:

the pension is paid during a period shorter than two years or the paying of the pension as an old-age pension starts before the insured person is 62 years old or a redemption takes place before the age of 62 and the reason for the redemption is some other personal circumstance relating to the insured person than his at least one year long unemployment or his permanent disability, death of his spouse or divorce.

The increase is not imposed to the extent that the taxpayer shows that the premiums were not deducted in taxation in Finland.

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2.3.8.5 Beneﬁ t from a life insurance policy

Benefi t from a life insurance policy is taxable investment income. Besides savings, the benefi t also covers surrender price and refund of premiums. Only the yield of a life insurance is taxable if the compensation is paid as a lump-sum or in several instalments within less than two years after the insured has reached certain age and the compensation is in both cases paid to the policyholder when he is the insured person, or to his spouse, the policyholder’s direct heir in ascending or descending line, adoptive child and his direct heir in descending line, foster child or spouse’s child. Benefi t from a life insurance policy is investment income even when the insurance has been taken out by the employer of the insured person. If the insurance contract covers several insurances the premium is attributed to different types of insurances on the basis of actuarial criteria. The yield of a life insurance is calculated by deducting from the compensation the total amount of premiums. The total amount of premiums covers only premiums for one single endowment insurance contract. If the insurance has been taken out by the employer of the insured person the amount to be deducted is the amount which is considered to be the insured person’s salary or wages.

2.3.9 General deductions, losses and deﬁ cit in the category of investment income

2.3.9.1 General deductions

In addition to the deductions mentioned above in the description of the investment income from different sources, a taxpayer is entitled to deduct from investment income all expenses incurred in acquiring and maintaining such income (natural deductions). Expenses incurred in the management of securities, shares and other similar property may be deducted for the part that exceeds 50 euros in the tax year. The amount of 50 euros is deemed cover these expenses also to the extent that the property or the income it has yielded is not taxable. The taxpayer has a right to deduct his interest expenses only from investment income. The interest expenses are deductible if the debt is related to the acquisition of taxable income or the acquisition or repair of the taxpayer’s or his family’s permanent dwelling. Dividend income is deemed to be related to the acquisition of taxable income (even though the dividend is partly tax-exempt). Taxable income does not include a shareholder loan which has been deemed to be a taxpayer’s investment income (see 2.3.2). However, the taxpayer has a right to deduct as an expense incurred in acquiring and maintaining investment income the amount which has been considered to be such income as a

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shareholder loan (see 2.3.2 and 2.3.4, last paragraph) and which has been paid back no later than in the ﬁ fth tax year after the year in which the loan was taken out. Deductible is also the interest on study loans guaranteed by the Finnish Government or the Provincial Government of Åland or study loans guaranteed or granted by an EEA Member State’s statutory body which is a part of the public study grants system. The amount of deductible interest is unlimited. Interest on a loan related to a voluntary pension insurance is not deductible. The right to deduct interest expenses is also in certain cases applied to interest paid by a guarantor or a surety. The taxpayer has a right to deduct exchange losses on foreign currency debts taken for acquiring or maintaining income as natural deductions (for corresponding gains, see 2.3.5). Exchange losses relating to debts taken for acquiring income which is subject to the tax withheld at source from interest are not deductible.

2.3.9.2 Voluntary pension insurance premiums

A taxpayer is entitled to deduct annually at most 5,000 euros voluntary pension insurance premiums. However, the maximum amount is 2,500 euros, if the taxpayer’s employer has paid the premiums for a voluntary pension insurance taken out by him for his employee. This maximum also applies to insurances taken out by a partnership for its partner and by a company for its leaders. The deduction right concerns an insurance taken out by the taxpayer or his spouse in which the taxpayer is the insured person. A further requirement is that according to the insurance contract the paying of the pension as an old-age pension starts at the earliest when the insured person is 62 years old and that the insurance cannot be redeemed on other personal circumstances relating to the policyholder than his at least one year long unemployment or his permanent disability, death of his spouse or divorce. Premiums paid for a lump-sum pension insurance are not deductible. Premiums for a voluntary pension insurance issued by an insurance institution which is not resident in an EEA Member State or doesn’t have a permanent establishment in such a State are not deductible. However, if the insured person moves into Finland and has not been resident in Finland in the fi ve years preceding the year of his removal, he is entitled to deduct the premiums for the year of removal and three following years if the premiums are based on an insurance taken out at least one year before the removal. Voluntary pension insurance premiums are deducted from the investment income after natural deductions, interests and losses have been deducted. If the total amount of deductions is higher than the total amount of investment income the taxpayer is entitled to form a separate investment income defi cit (a separate deduction). A loss cannot be confi rmed on the basis of these premiums.

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2.3.9.3 Losses

The concept of loss in the current tax system has several meanings. The loss of earlier tax years in the category of investment income is deducted from the investment income of the tax year according to the carry forward principle during the ten years following the loss year. Losses from business proﬁ ts or agricultural income sources are deducted from the investment income of the same tax year if the taxpayer or, in the case of spouses, both spouses so demand; otherwise the losses are carried forward for ten years and set off against income from the same source.

2.3.9.4 Investment income deﬁ cit and credit for the deﬁ cit against tax on earned income

If the amount of natural deductions, deductible interests, earlier losses and losses for the tax year from business profi ts and sources of agricultural income which the taxpayer demands to be deducted, exceeds the amount of investment proceeds for the tax year, the excess is the defi cit in the category of investment income. A taxpayer is entitled to a credit for the defi cit against his income tax on earned income according to the following rules:

the credit is 28 per cent of the defi cit up to 1,400 euros; the amount is increased by 400 euros if the taxpayer or the spouses have supported a minor during the tax year and by 800 euros if they have supported two or more minors; a credit which is due to premiums paid for a voluntary pension insurance are deductible irrespective of the limits in euros; the maximum amounts in euros are not applied in 2005–2009 to the credit for the investment income defi cit to the extent that the credit is due to interest on a loan used for acquiring the shares of a entrepreneur–shareholder or to a paid back shareholder loan; if the taxpayer had been granted the credit for an owner-occupied dwelling under the Income and Capital Tax Act (1988) and this credit would be bigger than the ordinary credit for the defi cit, the former is the minimum credit for the defi cit; the rate of the credit is increased by two percentage points (from 28 per cent to 30 per cent) on the part of the defi cit that is due to interest on a loan which the taxpayer has taken for the acquisition of his fi rst dwelling; the credit is deducted from the state income tax on earned income for the same tax year after the disability credit and the child maintenance credit; the maximum credit is 75 per cent of the overall credit; the excess is deducted proportionately from the state tax, communal tax, employees’ health insurance contribution and church tax;

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in the case of spouses, the deﬁ cit can also be deducted from the income tax of one of the spouses if the other has no investment income.

The amount of the defi cit for which credit cannot be given is converted into a loss for the tax year and, as such, can be carried forward and deducted from investment income over the next ten years (thus effectively becoming a loss for earlier tax years, see above 2.3.9.3). See also the last paragraph of 2.3.9.2 concerning a separate investment income defi cit which is usually treated in the same way as the ordinary investment income defi cit and the corresponding credit.

2.4 Income taxation of individuals: earned income 2.4.1 Deﬁ nition of earned income Earned income is deﬁ ned as any income other than investment income. This category of income includes:

salaries and wages (including fringe beneﬁ ts) and pensions; insurance compensation paid on the basis of a personal insurance other than life insurance or a voluntary individual pension insurance; insurance compensation paid on the basis of a voluntary pension insurance taken out by the employer; premiums paid by the employer for a savings insurance or a voluntary pension insurance, which he has taken out for his employee, are the latter’s taxable earned income but in the case of a voluntary pension insurance they are taxable earned income only if their aggregate amount in a tax year exceeds 8,500 euros (if the taxpayer’s insurances have been taken out by several employers all premiums are included in the maximum amount); this rule also applies to insurances taken out by a partnership for its partner and by a company for its leaders; premiums paid by the employer for a voluntary pension insurance taken out for the employee are taxable earned income without limitations if the insurance has been taken out in an insurance institution which is not resident in a EEA Member State and doesn’t have a permanent establishment in such a State; however, if the insured person has moved into Finland and has not been resident in Finland in the ﬁ ve years preceding the year of his removal, premiums of less than 8,500 euros paid for the year of removal and three following years are not taxable earned income if the premiums are based on an insurance taken out at least one year before the removal;

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the earned income share of business income (including private entrepreneurs) and income from agriculture as well as the earned income share of income from partnerships; the earned income share of dividends distributed by non-listed companies (see 2.3.4.2) and disguised dividend; scholarships and awards; 80 per cent of the distributions made by employee investment funds; royalties and other similar remuneration in respect of copyrights, if these rights are a consequence of a taxpayer’s own activity.

2.4.2 Exempt income

The Income Tax Act deﬁ nes the following items of income, inter alia, as exempt income:

certain pension schemes and welfare benefi ts; amounts received as maintenance for a child; alimony received from a separated or divorced spouse on the basis of a legally binding commitment or obligation; major national and international artistic awards which are annually named on an application in advance; inheritances and gifts (for inheritance and gift tax, see section 5); scholarships or other support received for studies, scientifi c research and artistic or sporting activities, subject to certain limitations; shares derived by a benefi ciary in the income of the domestic estate of a deceased person treated as a separate taxable entity; distributions of profi t to the partners of a partnership over and above the amount that has been taxed as the partners’ income (see 2.2.5); salary or wages derived by a resident individual from employment abroad lasting for a continuous period of at least six months (the “six month rule”); the exempted pecuniary salary or wages (excluding certain tax exempt compensations paid by the employer in connection with an employment abroad) are taken into account when calculating the health insurance contribution; this rule is not applicable if the state where the taxpayer performs his duties of employment does not have a primary right to tax the salary or wages under a double taxation agreement between Finland and

40 2 Taxation of income

that state; the rule does not apply to persons employed by the Government, a Finnish municipality, a domestic statutory body or Finpro (an association for speeding up the internationalisation of Finnish businesses) or persons working on board Finnish ships or aircraft; for each month of employment abroad, the employee may visit Finland for a maximum of six days without forfeiting the exemption; the exemption contains force majeure clauses; the “six month rule” is not applied to earned income which has been received on the basis of a share issue under market value or on the basis of an employee option scheme; however, it is applied also in these cases, if 1) between Finland and the state where the work is done there is in force a tax treaty and the income is taxed in that state as income from employment, 2) the taxpayer gives a suffi cient account that he has brought the existence of these benefi ts to the attention of the tax authorities of that state; certain compensation for specifi c expenses paid to persons serving at Finnish diplomatic missions or consular posts and to persons employed by the Finnish Foreign Trade Association; remuneration paid by the United Nations for expert tasks carried out abroad; remuneration including pension paid by the State to non-residents employed by Finnish diplomatic missions or consular posts if the non-resident is not a Finnish national (locally employed persons); however, pension is not exempt if the decision concerning its payment was made before 1 January 1996 or if the pensioner’s state of residence cannot tax the pension under a double taxation agreement between Finland and that state; certain expenses paid by the State, the EU Commission, an international organisation or any other administrator of crisis management operation to civil persons participating in such an operation; certain compensation for specifi c expenses paid to Members of the Finnish Parliament or to Members of the European Parliament, to national experts (including those working with the development of border regions) serving with the EU Commission and members of the Committee of Regions; certain expenses paid by the employer in connection with an employment abroad or a taxpayer’s (and his family’s) removal and travel expenses, the expenses for children’s education, ordinary expenses for private servants and certain expenses for dwelling; income from work for an intergovernmental meeting held in Finland if the employee is a non resident foreign national; special subsidy paid to immigrants; indemnifi cations, if they are not received in lieu of taxable income; lump-sum compensations on the basis of the insured person’s death and paid to his spouse and certain other close relatives, if the compensations are not received in lieu

41 2 Taxation of income

of taxable income; compensations for material damages are tax exempt if they are not received in lieu of taxable income; daily allowances and travelling allowances (the maximum exempt allowances are fi xed annually by the National Board of Taxes); 20 per cent of the distributions made by employee investment funds; commuter transport provided by the employer; benefi ts from a general health service programme provided by the employer (including temporary nursing of sick children organised by the employer for a maximum period of four days and subject to certain conditions); customary and reasonable staff discounts on goods and services; the benefi t arising from a low-interest loan received from the employer and the benefi t from the right or option to purchase shares in the employing company at a reduced price; both benefi ts are subject to detailed restrictions concerning the interest rate and purchase price discounts; the income from options in connection with an employment relationship (usually options for purchasing shares in the employer company) is taxed as the earned income of the original recipient of the option also when the recipient has donated the option to a third person; recreational or leisure time activities arranged by the employer and including ”gym vouchers” paid by the employer; benefi t derived by an employee from the private use of a communication line arranged for work; strike pay up to 16 euros a day; income from certain natural products (berries and mushrooms, plants for human consumption and medicine) other than employment income; in the case of individuals and undistributed estates the annual aggregate amount of exchange rate profi ts (which are not related to any income earning activity) up to 500 euros; in the case of persons travelling on assignment of a non profi t-making organisation and even if they are not employed by the organisation or do not receive any salary or wages for the work relating to that trip, compensation paid by the organisation for travel expenses up to 2,000 euros in a calendar year, daily allowances for 20 days in a calendar year, and accommodation expenses.

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2.4.3 Deductions and allowances

A. The taxpayer is allowed to deduct from chargeable income all expenses incurred in acquiring and maintaining such income (“natural deductions”). The following items, inter alia, are considered to be natural deductions:

wages and salaries, and other remuneration paid at the normal going rate (excluding payments to the taxpayer’s spouse or his children under 14 years of age); an amount paid by a partnership to a partner or by an undistributed estate of a deceased person to a benefi ciary as a salary at the normal going rate in return for activities performed on behalf of the partnership or estate; pensions paid to former employees; membership fees paid to employers’ organisations or trade unions; payments to unemployment funds; travelling expenses from the place of residence to the place of employment using the cheapest means of transport if it is between 500 and 4,700 euros; outlays on professional literature, research equipment and scientifi c literature, and expenses incurred in scientifi c or artistic work (unless compensated by scholarships); obligatory contributions to the farmers’ pension institution, accident insurance premiums and collective life insurance premiums if they relate to the investment income share of forestry; municipal tax on real property relating to the taxpayer’s acquisition of income.

Non-deductible expenses are those incurred in acquiring tax-exempt income, as well as expenses related to the taxpayer’s living costs including rent for the taxpayer’s ﬂ at and expenses for household management and child care. However, some expenses which are considered to be living costs, give right to the credit for domestic work, see Appendix 5. Also expenses incurred in acquiring dividend income are deductible. Expenses incurred for the purpose of acquiring or maintaining income which is exempt under a double taxation agreement are not deductible. This rule also applies when the expenses would otherwise be deductible (as is usually the case) under the Income Tax Act, the Act on the Taxation of Farm Income or the Act on the Taxation of Business Proﬁ ts and Income from Professional Activities. In addition to natural deductions, the taxpayer may claim deductions against the aggregate amount of his or her net earned income (to be made from the earned income after natural deductions). For maximum deductions and more detailed instances, see Appendix 4.

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B. The following deductions are allowable in both state income taxation and municipal income taxation:

employees’ obligatory pension insurance contributions and the unemployment insurance contribution; this rule is also applicable to such pension insurances taken out by sole proprietors and farmers which are not obligatory due to the small amount of the income or the size of the farm and to corresponding foreign pension insurances (see Appendix 4 for further details); a taxpayer is entitled to deduct from his earned income (after natural deductions) premiums paid to a supplementary collective pension benefi ts system organised through a pension fund, pension society or an insurance company; the deduction is at most 5 per cent of the salary or wages paid to the taxpayer by the employer who has arranged the benefi ts, but not more than 5,000 euros and not more than the amount paid by the employer for the supplementary pension benefi ts; moreover, the pension may be paid as an old-age pension at the earliest when the insured person is 60 years old (for further details see Appendix 5); premiums for a voluntary pension insurance issued by an insurance institution which is not resident in a EEA Member State or doesn’t have a permanent establishment in such a State are not deductible; however, if the insured person moves into Finland and has not been resident in Finland in the fi ve years preceding the year of his removal, he is entitled to deduct the premiums for the year of removal and three following years if the premiums are based on an insurance taken out at least one year before the removal; a standard deduction for work-related expenses; a deduction granted to sailors and deductions granted to forestry workers; a discretionary allowance for circumstantial incapacity to pay taxes.

C. The following allowance may be claimed in state income taxation:

pension income allowance;

D. The following allowances may be claimed in municipal income taxation:

earned income allowance; pension income allowance; disabled person’s allowance; student grant allowance; a basic allowance for taxpayers with a small income.

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E. Tax credit is allowed against state income tax on earned income as follows:

child maintenance credit; a taxpayer who has paid maintenance for a minor on the basis of an agreement provided by law or a court decision is granted a tax credit of one eighth of the maintenance paid, subject to a maximum of 80 euros for each child; disability credit is granted to persons who have been resident in Finland for more than six months of the tax year, provided the degree of disability is established to be at least 30 per cent; credit for the deﬁ cit in the investment income category (see 2.3.9.4); credit for domestic work (see Appendix 5); credit for study loans (see Appendix 5).

The Income Tax Act contains the following provisions concerning deductions for individuals who have been resident in Finland for only part of the tax year:

compulsory or voluntary pension insurance contributions are deductible only if they relate to earned income taxable in Finland; pension income allowance in state taxation, earned income allowance, pension income allowance, a disabled person’s allowance and student grant allowance in municipal taxation are granted only to individuals who have been resident in Finland for the major part of the tax year (in municipal taxation, the basic allowance for taxpayers with a small income is granted only to persons who have been resident in Finland during the whole tax year).

2.4.4 Income spreading, training fund and sportsman’s fund

In state income taxation, the opportunity to spread income over more than on tax year is available to individuals and the estates of deceased persons. Income spreading can be applied to earned income received during any particular tax year if that income can be attributed to the activities of at least two years (the tax year and the years preceding or following). The income in question must be at least 2,500 euros and it must constitute at least one-quarter of the taxpayer’s chargeable earned income for the tax year. To qualify for income spreading, the taxpayer must ﬁ le a request before the end of the assessment. Income spreading is carried out by dividing the income to be spread by the number of relevant years of activity, up to a maximum of ﬁ ve years. The resulting fraction of the

45 2 Taxation of income

income is added to the taxpayer’s other earned income for the tax year in question and the normal progressive tax scale is applied to this total. Using the same scale, the tax owed on the taxpayer’s other earned income is then subtracted from the fi rst-mentioned total amount of tax owed. The resulting amount is multiplied by the number of relevant years of activity and the new total is charged for the tax year (the tax must be at least 15 per cent of the income that has been spread). Income which may be spread includes income arising in connection with the sale of a business, income from a copyright or patent if it is not income from investment, wages and salaries for earlier years, pensions for the tax year and the preceding year, a lump sum payment on the termination of employment, and the total amount of income received by an artist from the sale of his or her artistic works during a single calendar year. Income derived by a sportsman directly from sport (income from sports) and paid to a specifi c nation-wide training fund or sportsman’s fund run by a fund named by the Ministry of Finance is not deemed to be a tax year’s income. Income from sports includes pecuniary and other prizes from competing and playing games, income from advertising agreements and income from other co-operative agreements where a sportsman, corresponding nation-wide sports association and co- operative partner are the contracting parties. Income from abroad and certain subsidies for training are not included in the income from sports. Income other than from salary or wages may be paid to a training fund. This income may then be used to cover expenses caused by sports or training during the tax year. That part of the amount outstanding at the end of a tax year which has not been transferred to a sportsman’s fund, is deemed to be earned income for the tax year. At most 20,000 euros may be left annually tax-exempt in the fund for the purposes of future training. A sportsman, whose income from sports for the tax year, before deducting expenses incurred in acquiring and maintaining such income, is at least 9,400 euros, may make as a tax exempt transfer from his income from sports to a sportsman’s fund no more than 30 per cent of the gross income from the sports. The maximum annual amount is 50,000 euros. Such transferred income is regarded as chargeable income for at least fi ve and at most ten tax years following the end of the sportsman’s career. For a special reason, such as disability, this period may be less than fi ve years. The return on the fund for these years is income for the tax year following the last such year. The sportsman’s career is deemed to be ended if he earns less than 9,400 euros as income from sports for two consecutive tax years and he does not show that he is going to continue his career, or if he has suffered injuries, or if he has informed the sportsman’s fund that he is going to end his career. In the case of a sportsman’s death all the funds in a training fund or sportsman’s fund are regarded as chargeable income for the year of death. Funds in a sportsman’s fund which are regarded as chargeable income, are deemed to be taxable earned income to their full amount.

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A training fund and a sportsman’s fund are exempt from income tax for the income from sports and they are also exempt from the net wealth tax.

2.5 Taxation of business profi ts, etc. Business profi ts are taxed at a fl at rate of 26 per cent.

2.5.1 Business proﬁ ts and income from professional activities

The Act on the Taxation of Business Profi ts and Income from Professional Activities defi nes the tax base for the taxation of business profi ts and income from professional activities as the difference between the proceeds and expenses (net income) of a business or profession. For the purposes of taxation a taxpayer’s various business activities and professional activities are treated as one single source of income.

2.5.2 Chargeable income

Business proﬁ ts and professional income subject to tax are deﬁ ned as income in money or money’s worth derived from economic activity. The following items of income, inter alia, are chargeable to tax:

sales proceeds and other compensation received in respect of inventories, investments1 and ﬁ xed assets as well as in respect of any other tangible (real property as well as other assets belong to a business income source if they are used solely or mainly for the purpose of directly or indirectly contributing to the business; examples of such real property are plants, workshops, buildings for business administration, as well as residential buildings for the personnel and buildings used for social purposes) or intangible assets used for the purpose of conducting business or performing professional activities (for exceptions, see 2.5.5);

compensation for renting, for work or for services rendered and for other similar activities carried out in the form of economic activity;

1 Investments comprise securities, real property and other similar property of a ﬁ nancial, insurance or pension institution, excluding claims, acquired for investment purposes or for the safeguarding of investments.

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dividend (see 2.5.3), interest and any other income derived from assets belonging to a business; compensation for letting out a business or profession or property, or the rights or benefi ts belonging thereto; profi ts derived from fi nancial assets; profi ts arising from the appreciation of investments made in the accounting books of an insurance institution or a pension fund; profi ts arising from the appreciation of claim certifi cates, securities and derivatives made in the accounting books of a credit institution in accordance with the Act on Credit Institutions or a corresponding foreign Act; income from timber and the transfer of the right to fell trees; corrections made to items in the accounting books in certain cases if the probable acquisition cost or disposal price exceeds the book value for tax purposes; the deductions relate to credit losses of business claims and fi nal losses of other fi nancial assets, investments and inventory valuation as well as depreciations calculated for fi xed assets not subject to wear and tear.

2.5.3 Dividend received by corporate bodies

2.5.3.1 General

Taxation of dividend was reformed in 2004. The new rules are applied as of 1 January 2005. There are no longer particular rules concerning fl ow-through dividends. The dividend taxation system is also applied to interest paid on the participation capital of a co-operative society, that part of the profi t which is paid on the basic reserves of a savings bank, the interest paid on the investment in the additional reserves of a savings bank, interest which is paid on the guarantee capital of a mutual insurance company or insurance association. If dividend is paid on a share which has been lent (under a security lending contract), the amount paid by the borrower as a substitute (substitute dividend) is treated in the same way as ordinary dividend. In the case of disguised dividend 70 per cent is taxable. Of dividend received by an individual or an estate of a deceased person 70 per cent is taxable income (subject to the rules explained in 2.3.4.4 fi rst paragraph). For taxation of individual shareholders see 2.3.4.

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2.5.3.2 Domestic situations

In a domestic situation both the distributing and the receiving company are resident in Finland. As a general rule dividend is tax exempt. There are two exceptions:

1) If dividend is received on the basis of investment shares, 75 per cent (”3/4-rule”) of the dividend is taxable (at the corporation tax rate of 26 per cent). Only ﬁ nancial, insurance or pension institutions can have such shares and so only they are governed by this rule. Investment shares are shares which are not part of ﬁ xed assets or current assets of the entities. 2) Similarly, 75 per cent of dividend is taxable (at the corporation tax rate of 26 per cent), where the distributing company is a publicly listed company (see 2.3.4.1) but the recipient company is a non-listed company which does not own directly at least 10 per cent of the share capital of the distributing company at the time of distribution.

In 2005 a transitional rule is applied and the taxable share of the dividend is 60 per cent.

2.5.3.3 Dividend is distributed by a company resident in an EU Member State

If the distributing company is resident in an EU Member State, dividend is taxable in the following three cases: 1) If the dividend is received on the basis of investment shares and the distributing foreign company is not a company referred to in Article 2 of the EU Parent–Subsidiary Directive (90/435/EEC) of whose capital the receiving company owns directly at least 10 per cent, 75 per cent of the dividend is taxable (at the corporation tax rate of 26 per cent). Only fi nancial, insurance or pension institutions can have investment shares and so only they are governed by this rule. Investment shares are shares which are not part of fi xed assets or current assets of the entities. Article 2 of the Parent–Subsidiary Directive includes the following criteria (non- fulfi lment of any one of them results in taxability): a) The distributing company takes one of the forms which are listed in the Directive. b) According to the tax laws of a Member State the distributing company is considered to be resident in that State and, under the terms of a double taxation agreement

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concluded with a third State, is not considered to be resident outside the European Community. c) The distributing company is subject to one of the taxes mentioned in the Article, without the possibility of an option or of being exempt.

2) If the distributing company is not a company referred to in 1) resident in a EU Member State, 75 per cent of the dividend is taxable (at the corporation tax rate of 26 per cent).

This rule concerns dividend not received on the basis of investment shares and not covered by 3) (a publicly listed company distributes dividend to a non-listed company). It covers the ordinary case where a Finnish resident company receives dividend on the basis of its participation in a company resident in an EU Member State. As there is no minimum participation requirement, it also covers portfolio dividends. If the conditions in 1) a)–c) are not fulﬁ lled and between Finland and the EU Member State in which the distributing company is resident there is not in the tax year in force a tax treaty or the treaty is not applied to the dividend in question (for instance due to a limitation of beneﬁ ts rule), 100 per cent (instead of 75 per cent) of the dividend is taxable (and the 2005 transitional rule is not applied in this case). 3) Moreover, 75 per cent of dividend is taxable (at the corporation tax rate of 26 per cent), where the distributing company is a publicly listed company (see 2.3.4.1) but the recipient company is a non-listed company which does not own directly at least 10 per cent of the share capital of the distributing company at the time of distribution. It should be noted that all tax treaties between Finland and EU Member States include an intercompany exemption. Therefore, if the recipient Finnish company has at least 10 per cent participation in the voting power of the distributing company, dividend is tax exempt in Finland. This exemption, which overrides the Finnish domestic legislation, is complete (100 per cent of dividend is exempt) and it usually applies to all types of dividends and irrespective of the character of the distributing company and the receiving company. Some intercompany exemptions do not use the 10 per cent voting power threshold but refer directly to the Finnish domestic tax law. Foreign dividend is then exempt from Finnish tax to the extent that the dividend would be exempt from tax under Finnish domestic tax law if both companies were resident in Finland. In that case the Finnish domestic tax law (described above in 2.5.3.2) is applied as such. For these reasons the relevant tax treaty should always be consulted when determining how dividend distributed by a company resident in an EU Member State is treated in the hands of the Finnish recipient. In 2005 a transitional rule is applied and the taxable share of the dividend is 60 per cent. This rule is not applied when 100 per cent of dividend is taxable (see the paragraph before item 3).

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2.5.3.4 Dividend is distributed by a company resident outside the EU area If the distributing company is resident in a non-EU Member State, the situation is as follows:

1) If dividend is received on the basis of investment shares, 75 per cent of it is taxable (at the corporation tax rate of 26 per cent). Only ﬁ nancial, insurance or pension institutions can have such shares and so only they are governed by this rule. Investment shares are shares which are not part of ﬁ xed assets or current assets of these entities. The participation exemption (see 2.5.3.3 item 1) is not applied to companies which are resident outside the EU area.

2) Similarly, 75 per cent of dividend is taxable (at the corporation tax rate of 26 per cent), where the distributing company is a publicly listed company (see 2.3.4.1) but the recipient company is a non-listed company which does not own directly at least 10 per cent of the share capital of the distributing company at the time of distribution. In 1) and 2) where the type of shares and the types of (distributing and receiving) companies are decisive, the taxable part of the dividend is always 75 per cent.

3) Moreover, 75 per cent of dividend is taxable (at the corporation tax rate of 26 per cent) in all other cases, if between Finland and the country of residence of the distributing company there is in that tax year in force a tax treaty, which is applied to the dividend distributed by that company. In practice this is the most important case which includes the ordinary relationships between a parent company and its subsidiary (direct and portfolio investments) in tax treaty situations under the assumption that the treaty is applicable.

If there is no such treaty between Finland and the country of residence of the distributing company or an existing tax treaty cannot be applied to the dividend in question (for instance due to a limitation of beneﬁ ts rule), 100 per cent (instead of 75 per cent) of the dividend is taxable (and the 2005 transitional rule is not applied in this case). It should be noted that all tax treaties between Finland and Non-EU Member States include an intercompany exemption. Therefore, if the recipient Finnish company has at least 10 per cent participation in the voting power of the distributing company, dividend is tax exempt in Finland. This exemption, which overrides the Finnish domestic legislation, is complete (100 per cent of dividend is exempt) and it usually applies to all types of dividend and irrespective of the character of the distributing company and the receiving company. Some intercompany exemptions do not use the 10 per cent voting power threshold but refer directly to the Finnish domestic tax law. Foreign dividend is then exempt from Finnish tax to the extent that the dividend would be exempt from tax under Finnish

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domestic tax law if both companies were resident in Finland. In that case the Finnish domestic tax law (described above in 2.3.3.2) is applied as such. For these reasons the relevant tax treaty should always be consulted when determining how dividend distributed by a company resident in a Non-EU Member State is treated in the hands of the Finnish recipient. In 2005 a transitional rule is applied and the taxable share of the dividend is 60 per cent. This rule is not applied when 100 per cent of dividend is taxable (see the paragraph before item 3) in 2.5.3.3). Non-resident shareholders of Finnish resident companies A non-resident shareholder has to pay withholding tax on the whole amount of dividend distributed to him by a company resident in Finland.

2.5.4 Exempt income

The following receipts are exempt: capital paid up by shareholders, refunds of income taxes (but not interest on the tax refunded) and distributions from partnerships (see below). Connection charges collected by companies which maintain electricity, telephone, water, sewage or district heating systems are exempt from tax, provided that these charges are refundable to the payer or entitle the payer to benefi ts which are transferable to a third party. For the participation regime for capital gains, see 2.5.5. Since partnerships are not treated as separate entities for tax purposes, the taxable income of a partnership is allocated to the partners. Consequently, actual distributions made by the partnership do not constitute taxable income. A similar rule applies to shares of income from those domestic estates of deceased persons which are taxed separately from their benefi ciaries. If a resident benefi ciary of a foreign estate of a deceased person has received income from the estate and the estate is liable to pay tax for the income in Finland, the benefi ciary is exempted. The lending of securities is not deemed to produce profi ts (sales proceeds) for the rightful owner of the security.

2.5.5 Participation exemption for capital gains

The new participation exemption for capital gains has been applied as of 19 May 2004. Capital gains derived by companies (corporations) from transfer of shares are not taxable income and acquisition costs of shares are not tax deductible, if:

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1) the transferor of shares is a company, a cooperative, a savings bank or a mutual insurance company not engaged in investment activity (venture capital business); and

2) the shares belong to the transferor’s ﬁ xed assets; and

3) the transferor has owned at least 10 % of shares in the capital of the company to be transferred uninterruptedly for at least one year during a period that has ended at most one year before the transfer and the transferred shares are among the shares which have been owned in this way; and

4) the company to be transferred is not a residential housing company, a real estate company or a limited liability company the activities of which mainly consist of real estate holding or managing;

5) the company to be transferred is a) a domestic (Finnish resident) company or, b) a company referred to in Article 2 of the EU Parent–Subsidiary Directive (90/435/ EEC; for the details, see 2.5.3.3) or c) a company resident in a country with which Finland has in that tax year in force a tax treaty, which is applied to dividends distributed by that company.

If the difference between the transfer price and the net book value of the shares is due to an extraordinary depreciation (write-downs on shares have not been possible on 19 May 2004 and thereafter; write-downs made before that date, i.e. the taxpayer has shown that the current value of the shares at the end of a tax year has been substantially lower than its book value and has then made an extraordinary depreciation that has reduced the book value to the current value), that amount of the difference is taxable income. The same applies to cases where a subsidy granted by a public body or a provision has been deducted from the acquisition price. And fi nally, taxable is also that part of the transfer price that corresponds to a tax-deductible loss resulting from an earlier transfer of the relevant shares between members of a same group. Capital losses accruing from transfer of shares which are fi xed assets but cannot be transferred exempt from tax can be deducted only from those capital gains derived from transfer of shares which are taxable. Similarly, when a company transfers shares in a partnership the difference between the acquisition cost and the transfer price can only be deducted from taxable capital gains. The deduction can be made in the tax year and the following fi ve years. This limitation is not applied to transfer of shares in residential housing companies, real estate companies and real estate holding or management companies mentioned in subparagraph 4) above.

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However, if in such a case the taxpayer has not owned the transferred shares uninterruptedly for at least one year the deductible loss is lowered by the following amounts that the transferred company has paid to the taxpayer:

1) dividend on the basis of share ownership during the ownership period,

2) any contribution under the system of contributions between afﬁ liated companies, and

3) any comparable item that has reduced the assets of the transferred company.

The capital loss is not deductible when the transferred company is resident in a State other than Finland and it is not a company referred to in Article 2 of the EU Parent– Subsidiary Directive (for details, see 2.5.3.3) and between Finland and the country of residence of the transferred company there is not in that tax year in force a tax treaty, which is applied to dividend distributed by the transferred company.

2.5.6 Allowable expenses

In general, expenses are deductible if they are incurred for the purpose of acquiring or maintaining income. The fact that it was the taxpayer’s intention to incur a particular expense for this purpose is usually the decisive test for deductibility. Deductible expenses include the following:

expenses incurred in the acquisition of inventories and investments (see footnote on page ?); expenses incurred in the acquisition of fi xed assets (fi nancial aid from public authorities for such acquisition reduces deductible expenses; they are also reduced when another entity, through its business activity, takes part in paying the acquisition costs); expenses relating to depreciation of claim certifi cates, securities and derivatives made in the accounting books of a credit institution in accordance with the Act on Credit Institutions or a corresponding foreign Act; rents for real property and water rights as well as for premises used in business or professional activities; wages and salaries, pensions, and periodic relief payments or similar periodic remuneration to employees (or former employees) as well as insurance premiums and other similar payments; contributions for life insurance are subject to restrictions; profi t remuneration of employee investment funds;

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contributions to the company’s pension fund to the extent that it covers the actuarially approved pension liability; contributions made by insurance companies, insurance associations and other similar insurance institutions, pension funds and other similar pension institutions to cover the actuarially approved liabilities; advertising expenses; research and development expenses; start up costs and reorganisation expenses; 50 per cent of entertainment expenses; membership fees paid to employers’ organisations and trade unions; losses due to fraudulent conversion, theft or other crimes involving fi nancial assets, reductions in the value of business claims and fi nal reductions in the value of other fi nancial assets (in the case of pension insurance institutions with statutory insurances this rule is applied only to such institutions which have made a separate reservation calculated on the basis of the pension legislation, see 2.5.7); annual and other rebates; interest paid on loans obtained for business purposes; however, that part of the interest corresponding to the entrepreneur’s private use (in partnerships and sole proprietorships) which exceeds profi ts derived from business activities (calculated on the basis of detailed rules), is not deductible; exchange losses on claims or loans obtained for business purposes; co operative societies are entitled to deduct patronage dividends paid on members’ purchases from the society; municipal tax on real property concerning real property used in the business or profession; expenses relating to forestry; payments to various guarantee and compensation funds (the Deposit Guarantee Fund, the Government Guarantee Fund, the Guarantee Fund and the Investor Compensation Fund); corporate bodies (a foundation, limited liability company, co-operative or association etc.) are entitled to deduct donations of at least 850 euros to the State or Finnish universities for the purpose the promoting Finnish cultural heritage, or to any Finnish associations, foundations or other institutions, which have been nominated by the National Board of Taxes (Deductible Gift Recipient) and the purpose of which is the maintenance of Finnish cultural heritage; similarly, these corporate bodies are entitled to deduct donations of 850–25,000 euros for promoting art or science;

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in the case of individuals carrying on a business or practising a profession (i.e. usually sole proprietors) the difference between increased living costs due to a business trip and tax exempt maximum daily allowance as well as the similar difference (on the basis of kilometre allowance) if the individual uses his own car for such a trip.

The following expenses are not deductible:

income and capital (net wealth) taxes; salaries, wages, pensions and other remuneration paid to a spouse or other family member under the age of fourteen; connection charges collected by companies which maintain electricity, telephone, water, sewage or district heating systems provided that the charges are refundable to the payer or entitle the payer to benefi ts which are transferable to a third party; acquisition costs of shares where the capital gains derived by companies from transfer of those shares are tax-exempt under participation exemption for capital gains (see 2.5.5); expenses incurred for the purpose of acquiring or maintaining tax-exempt income (the part which exceeds the tax exempt income is deductible); expenses incurred for the purpose of acquiring or maintaining income which is exempt in Finland under a double taxation agreement; this rule also applies when the expenses would otherwise be deductible under the Income Tax Act, the Act on the Taxation of Farm Income or the Act on the Taxation of Business Profi ts and Income from Professional Activities; fi nes, parking tickets and similar penalty payments substitute dividend to the extent that the ordinary dividend which it replaces would be tax exempt for the payer of the substitute dividend; loss or depreciation of receivables other than sales receivables if the debtor is a limited liability company and the creditor is a limited liability company, a cooperative, a savings bank or a mutual insurance company not engaged in investment activity, which alone or together with other group companies owns at least 10 per cent of the share capital of the debtor; group subsidies and other similar expenses without counter-performance to improve the fi nancial position of such a limited liability (group) company are also non-deductible.

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2.5.7 Allocation

As a rule, chargeable proﬁ ts are allocated for purposes of taxation to the tax year in which goods are delivered or services rendered. Minor receipts may be allocated to the tax year during which the taxpayer receives the payment. If the taxpayer receives interest or rent in advance, he may either disclose it in full immediately or allocate it in equal annual instalments over the years of the loan or rental period. The same holds for any other income of a similar nature, provided that it can be attributed to at least two subsequent years. Items other than interest may not be allocated to a period of more than ten years, and in no case may income be allocated to two or more years if the taxpayer does not follow the same procedure in his own bookkeeping. In the case of products which take a long time to manufacture, expenses and income may be allocated according to the degree to which manufacture is complete if the same principle is followed in accounting. In principle, income and expenses are allocated on an accruals basis. This means that, apart from several exceptions set out below, an expense is allocated to the year during which the obligation to pay it arises, i.e. generally when the taxpayer receives the goods or services for which money was paid. However, minor expenses may be allocated to the tax year during which the taxpayer made the payment. Interest, rents and similar expenses must be allocated to the year in which they are incurred. However, the taxpayer may, if he or she so elects, deduct interest incurred on loans used to ﬁ nance the construction of a new power station, factory or mine as annual depreciations of not more than 10 per cent. Thus, the annual deductions for depreciation need not be equal, but in no year may they exceed 10 per cent of the original amount to be depreciated. Interest paid on the capital investment made by the Government or the Government Guarantee Fund must always be allocated to the year in which it is incurred. Unless otherwise provided for, other expenses which generate or maintain income over a period of at least three years are allocated equally to the years in question up to a maximum period of ten years. This provision covers such expenses as organisational costs and the costs of long term advertising campaigns. Expenses incurred in research and development work (except expenses incurred for the acquisition of research buildings) may, at the taxpayer’s discretion, be either deducted in the year in which the obligation to pay them arises or depreciated over two or more years. The premium received by an option writer is allocated to the tax year when the option was written. However, if the exercise period of a publicly traded option is at most 18 months, the premium is allocated to the tax year in which the option is closed or exercised or when it expires. If the writer of a put option buys the underlying instrument or commodity of the option as a consequence of exercising the option the deductible acquisition cost of the

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acquired instrument or commodity is the acquisition price of the instrument on the basis of the contract minus an amount corresponding to the premium. The premium paid by an option holder to the writer of the option is deductible in the year when the option is closed or exercised or when it expires. If the holder of a call option exercises the option and buys the underlying instrument or commodity, the acquisition cost of the instrument or commodity is the amount corresponding to the underlying instrument’s or commodity’s acquisition price on the basis of the contract plus the amount of the premium paid. In principle, the acquisition costs of inventories are disclosed when assets are sold, consumed or lost. However, inventories (goods in stock) at the end of the tax year are estimated for tax purposes at a value not exceeding the acquisition cost or market value, whichever is lowest. The acquisition cost is calculated on a fi rst in fi rst-out (FIFO) basis. Overhead expenses which are related to the acquisition and manufacturing of the goods may be added to the acquisition costs of the inventory if they are entered in the taxpayer’s book-keeping and if their amount is signifi cant in comparison to the variable costs. Investments (see footnote on page 31), excluding buildings, owned by a bank or an insurance company, are valued in the same way as inventories at a value not exceeding the acquisition cost or market value, whichever is lowest. Expenses incurred in acquiring fi xed assets are deductible through depreciation. The acquisition cost of the taxpayer’s entire stock of machinery and equipment is written off annually as a single item using the declining balance method. Under this method, the depreciation base consists of the net book value of all such assets at the beginning of the year plus the acquisition value of assets put into use during the tax year less any sales proceeds, insurance compensation and the like received for assets sold, damaged or lost during the tax year. The maximum annual depreciation is 25 per cent of this base, although the taxpayer may claim a smaller allowance if he wishes. If the taxpayer can show that the current value of these assets is less than the depreciation base reduced by the full 25 per cent, he is entitled to an additional depreciation that will reduce the depreciation base to the current value. With regard to machinery and equipment with an economic life not exceeding three years or with a maximum acquisition price of 850 euros (this latter rule is not applied if the taxpayer is taxed on the basis of the Income Tax Act), the taxpayer may either write them off in full in the tax year in which they were acquired or depreciate them along with other machinery and equipment. Such deduction must not be greater than 2,500 euros in any tax year. The acquisition cost of cars, buses and lorries used in a transportation business may be depreciated by applying the following maximum depreciation rates: 25, 20, 20 and 15 per cent for the remaining years. If the taxpayer chooses to write off these products (machinery, equipment, cars etc.) in full in the year of acquisition, all proceeds from the sales of such assets, including damages, insurance compensation, etc., must be entered in the books as income for the year in which they were received.

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Another exception to the main rule is that the acquisition cost of boats and ships that are not directly used in the business activities of the taxpayer may be depreciated at annual rates of no more than 10 per cent in a single tax year. The acquisition cost of real property (to which no depreciation method is applied) is deducted when the real property is alienated. This principle also applies to securities, but if the taxpayer can show that the current value of securities other than shares (in a limited liability company) or of ﬁ xed assets other than land area is at the end of the tax year substantially lower than its book value (and taking into account earlier extraordinary depreciations) the taxpayer is entitled to an extraordinary depreciation that will reduce the book value to the current value. If the asset’s current value at the end of any future tax year substantially exceeds the book value the excess will be added to the taxable income. Buildings and other constructions are depreciated using the declining balance method. Each building must be depreciated as a separate item. Maximum rates of depreciation range from 4 to 20 per cent, depending on the use of the building. The taxpayer may vary the depreciation from year to year within the applicable percentage range. If he can show that the current value of the building is less than its book value he is entitled to an additional depreciation. Large repair costs can either be set off against taxable proﬁ ts immediately or included in the depreciation base of the building. The depreciation rates for buildings and other constructions are as follows:

Rate per annum applied to reducing balance, %

– Shops, warehouses, factories, workshops, power stations or similar buildings 7 – Residential buildings, ofﬁ ce buildings or other similar buildings 4 – Tanks for storage of liquid fuel and acids and other similar storage buildings and constructions made of metal or other similar material 20 – Light constructions of wood or other comparable material 20 – Buildings or constructions or parts of buildings or constructions used exclusively for research and development 20

The acquisition cost of bomb shelters or that part of the acquisition cost of a building which relates to a bomb shelter is depreciated at an annual rate of not more than 25 per cent, i.e. over four years or more. This also applies to the acquisition cost of constructions, equipment, machinery and other items for the prevention of water and air pollution and to the acquisition cost of a natural gas pipeline connection. The acquisition cost of gravel and sand pits, mines, quarries, peat bogs and similar property may be depreciated by an amount equivalent to the quantity of the resource used up annually. The acquisition cost of ﬁ xed assets other than those referred to above, such as railways, bridges, quays, dams and basins, are depreciated by the straight line method over their

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probable economic lives (maximum 40 years). The acquisition costs of patents, copyrights, trade marks, etc., are depreciated by the straight-line method over ten years or over a shorter period if the taxpayer can show that the probable economic life of the asset is shorter than ten years. Any sum calculated on the basis of traffi c density and paid in compensation by the State to a private company for constructing and maintaining a road (or a railway) whose ownership is to be made over to the State at a future date, is allocated as income – following the main rule – to the year in which the service has been provided. Costs for constructing and maintaining such a road (with the exception of maintenance costs of less than three years’ duration) as well as the interest incurred during the period of construction on loans used to fi nance the construction, are depreciated by the straight line method over the remaining period (minimum 10 years) for which the contract between the State and the private company has been concluded and starting from the tax year in which the road or railway was put in use. As a rule, the proceeds of sales and other compensation from assets which are sold or have suffered a loss through destruction, theft or other crime, as well as the non depreciated part of the acquisition costs of such assets, are allocated for the purposes of taxation to the year in which the assets are disposed of or when the loss has been noticed. In the same manner, if the depreciation base for machinery and equipment is negative, i.e. if the sales proceeds, insurance compensation, etc., received for machinery and equipment exceed the balance of the acquisition cost of all assets, the excess is treated as that year’s income. In the case of destruction or damage of fi xed assets through fi re or accident, the taxpayer may deduct the remaining acquisition costs from expenses due to repairs or the acquisition cost of new depreciable fi xed assets (which are subject to wear and tear) within the two following tax years, the balance thus forming the depreciation base (replacement reserve). The replacement reserve is formed on the taxpayer’s demand and only if the taxpayer intends to continue in business. The reserve must also be shown in the bookkeeping; it must be deducted from the acquisition cost of new assets during the following three years. Any part of the reserve which has not been deducted as described is included in the taxable income of the last year (with an increase of 20 per cent) in which it could have been deducted. For special reasons the taxpayer may apply for an extension of the deduction period (up to three years). The replacement reserve can also be formed on the basis of sales of shares carrying the right to the enjoyment of business premises in a building owned by a real estate company. In this case, the reserve may be deducted from the acquisition cost of new shares carrying the right to the occupation of business premises or expenses due to repairing such premises only when the replacement reserve has been formed on the basis of proceeds from the sale of a building or shares carrying the right to the enjoyment of business premises. As a rule, any asset may be depreciated for tax purposes at a slower, but not faster, rate than for the purposes of accounting.

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2.5.8 Reserves and provisions In certain limited cases, the taxpayer has a right to create untaxed reserves provided that they are entered into the taxpayer’s accounts. These reserves become taxable at current rates, if dismantled. Savings banks, ﬁ nancial and pension institutions are entitled to make a provision for bad and doubtful debts amounting to 0.6 per cent of receivable accounts outstanding at the end of the tax year. The annual reserve may not exceed 0.6 per cent and the accumulated unused reserve of 5 per cent of accounts receivable at the end of the tax year. This provision also applies to insurance institutions with statutory pension insurances, the base being other than claims relating to insurance premiums. These institutions may also create a provision for insurance claims which is at most 2 per cent. However, if such an insurance institution has made a separate reservation calculated on the basis of the pension legislation, it is not entitled to make the above-mentioned reservations. For other insurance institutions the reserve is at most 1 per cent of items other than claims relating to insurance premiums. In both cases it may be higher if the insurance institution demonstrates that the risk is higher. Insurance institutions were permitted to form a transitional reserve in 1993. If the provision for bad debts exceeds the maximum amount in any one year, the excess is regarded as chargeable income for that tax year. Foundations engaged in statutory pension insurance or occupational pension insurance activity have their own particular reserves. Individuals (sole proprietor), partnerships and the estates of deceased persons having only individuals or estates of deceased persons as partners, are entitled to set up an operating reserve. The accumulated unused reserve at the end of the tax year must not exceed 30 per cent of the wages and salaries subject to withholding which were paid during the previous 12 months. If the reserve exceeds the maximum amount, the excess is added to taxable income. Taxpayers engaged in construction, shipbuilding or in activities in the metal and engineering industries who are subject to a guarantee commitment in respect of defects in buildings, bridges, aircraft, large vessels, or large units of machinery constructed or manufactured by them are entitled to deduct a guarantee provision of up to the likely cost of work carried out under guarantee. The guarantee provision is deducted during the tax year in which the product is delivered. Unutilised guarantee provisions are taxed as income for the tax year in which the guarantee expires. When the taxpayer is able to demonstrate that the replacement cost of inventories ordered but not yet received is, as at the date of the balance sheet, at least 10 per cent lower than the price irrevocably agreed on in writing with the supplier, he is entitled to deduct the excess of the agreed price over the replacement cost against the chargeable income for the current year. See also replacement reserve in the third last paragraph of 2.5.7.

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2.5.9 Losses If the taxpayer’s business income profi ts, agricultural income source or other source of income shows a net loss, this loss is carried forward for the purpose of income tax and set off against income from the same source in the subsequent ten tax years. Losses are deducted in the order in which they are incurred. If more than 50 per cent of the shares in a company or a business partnership have changed hands (for reasons other than inheritance or bequest) during the year in which a loss is recorded or thereafter, the right to carry forward is forfeited. If such a majority share transfer has taken place in a company or partnership which owns at least 20 per cent of the shares in the loss-making company or partnership, the shares in the loss-making company or partnerships are deemed to have been transferred. Regional tax offi ces may, upon application by the taxpayer, grant exemptions to this rule under certain conditions. Even then a limited liability company or a co-operative society may deduct not more than the amount that corresponds to the difference between the income for the tax year before the loss is deducted and any contribution from an affi liated company. Moreover there are exceptions which concern companies quoted on the Main List of the Helsinki Stock Exchange (in these cases only those shares which are not quoted on any such list are taken into account) and in these cases also the 20 per cent rule is not applied to its subsidiaries. As a consequence of exemptions granted by regional tax offi ces and the statutory exceptions the main rules are usually not applied to companies quoted on the Stock Exchange. In the case of a merger, the recipient corporate body and its shareholders must have held more than 50 per cent of the shares of the transferring corporate body in order to retain the right to carry forward its losses. There are no special provisions for allowing the losses of one company in a group to be deducted from the profi ts of other companies in the same group. In a division, the losses of the original corporate body are transferred to the new corporate bodies in the same proportion as the net assets are transferred. If the original corporate body has several sources of income, any losses in a particular source of income are transferred only to those corporate bodies with a corresponding source.

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2.5.10 Tax incentives

2.5.10.1 Incentive for the shipping industry

This incentive is applied for the last time in 2005. For details, see Appendix 7.

2.5.10.2 Incentives for developing regions

For investments and extensions made between 1998-2006 by small and medium-sized enterprises, the depreciation rate is the ordinary maximum depreciation rate increased by 50 per cent for the year in which the investment was put into use and the following two years. This incentive will be applicable for the last time in the assessment for 2010. The incentive is applied to such lines of activities as production and tourism but excludes the shipbuilding and ship repairs, the processing of agricultural products, and the production of steel, steel pipes, cars, car parts or synthetic fi bres. A small or medium-sized enterprise has been defi ned as an enterprise which fulfi ls the following criteria at the end of the tax year:

it employs no more than 249 employees, its turnover does not exceed 20,000,000 euros or the total sum of its balance does not exceed 10,000,000 euros, and it fulﬁ ls the criteria of the deﬁ nition of a micro, small and medium-sized enterprises in the European Commission Recommendation 2003/361/EC.

The incentive also applies to transfers of assets (see 2.5.12.2).

2.5.11 Contributions between afﬁ liated companies (group contribution)

Contributions from an affi liated company may be deducted from the chargeable profi t of the contributing company and added to the chargeable profi t of the recipient company. Such a transfer of profi t is allowed between affi liated companies if the group of companies and the transfer of profi t meet the following requirements:

both companies are Finnish; the parent company owns at least 90 per cent of the share capital of the afﬁ liated company during the whole tax year;

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both companies are engaged in business and are not savings banks, ﬁ nancial, insurance or pension institutions; the accounting year of both companies ends on the same date; the contribution is recorded in the accounts of the contributing company as well as in the accounts of the recipient company; the transfer is not a capital investment and is not directly related to the respective companies’ mutual business operations; the contribution does not exceed the amount of the contributing company’s proﬁ t from business activities.

2.5.12 Change in a company’s form, mergers and divisions

2.5.12.1 Change in a company’s form According to Finnish company law, a partnership may be transformed into another kind of a partnership as well as into a limited company. A limited company may not be transformed into a partnership. In the transformation of the company’s form Finnish tax provisions are based on the principle of continuity in accounting. The value of investments, ﬁ xed assets, inventories and liabilities remains unchanged and the change does not have any other direct or immediate tax consequences. The principle of continuity prevails if the entity (i.e. a partnership) maintains its identity through the change into another company form (i.e. into a limited company). The decisive factor is that the ownership of the company is the same as before the change. Another precondition for maintaining identity is that all the company’s assets and liabilities are transferred unchanged. Besides this most common alternative, these principles are applicable to sole proprietors, farmers, estates of deceased persons, partners (in connection with the dissolution of a general partnership or a limited partnership) and non-organised partnerships (partnerships other than general or limited partnerships) when a new and usually more capital-intensive form of organisation is chosen.

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2.5.12.2 Mergers and divisions etc.

As a member of the European Union, Finland has harmonised its tax provisions concerning cross-border mergers, divisions, transfers of assets and exchanges of shares in accordance with the EC Merger Directive 90/434/EEC. These rules also apply to domestic transactions. With the exception of exchanges of shares, the same rules apply to corporate bodies other than limited companies, and the rules on mergers also apply to domestic business partnerships. In a merger, by dissolving, one or more companies transfer their assets and liabilities to another company, i.e. a recipient company which, as a consideration, issues new shares to the shareholders of the transferring company or companies. In the case of mergers, following rules apply:

1) the transferring company is not deemed to be dissolved for the purposes of taxation; 2) the expenses and costs of the transferring company are deducted from within the recipient company as they would have been deducted in the transferring company; the maximum depreciations (for the year of merger) of the recipient company are decreased by the amount of depreciations allowed in the taxation of the transferring company for that tax year; 3) a loss resulting from a merger is not a deductible expense and a gain is not chargeable income; 4) the recipient company and the transferring companies are treated as separate taxpayers until the merger is complete; 5) in the taxation of the shareholders of the transferring company, the exchange of the shares in the transferring company for shares in the recipient company is not treated as a taxable event; 6) a cash compensation may be used as a consideration but it must not exceed 10 per cent of the nominal value of the new shares issued by the recipient company or, in the absence of a nominal value, 10 per cent of the paid-in capital relating to the shares in the transferring company; the transaction is deemed to be a taxable event to the extent that cash compensation has been used; 7) the deductible acquisition cost of the new shares received as a consideration by the shareholders of the transferring company is equal to the acquisition cost of the shares in the transferring company.

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In a division, a company by dissolving transfers its assets and liabilities to two or more companies. The shareholders of the transferring company receive (in proportion to the ownership of shares in the transferring company) shares issued by the recipient companies. The rules in items 1), 2), 4), 5) and 6) in the preceding paragraph also apply to divisions. The deductible acquisition cost of the new shares in a recipient company is equal to the net value of the property transferred to that recipient company. In a transfer of assets, a company transfers all its assets or the assets of one or more branches of its business activity and the corresponding liabilities to the company which continues the activity. The transferring company receives as a consideration new shares issued by the recipient company. In the taxation of the transferring company the book value of the acquisition costs of the transferred assets is taxable income only if the transfer has been realised by using the same book values as in the company accounts. The corresponding value is the deductible acquisition cost for the recipient company. Other costs are deducted as they were previously deducted by the transferring company. Reserves are deemed to be taxable income in the same way as they were taxable income for the transferring company. The deductible acquisition cost of the new shares received by the transferring company is the book value of the transferred assets minus the transferred debts and reserves. The rules concerning mergers, divisions and transfers of assets also apply to the transferring company when the recipient company is resident in another EU Member State on condition that the transferred assets remain effectively connected with a permanent establishment that the recipient company has in Finland. If this condition is not fulﬁ lled or if the assets cease to be effectively connected with such a permanent establishment, the market price of the assets becomes taxable income. The reserves transferred to a permanent establishment are taxable income for the tax year in which the permanent establishment ceases to exist. If the transferred assets and liabilities are connected with a permanent establishment that a domestic corporate body has in another EU Member State, the market price of the assets and the reserves deducted from the income of the permanent establishment are deemed to be taxable income of the transferring company. The tax that would have been paid for the same income in the state where the permanent establishment is situated is then deducted from the tax that is due on this income in Finland. In the case an exchange of shares, a company acquires a sufﬁ cient number of shares in another company to give it the majority of the voting rights and as a consideration issues new shares to the other company’s shareholders. For the use of cash compensation, see item 6) above. The exchange of shares is not treated as a taxable transaction except when a person receiving new shares becomes resident abroad under the provisions of Finnish national legislation or a double taxation agreement within three years of the end of the tax year in which the exchange took place. The exempted amount is then taxable income for the tax year in which the person became resident abroad.

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If it can be established that the main purpose of the transaction has been avoid or evade tax, the rules concerning mergers, divisions, transfers of assets and exchanges of shares do not apply. When a company is being dissolved the market value of the assets is applied. The liquidation gain is tax exempt and the corresponding liquidation loss non-deductible, provided that the shares of the company liquidated would have qualiﬁ ed for the participation exemption.

2.5.13 Controlled foreign companies (CFCs)

According to the Act on the Taxation of Shareholders in Controlled Foreign Companies (1994) a resident shareholder with a share of at least 10 per cent in a controlled foreign company (CFC; the Act is applicable to all foreign corporate bodies) is liable to pay tax on his share in the CFC’s income under the following conditions:

one or several resident shareholders directly or indirectly own at least 50 per cent of the capital of or the voting rights in the CFC or they are entitled to at least 50 per cent of the yield of the net wealth of the CFC; the actual tax of the CFC in its country of residence is less than three-fi fths of the tax of a corporate body resident in Finland; a dividend paid by a CFC to another CFC and distributed from the profi ts which has been included in Finland in a calculation of the actual tax of the latter CFC for the fi ve tax years immediately preceding the distribution, is not taken into account (such dividend is not taken into account as chargeable income either).

The following entities are not deemed to be CFCs: a corporate body whose income is mainly derived from industrial activity, any other comparable production activity or shipping business in their country of residence; a corporate body whose income is mainly derived from sales and marketing activity, which directly serve a corporate body conducting one of these (three) areas of activity and which is mainly directed to the territory of the country of residence; a corporate body whose income is mainly derived from payments made by a limited company within the same group which is a resident in the same country as the corporate body in question and conducts there one of the industrial activities mentioned in the preceding paragraph; a corporate body resident in a country with which Finland has a double taxation agreement in force and assuming that:

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the corporate body is a resident of that country under the agreement and the agreement is applicable to its profi ts; and corporate bodies are liable to pay an income tax in that country which does not substantially deviate from the corporate tax which corporate bodies must pay in Finland and the corporate body in question has not profi ted from the specifi c tax relief legislation of that country; a substantial deviation exists if the corporate bodies in this country, on the basis of its legislation, are liable to pay to the State or its part an income tax, the actual and total amount of which on average is signifi cantly lower that the actual income tax paid by corporate bodies in Finland.

The chargeable income is the share of the CFC’s profi ts that corresponds to the above- mentioned share of the shareholder (together with associates) in the CFC, if this share is at least 10 per cent. The dividends and other distributions received by the shareholder are chargeable in so far as they exceed the amount of profi ts that in the same year or fi ve preceding years has been included in the chargeable income of the shareholder. The shareholder’s share of the CFC’s loss is carried forward fi ve years but it may be set off only against the shareholder’s share of chargeable income which is derived from the CFC. Credit is given for the state taxes paid by the CFC on the same income. Where a double taxation agreement is in force between Finland and the state of residence of the CFC, credit is given for no more than the taxes that would have been credited if the taxpayer had paid them. The tax which exceeds tax actually paid is not credited (matching credit or tax sparing credit is excluded). The credit is limited to the amount of Finnish taxes on the same income.

2.5.14 Taxation of real estate companies

The taxation of real estate companies is a special feature in the Finnish taxation system. A real estate company is defi ned as a limited company where more than 50 per cent of the total gross assets of the company consist of real property situated in Finland. The term “real property” has here and elsewhere in the tax law basically the same meaning for tax purposes as in general law respecting landed property. However, a building or an installation on a landlord’s real property (by virtue of a contract of land lease) is also regarded as real property if the ownership of the building or installation together with the right to occupy the ground can be transferred to a third party without the consent of the landlord. These companies are divided into three categories: a residential housing company is a limited company where more than 50 per cent of the total area of the fl ats is reserved for shareholders as residential (condominium-type) fl ats and in which every share separately, or jointly with certain other shares, entitles the shareholder to the enjoyment of a specifi ed fl at in the building owned by the company;

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the second category includes limited companies where less than 50 per cent of the total area of the fl ats is reserved for the shareholders for residential purposes; the most common type is a company where more than 50 per cent is reserved for the shareholders for other than residential purposes; the remaining part may be enjoyed by the company itself or reserved for the shareholders for residential purposes or it may also be partly used for these two purposes; the third category comprises companies where there are one or several shares which do not entitle shareholders to the enjoyment of a specifi ed fl at in the building owned by the company; it is also possible that none of the shares entitles a shareholder to any such enjoyment.

These companies are taxed under the Income Tax Act (only exceptionally under the Act on the Taxation of Business Profi ts and Income from Professional Activities). In practice the residential housing companies do not pay tax. The purpose is only to provide residence to the shareholders who pay all the costs of the company through a monthly maintenance charge. Thus these companies usually do not yield taxable profi t. They are also entitled to create a deductible residential house reserve if they should yield profi t. In other real estate companies profi t is more common. According to a decision of the Supreme Administrative Court of 1968, which dealt with the interpretation of Article 6 (income from immovable property) and Article 21 (income not expressly mentioned, i.e. other income) of a double taxation agreement which were drafted in complete conformity with Articles 6 and 21 of the 1963 OECD Draft Convention (the 1977 and 1992 OECD Model Conventions contain Articles which are in substance the same as the Articles 6 and 21 of the 1963 OECD Draft Convention), the shares in these companies were not deemed to be immovable property and the income from such shares (being income other than dividends) was taxed according to Article 21. These companies are the principal means of owning real property used for residential purposes, especially in densely populated areas. The decision of the Court implied, inter alia, that the right to tax the shareholder on income from letting a fl at situated in the building owned by the company only belonged to the country of residence of the shareholder. In all its subsequent double taxation agreements, Finland has included a paragraph where it reserves the right to tax the income from shares or other corporate rights in the above-mentioned companies as income from real property. This principle is also applied to capital gains derived from the disposal of shares in real estate companies.

69 70 3 Net wealth taxation

3 NET WEALTH TAXATION (capital tax)*

3.1 Rate of tax Capital (net wealth) tax is levied according to a tax table set annually by Parliament. The rates of tax applicable for the 2005 tax year are as follows:

TABLE 2. Rates of state net wealth (capital) tax 2005 (euro)

Taxable net wealth Basic tax amount Rate in respect of taxable (euro) (euro) net wealth in excess of 250.000 euros (per cent) 250.000 80 0.8

This rate applies to individuals and the estates of deceased persons. The rate of capital tax for corporate bodies is 1 per cent.

3.2 Taxpayers Individuals who are resident (as to residency, see page 2.2.2) in Finland at the close of the calendar year are subject to capital tax in Finland on their worldwide net wealth. Non resident individuals are subject to capital tax on assets situated in Finland, with certain exceptions (see 6.2). Persons serving in Finland at foreign diplomatic missions, other similar representations or consular posts headed by career consular ofﬁ cers and persons serving in Finland as

* See Appendix 13, item 7), which concerns the abolition of this tax. 71 3 Net wealth taxation

employees of the United Nations, its specialised agencies or the International Atomic Energy Association, as well as members of their families and their private servants who are not Finnish nationals, are liable to capital tax in respect of real property situated in Finland, assets invested in any business or professional activities they carry on in Finland, shares in Finnish limited companies and co-operative societies and interests in Finnish partnerships. Spouses are taxed separately whereas the taxation of minors is based on the principle of joint taxation. The assets of minors and assets of the parent with higher taxable assets are aggregated and their total liabilities deducted. A person is treated as an owner of assets and liable to pay capital tax:

if he is permanently authorised to possess (i.e. to be in occupation of) real property; in the case of a widower or widow, if, on the basis of a joint will or otherwise, he or she is entitled to receive for life the proceeds from property when the title has been transferred to his or her direct heir.

A person who is otherwise entitled to receive the earnings from property owned by another person is liable to pay tax on at least the value of the right to the earnings. In principle any corporate body is liable to pay net wealth tax. However, the following entities, inter alia, are exempt from tax:

the State and its institutions, the Bank of Finland, the University of Helsinki, the Finnish Broadcasting Company Ltd (YLE), the Regional Development Fund, the Fund for Industrial Co operation Ltd (Finnfund), the Nordic Investment Bank (NIB), the Nordic Project Export Fund (NOPEF), the Nordic Development Fund, the Nordic Environment Finance Corporation (NEFCO), the Social Insurance Institution, various guarantee and compensation funds (the Deposit Guarantee Fund, the Government Guarantee Fund, the Guarantee Fund and the Investor Compensation Fund), the Finnish National Fund for Research and Development, and Ekokem Ltd (a company for treating hazardous waste). municipalities and joint municipal authorities; the Evangelical Lutheran and the Orthodox churches, and other registered religious communities; state supported pension institutions; organisations for promoting the public good (e.g. charitable, philanthropic and sporting associations); savings banks, branches of foreign credit institutions (concerning their assets situated in Finland);

72 3 Net wealth taxation

investment funds, employee investment funds, unemployment funds, training funds and sportsmen’s funds, domestic limited companies, co-operative societies and other corporate bodies whose shareholders’ or members’ interests in the company, etc., constitute chargeable assets. 3.3 Chargeable assets Capital taxation is based on the taxpayer’s total wealth. The taxpayer’s liabilities are deducted from his gross assets. Although taxation of total wealth is the general principle, several concessions are made by granting tax exemption for certain types of assets. Chargeable assets include, inter alia, the following items:

the right to possession or use of real property, the right to the earnings from forest land or any other right to use another person’s real property; rights to pensions or annuities payable for life or a predetermined period of time, or the right to the earnings from real property provided that the annual earnings exceed 450 euros; intangibles, (e.g. patents, copyrights and trade-marks), under certain conditions; a partner’s share in the net wealth of resident and non-resident partnerships.

The following assets, inter alia, are exempt from tax:

furniture and household effects, and other belongings (excluding, inter alia, boats, cars and valuables of exceptionally high value) exclusively intended for the personal use of the taxpayer or his family; the right to the most common pensions (speciﬁ ed in law); the right to alimony payments from a divorced spouse or a spouse legally separated or living permanently apart; an interest in the assets of the domestic estate of a deceased person which is taxed as a separate entity; an interest in the assets of a non-resident partnership or a non resident estate of a deceased person if the assets are situated in Finland; livestock, farm produce, seeds, fertilisers and other similar supplies belonging to the taxpayer’s farm; the means that a taxpayer has in a training fund or sportsman’s fund; bank accounts and bonds the income from which is subject to the tax withheld at source from interest (see 9.3), both those belonging to individuals and those belonging to the domestic estates of deceased persons.

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3.4 Valuation Capital tax is assessed annually on the basis of net wealth at the end of the calendar year. The taxpayer’s assets are valued at the current prices that they had in the hands of the owner and at the place where they were located. Buildings are valued by determining the current replacement cost for a new building of the same construction and volume and then allowing for the age of the building by subtracting a discount of 1 and 10 per cent per year depending on the purpose for which the building is used and the building material. The Ministry of Finance deﬁ nes annually the basis for the determination of the current replacement value. Guidelines for the valuation of land, except agricultural and forestry land, are issued by the National Board of Taxes. Subject to a decision by the National Board of Taxes shares quoted on the Main List, the I List, New Market or Pre List of the Helsinki Stock Exchange are valued at 70 per cent of the market price. This rule is also applied to foreign shares quoted on a regulated market which is under authorities’ supervision. If an undistributed estate or an individual together with his spouse, parents, child or child’s direct heir owns at least 10 per cent of the capital of such a company, only 30 per cent of the current value is taken into account. The 70 per cent rule is also applied to publicly quoted work-related options and shares of mutual funds. Subject to certain detailed conditions, non-listed shares are valued according to the guidelines issued by the Ministry of Finance on the basis of net assets at the end of the previous year. The increase in the value of such share, compared with value in the previous year, must not exceed 50 per cent. Also in this case, if an undistributed estate or an individual together with his spouse, parents, child or child’s direct heir owns at least 10 per cent of the capital of an unquoted company conducting business, only 30 per cent of the taxation value is taken into account. In the case of individuals and undistributed estates, only 30 per cent of net wealth of the enterprise or 30 per cent of the allocated share of the net wealth of a partnership is taken into account. The value of agricultural land is determined by multiplying the estimated average annual yield by seven. The average yield is determined by the National Board of Taxes for each municipality. The taxable value of forestland is determined by multiplying the estimated net yield by ten. Pensions and annuities are valued taking into account the age of the recipient and the amount of the annual instalments and by capitalising pensions, etc., according to a table of coefﬁ cients laid down in the law.

74 3 Net wealth taxation

3.5 Deductions The taxpayer’s debts are deducted from his assets when computing taxable net wealth. The amounts deductible are not affected by the existence of exempt assets. Resident individuals are granted a deduction of 2,000 euros for every child less than 17 years of age. The deduction is granted only to the parent with the greater net wealth. A deduction amounting to 10,000 euros is granted for owner occupied dwellings. Income tax on dividend (for the same year as the dividend is distributed) is also deducted from the net wealth tax if the dividend is distributed by a company other than a publicly quoted company and if the dividend is investment income.

75 76 4 Prepayment of inocme taxes and ...

4 PREPAYMENT OF INCOME TAXES AND CAPITAL TAX

4.1 General

Income taxes and capital tax assessed (in practice) by local tax offi ces are typically due for payment at the end of the assessment year (the year following the tax year) and at the beginning of the year following the assessment year. Through a system of advance tax payments, the bulk of the tax money is, however, collected during the tax year to which the taxes relate. The present prepayment system is governed by the Prepayment Act (1996). The prepayment system has two distinctive features: on the one hand, withholding from wages and salaries, certain indemnities, pensions, taxable social security benefi ts and certain types of interest, and, on the other hand, preassessment and payment of estimated tax amounts with regard to other kinds of income and net wealth. The prepayment tax rates and the estimated tax amounts are drawn up according to the latest assessment so as to match as closely as possible the taxpayer’s fi nal taxes for a full tax year. The total fi nal tax, when payable by the taxpayer, includes state income taxes, communal tax, church tax and a health insurance contribution. The rates and estimated tax amounts can be changed if it becomes obvious that they will not match the fi nal taxes. Withholding is the primary method of prepayment. Preassessment is used in the case of business profi ts, agricultural income and various other kinds of income. The National Board of Taxes is entitled to exempt an income from prepayment. In order to avoid the situation whereby an individual is forced to pay an accumulated total of taxes in the period following the end of the assessment he may make supplementary payments at his discretion. Such payments must in any case be made on 31 March of the assessment year at the latest. As a part of the Nordic tax co-operation prepaid taxes can be transferred from one Nordic country to another where there is a defi cit of prepayment (for instance as a consequence of employment in another Nordic country).

77 4 Prepayment of income taxes and ...

4.2 Withholding and prepayment register Tax is withheld by all employers from wages and salaries paid to employees. The concept of wages and salaries includes:

wages and salaries of all kinds, fringe beneﬁ ts, rewards, compensation, beneﬁ ts and remuneration that are received as a consequence of employment relations; meeting fees, personal lecture and seminar fees, remuneration on the basis of membership of an administrative body, managing director’s fees, the salary or wages of a partner in a partnership and remuneration for holding positions of trust.

Even though the payment is not deemed to be wages or salary, tax must be withheld from:

remuneration paid in respect of work, a task or service done for another person; a sportsman’s fee; remuneration for the use of, the right to use, or the sale of the right to use the copyright of a literary, artistic or scientiﬁ c work, any right based on a photograph, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientiﬁ c experience.

No withholding is, however, made from payments mentioned above, being other than wages or salary, if the recipient is registered in the prepayment register held by the regional tax offi ces. Anyone who runs a business, carries on farming or other income- generating activity is entitled to be registered under the condition that the remuneration is not a sportsman’s fee, salary or wages according to the fi rst list above in this section. Such a person is subject to preassessment (see 4.3). Tax is also withheld, usually at the rate of 28 per cent, from profi ts distributed from domestic investment funds, from withdrawals of shares from employee investment funds and surpluses distributed by such funds, from returns on zero-coupon certifi cates of deposit and zero-coupon bonds and interest earnings on loans where the number of lenders is small, i.e. where the staff of an enterprise subscribes to a loan issued by the employer. The amount to be withheld is computed for each separate amount of wages or salaries, whether paid in money or in kind. The value of wages or salaries in kind is determined according to values fi xed by the National Board of Taxes. If an employee’s earnings include compensation for the use of his own motor vehicle or tools or compensation for other outlays, the income subject to withholding is computed by reducing the earnings by an amount corresponding to the compensation.

78 4 Prepayment of inocme taxes and ...

Withholding tax on wages or salary received by an employee in respect of employment which constitutes his principal occupation is deducted at a rate set separately for each individual. Employers must pay the amounts withheld at source to the account of the regional tax ofﬁ ce not later than on the tenth day of the month following the withholding. The employer is responsible to the State for the amounts which have or should have been withheld. Pensions are subject to withholding tax at a rate which is determined separately for each taxpayer.

4.3 Preassessment The preassessment of taxes on income not subject to withholding and of capital (net wealth) taxes is carried out (in practice) by the local tax offi ce. Assessment is made on the basis of the taxpayer’s income and net wealth in the latest ordinary assessment according to the tax rates for the current tax year. The National Board of Taxes decides whether the income and net wealth estimates forming the basis for the preassessment should be adjusted. If similar reasons apply with regard to an individual taxpayer, an increase or reduction is made by the tax offi ce. The amount assessed is collected monthly in the case of corporate bodies. In other cases the number of instalments is two (for 170–500 euros), three, six or twelve (for more than 10,000 euros). If the taxpayer is dissatisfi ed with his preassessment, he may apply to the tax offi ce for a new assessment.

4.4 Use of prepaid tax Prepayments withheld and assessed are credited against the taxpayer’s fi nal taxes and only the difference remains to be paid. If the prepayments exceed the fi nal taxes assessed, the excess amount is refunded to the taxpayer. In the case of spouses, a refund due to one spouse is credited against the tax due from the other spouse, when permission for this is specifi cally given in the tax return of the spouse entitled to the refund. All prepayments, whether withheld or assessed, accrue to the State. During the tax year, estimated instalments are paid from the State Treasury to the municipalities, the local communities of the Evangelical Lutheran and Orthodox Churches and the Social Insurance Institution. After the fi nal taxes have been assessed, the balances due to the municipalities, communities and the Social Insurance Institution are paid.

79 80 5 Inheritance and gift tax

5 INHERITANCE AND GIFT TAX

Although there is actually only one tax which is based on the Inheritance and Gift Tax Act (1940), the tax has two clearly distinguishable tax objectives. For this reason, the taxation of inheritances and bequests on the one hand, and the taxation of gifts, on the other, are treated separately below and the two names for the tax are used accordingly. Inheritance tax and gift tax are imposed solely by the State. For double taxation agreements on inheritances and gifts, see 6.3.2.

5.1 Rates of inheritance and gift tax 2005

TABLE 3. Rates of inheritance and gift tax 2005

Taxable inheritance or gift Basic tax amount Rate within brackets (euro) (euro) (per cent) 3.400 – 17.000 85 10 17.000 – 50.000 1.445 13 50.000 – 5.735 16

These tax class I rates cover the following relationship between the beneﬁ ciary (correspondingly the donee) and the deceased (correspondingly the donor): spouse, child including the child of the surviving spouse, adopted child, father, mother, adoptive parents and direct heir of a child or an adopted child or in some cases also the ﬁ ancé(e). Class I rates also apply if the provisions of the Income Tax Act concerning spouses are applicable for the year of death to the deceased and an individual who had lived with the deceased in free union, i.e. class I rates apply to spouses who previously have been married to each other and who have had or are having a child together.

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The tax class II rates apply to a brother, sister, half-sister, half-brother and their descendants. The tax class III rates apply to other relatives and all non related persons. The tax rate is double in tax class II and triple in tax class III.

5.2 Residence For the purposes of the Inheritance and Gift Tax Act a person is deemed to be resident in Finland if he has his main abode in Finland.

5.3 Inheritance tax 5.3.1 Scope of application

An inheritance tax is levied on the individual share of each beneﬁ ciary, and not on the estate of the deceased as a whole. Inheritance tax is levied on the following property received as an inheritance or a bequest:

1) any property, if the deceased or the person who receives the property as an inheritance or a bequest was resident in Finland at the time of death; 2) real property situated in Finland and shares or other rights in a corporate body where more than 50 per cent of the total gross assets of that corporate body consist of real property situated in Finland.

Insurance claims paid out to a benefi ciary or estate under a personal insurance scheme in the event of the death of the benefactor as well as any similar economic subsidy paid by the Government, a municipality or any other statutory body or a pension institution, are subject to inheritance tax only if they are not subject to income tax and the benefi t or subsidy of a benefi ciary or heir for a single death exceeds 35,000 euros. Half of the aggregate amount of such claims or economic subsidies and amounts up to 35,000 euros are tax exempt for widowers and widows. No inheritance tax is levied on the value of a right to annual income or on the value of a usufruct. Instead, the annual value of such rights is included when computing the benefi ciary’s income for income tax purposes during all the tax years in which he is entitled to such income. No inheritance tax is payable when, on being dissolved, the property of an association is transferred in accordance with its articles of association. If the inheritance tax should be levied on the same property on the basis of two or more deaths which have occurred within two years, the inheritance tax is levied only once and on the basis of the most remote relationship.

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5.3.2 Credit for foreign inheritance tax

To avoid double taxation, the tax paid on an inheritance by a person resident in Finland to a foreign state on property mentioned in item 1) in 5.3.1 is credited against the inheritance tax due in Finland on the same property. The maximum credit is the lesser of either the amount of foreign inheritance tax or an amount based on the following calculation (ordinary credit): value of foreign property x Finnish inheritance tax value of total property (incl. foreign property)

5.3.3 Exempt persons

The following persons are exempt from inheritance tax when they receive an inheritance or a bequest:

1) the State and its institutions, municipalities, joint municipal authorities, religious communities and non-proﬁ t-making organisations;

2) persons serving in Finland at foreign diplomatic missions, other similar representations or consular posts headed by career consular ofﬁ cers and persons serving in Finland as employees of the United Nations, its specialised agencies or the International Atomic Energy Association as well as members of their families and their private servants who are not Finnish nationals; however these persons are liable to pay inheritance tax on real property situated in Finland and shares or other rights in a corporate body where more than 50 per cent of the total gross assets of the company consist of real property situated in Finland (i.e. item 2 in 5.3.1).

No inheritance tax is payable when a widower or widow is entitled by law to retain the estate of the deceased spouse in his or her possession undistributed.

5.3.4 Valuation and deductions

The value of the inheritance or bequest is computed at current prices according to the principles applied in capital (net wealth) taxation (see 3.4). The value of any advance on inheritance or any gift received during the last three years before the death of the benefactor is included in the value subject to inheritance tax. Gift tax paid on advances, or on gifts falling into this category, is credited against inheritance tax.

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Deductions are allowed for all debts, including taxes relating to the lifetime of the deceased (but excluding inheritance tax) as well as funeral and tombstone costs and expenses incurred in drawing up an estate inventory, up to reasonable amounts. Expenses incurred in distributing estates are not allowed as deductions. Moreover, the spouse, or a person to whom the provisions of the Income Tax Act concerning spouses are applicable for the year of death (see 2.2.3.1) is entitled to a deduction of 6,800 euros from the chargeable share of the inheritance. Persons under 18 years of age are entitled to a deduction of 3,400 euros. Inheritance tax is not levied on the personal effects of the deceased or his family for that part which does not exceed 3,400 euros. The liability to pay inheritance tax commences from the time of death.

5.4 Gift tax A gift tax is levied on the following property (received as a gift):

1) any property, if the donor or the beneﬁ ciary was resident in Finland at the time when the gift was made; 2) real property situated in Finland and shares or other rights in a corporate body where more than 50 per cent of the total gross assets of that corporate body consist of real property situated in Finland.

Insurance claims which are paid without consideration under a benefi ciary clause and which are not subject to income tax are also treated as gifts. However, they are exempt if their aggregate amount over three years does not exceed 8,500 euros. No gift tax is levied on household effects received as gifts and intended for the benefi ciary’s (or his family’s) personal use and whose value does not exceed 3,400 euros, on gifts received solely for the benefi ciary’s education or maintenance and on other gifts whose value is less than 3,400 euros. If a person receives such gifts from the same donor within a period of three years, the gifts are aggregated for the purpose of computing the 3,400-euro limit and the gift tax liability. If a person has received one or more taxable gifts from the same donor within three years before his tax liability has begun, these gifts must be taken into account when the tax is calculated. The gift tax paid earlier is credited in such cases.

84 5 Inheritance and gift tax

The gift tax is similar to the inheritance tax in the following particulars:

credit for foreign gift tax (5.3.2); exempt persons mentioned in items 1) and 2) in 5.3.3. class I rates are applied if the provisions of the Income Tax Act concerning spouses (see 5.1) are applicable to the donor and the donee; the valuation of property.

The liability to pay gift tax begins when the beneﬁ ciary takes possession of the gift. In cases where the ﬁ nancial consideration in a contract of sale or exchange does not exceed three quarters of the current price of the property sold or exchanged, the difference between the current price and the consideration is regarded as a gift.

5.5 Provisions concerning the transfer of a farm or a business A taxpayer may demand that part of the inheritance or gift tax is not charged under the following conditions (change of generation rules):

the chargeable inheritance or gift contains a farm or a business or a part of them (including at least 10 per cent of shares or rights giving title to a farm or business); the descendant or donee continues to run a farm or a business on such a farm or in such a business unit using the assets which he has received as an inheritance or gift; that part of the tax corresponding to the above-mentioned property is more than 850 euros.

If a ﬁ nancial consideration has been used in a transfer and the consideration is more than 50 per cent of the market value, no gift tax is charged. In addition, an interest-free extension of the period of payment may be granted. That part of the tax not charged and an additional 20 per cent is imposed if the taxpayer disposes of the main part of the farm or enterprise before ﬁ ve years have elapsed from the date of the assessment.

85 86 6 International aspects of income taxation

6 INTERNATIONAL ASPECTS OF INCOME TAXATION

6.1 Residents Resident individuals as well as resident corporate bodies and partnerships (for the usage of the term “resident”, see 2.2.2) are liable to state income taxes and communal tax on their world-wide income (including income from foreign investments) and to capital (net wealth) tax on their world-wide net wealth (including foreign investments). A special tax treatment is available only for dividend received from abroad by resident corporate bodies (intercompany exemption, see 2.5.3.3). There are no special incentives for investments in developing countries. Taxable income from foreign sources and net wealth situated abroad are determined according to the same rules that apply to domestic income and net wealth. The deduction of foreign direct taxes as expenses is not allowed, but on certain conditions tax credit is granted for such taxes (see 6.3.1). The rates of tax apply regardless of whether the tax base includes foreign source income or the property is situated abroad. Finland’s double taxation agreements may restrict the right to tax income from foreign sources and the property of residents situated abroad (see 6.3.2). There is one signiﬁ cant exception provided under domestic law; the remuneration that a resident individual derives from employment abroad lasting at least six months and meeting certain conditions is partly exempt (the “six month rule”, see 2.4.2 where other exemptions concerning income from abroad are also listed).

6.2 Non-residents 6.2.1 Source rules

Non-residents are taxed in state and municipal income taxation on their income from investments in Finland and on other income derived from Finland, and in capital taxation on the net value of such investments and other assets situated in Finland.

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The following items, inter alia, are considered as income derived from Finland (“Finnish source income”):

income from real property situated in Finland; income from letting a fl at held by virtue of shares in a Finnish residential housing company; capital gains on the sale of real property situated in Finland and capital gains on the sale of shares in a Finnish residential housing company or in any other company, if more than half of the company’s total assets consist of real property situated in Finland; profi ts from a business, agriculture and forestry carried on in Finland and income from professional activities performed in Finland (see also Appendix 13, item 5); wages, salaries and pensions paid by the State, a Finnish municipality or any other domestic statutory body, including pensions based on work, duty or service for the State or such municipality or body as well as pensions which are based on pension or traffi c insurance taken out in Finland; wages and salaries derived in respect of employment exercised solely or mainly in Finland for an employer in the private sector who is located in Finland, as well as pensions paid in consideration of such employment; remuneration paid on the basis of membership of a board of directors or another similar organ of a Finnish corporate body or partnership; income arising from the personal activities of a sportsman or artiste if these activities are exercised in Finland or on board a Finnish vessel; dividends from Finnish limited companies and co operative societies and shares in the income of Finnish partnerships; interest in cases where the debtor is a resident individual or a Finnish corporate body, partnership or undistributed estate of a deceased person; royalties in cases where the property or right in respect of which the royalties are paid is used in a business carried on in Finland or where the person liable to pay the royalties is a resident individual or a Finnish corporate body, partnership or undistributed estate of a deceased person; distributions by investment funds and employee investment funds.

The following items, inter alia, are regarded as investments in Finland: real property situated in Finland, assets invested in a business carried on or pertaining to a ﬁ xed base available for the purpose of performing professional services in Finland, shares in Finnish companies and participations in Finnish partnerships, debts when the debtor is a resident

88 6 International aspects of income taxation

individual or a Finnish corporate body, partnership or undistributed estate of a deceased person, and property or rights forming the basis for the payment of royalties, where the property or rights are used in a business carried on in Finland or where the person liable to pay the royalties is a resident individual or a Finnish corporate body, partnership or undistributed estate of a deceased person.

6.2.2 Taxation of non residents*

6.2.2.1 Final withholding tax

Income and capital taxation of non-residents is governed by the Act on the Taxation of Non residents’ Income and Capital (1978.) The taxation of non-residents in respect of dividends (including substitute dividends), distributions by employee investment funds, interest, certain kinds of royalties, and income from employment, pensions and certain benefi ts differs substantially from the taxation of such income when derived by a resident taxpayer (for dividends paid to non-resident individual shareholders, see 2.3.4.1, and for dividends paid to other non-resident shareholders see 2.5.3.5). Thus, the different income taxes (and the capital tax on the assets generating the income) imposed on residents are replaced by a single tax at source withheld by the payer of the dividends, etc. Items of income derived from Finland other than those mentioned above, e.g. business profi ts, and assets situated in Finland are taxed on an assessment basis and at the ordinary rates of tax. The rules concerning withholding tax do not apply to dividends, interest or royalties derived by and attributable to the permanent establishments of foreign enterprises situated in Finland. Unless lower rates of tax are provided for in a double taxation agreement, the rate of withholding tax is 28 per cent for distributions from investment funds, dividends including disguised dividend and other similar profi t distribution to a shareholder, interest (see 6.2.1) and royalties, and 35 per cent for income from employment, pensions, distributions from employee investment funds, sickness and maternity allowances and any compensation for loss of income paid under the Health Insurance Act, a compulsory employment accident insurance scheme or third party motor insurance. The rate for income from selling of timber is 19 per cent. The rate of withholding tax is 15 per cent for a remuneration paid on the basis of the activities of a sportsman or artiste. The tax is levied irrespective of the type of the remuneration and its recipient. If such a remuneration is paid to a foreign corporate body or a non-resident person, only that corporate body or person is deemed to be liable to the tax.

* See Appendix 13, item 6. A major reform of the taxation of non-residents is pending in the Parliament.

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The tax is always computed on the gross amount of the income in the case of dividends, interest, royalties2 and pensions. A non-resident who works in Finland for a period not exceeding six months in any twelve month commencing or ending in the tax year concerned is entitled to deduct 510.0 euros a month or 17.0 euros a day (when the period paid for is less than a month) if:

– the employment is related to his studies or training or a scheme concerning employment during vacations or a Nordic student exchange programme and the job has been provided by the State Employment Service; or – the non-resident will be no older than 25 in the year in which he earns his salary or wages and he is a full-time student in a foreign educational establishment.

The following items are exempt from withholding tax:

interest derived by non residents on Finnish bonds, debentures and other mass instruments of debt, loans from abroad not considered as capital investment assimilated to the debtor’s own capital, deposits in banks or other fi nancial institutions and foreign trade credit accounts owned by non residents; interest which belongs to the scope of application of the EU Savings Directive (2003/48/ EC); interest and royalties when the benefi cial owner of interest or royalty is a company of another EU Member State or a permanent establishment situated in another Member State of a company of a Member State; the exemption is applied only if the company which is the payer, or the company whose permanent establishment is treated as the payer, of interest or royalties, is an associated company (direct ownership of at least 25 per cent of the capital is required) of the company which is the benefi cial owner, or whose permanent establishment is treated as the benefi cial owner, of the interest or royalties (the EU Interest and Royalty Directive 2003/49/EC); dividends paid to a company resident in a Member State of the European Union if the company owns directly at least 20 per cent of the capital of the distributing company; this rule applies only if the recipient of the dividend is a company mentioned in Article 2 of the EU Parent–Subsidiary Directive (90/435/EEC; for details, see 2.5.3.3). the survivor’s pension paid on the basis of the Survivor’s Pension Act and national pension paid by the Social Insurance Institution are both tax exempt.

See 11.1.3 for appeals and advance rulings on withholding tax.

2 In particular, it should be noted that payments made in consideration for the use of, or the right to use, cinematograph ﬁ lms are not regarded as royalties for the purposes of non-residents withholding tax. Such payments are taxed on the basis of assessment.

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6.2.2.2 Withholding tax for foreign employees

Under the Act on Withholding Tax for Foreign Employees (1995) a withholding tax of 35 per cent is levied instead of State income tax on earned income and communal tax. The withholding tax is applied to foreign employees under the following conditions:

1) the individual becomes resident in Finland at the beginning of the period of employment to which the Act applies; 2) the pecuniary salary for this employment is at least 5,800 euros a month during the total period of employment to which the Act applies; 3) his tasks require special expertise; 4) he is not a Finnish national and he has not been resident in Finland in the ﬁ ve years preceding the year in which this employment began.

If the individual works as a teacher in a Finnish university or other establishment for higher education or if he carries on scientifi c research for the public good (and not for private gain), the conditions set out in items 2) and 3) do not apply. A taxpayer is deemed to be a foreign expert for a maximum of 24 months calculated from the beginning of the period of the employment to which the Act applies and as long as the employment is not interrupted. The tax basis is the salary and it is the recipient of income who is liable to the tax. Under the Act on Withholding Tax for Foreign Employees a foreign expert must fi le an application within 30 days of taking up the employment. If the conditions for the withholding have not been fulfi lled, ordinary assessment is applied to the total period of employment and the withheld tax is set off against the tax withheld. In the taxation of other earned income, the income subject to withholding tax is added to the other earned income. Allowances which are deducted after deducting expenses incurred in acquiring and maintaining earned income are then deducted from this aggregate amount. The income tax is then calculated on the basis of the subsequent aggregate amount. That part of the tax corresponding to the ratio between other earned income and this subsequent aggregate amount is deemed to be tax on other earned income. If a foreign employee is liable to pay communal tax to a municipality of the Province of Åland the tax rate is 17.5 per cent instead of 35.

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6.2.2.3 Taxation on the basis of assessment

Any income derived by non residents other than that which is subject to fi nal withholding tax is subject to income tax assessment. For corporate bodies the corporate income tax rate is 26 per cent. The income of individuals is apportioned to investment income and earned income. The corresponding State income tax rates are 28 per cent and 35 per cent. This division is not applied to income which is subject to the fi nal withholding tax. Income from agriculture or forestry is taxable only if the annual amount exceeds 350.0 euros. The health insurance contribution is levied on residents only. The taxable income and net wealth of non-residents are determined according to the same rules which apply to resident taxpayers. In capital taxation a non resident individual or corporate body has a right to deduct only debts related to assets situated in Finland. Furthermore, a taxpayer conducting business in Finland but who is directly or indirectly associated with a non resident individual or foreign enterprise is not entitled to deduct that part of the debts of the business that can be regarded as a capital investment in the business. The practical signifi cance of this rule is, however, very limited, since resident limited companies are exempt from capital tax in all cases. In addition to the exceptions already mentioned, some deductions granted to individuals are available to resident taxpayers only. The assessed capital tax payable by non-resident individuals is levied at a fl at rate of 0.8 per cent of taxable net wealth in excess of 135,000 euros. Shares in Finnish companies (except for shares in residential housing companies), claims in respect of which interest is paid, and rights forming the basis for the payment of royalties belonging to a non resident are, however, exempt from capital tax, unless these assets are attributable to a permanent establishment which the non-resident has in Finland. Non-resident taxpayers deriving income (other than dividends, interest, certain kinds of royalties not effectively connected with a permanent establishment situated in Finland, wages and salaries, and pensions) or owning assets (other than those generating the income mentioned above) subject to tax in Finland are preassessed in the same manner as in the case of resident taxpayers. Non-resident taxpayers have to fi le tax returns in respect of such income and assets. They fi le their returns with the tax offi ce in Helsinki. A taxpayer not physically present in Finland may also fi le his return with the offi ce of a Finnish diplomatic representative or career consul. Amounts preassessed on the taxpayer are then, on the basis of the assessment, credited against the taxpayer’s fi nal taxes. A non-resident is registered in the prepayment register (see 4.2) only if the non- resident has a permanent establishment in Finland.

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Capital gains or other one-off sources of income may be assessed at any time outside the regular assessment period upon application by the taxpayer and on the basis of tax return ﬁ led.

6.3 Arrangements for avoiding double taxation

6.3.1 Act on Elimination of International Double Taxation

6.3.1.1 General

The Act on Elimination of International Double Taxation (1995) is a general law which is applied both in the unilateral elimination of double taxation and elimination under a double taxation agreement. The Act applies to State income taxes, communal tax, church tax, corporate income tax and net wealth tax.

6.3.1.2 Credit method

The primary method used is the credit method (“ordinary credit”). In this method, credit is granted for taxes which have been paid for the same income and over the same time period and the credit is given for taxes paid to a foreign state. Other taxes paid in a foreign state are credited only on the basis of a separate rule as part of an international agreement. Credit is granted in Finland against taxes payable for the same income on a pro rata basis. The maximum credit is the lesser of either the amount of the foreign tax or an amount equal to the Finnish tax payable on the income from a foreign state. This maximum is calculated country-by-country and source-by-source. In the case of an individual or an undistributed estate, the credit is calculated by taking into account the type of income (earned income or investment income). Income is deﬁ ned as the income left after deducting the expenses incurred in acquiring and maintaining chargeable income. When calculating the maximum credit, only income which is subject to tax in Finland and which, in a foreign state, is subject to a tax that can be credited under the Act is deemed to be derived from foreign state. As an exception to the maximum credit rule credit for interest governed by EU Savings Directive may be higher than the Finnish tax payable on that interest. In this case the

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amount exceeding the Finnish tax may be deducted from state income tax on other income for the same tax year and only after that the exceeding amount is refunded. If not all the tax paid in a foreign state can be credited, the amount of tax which remains uncredited is deducted in the following tax year from the tax on income derived from the same state and from the same source of income, taking into account the type of income. Any unused credit for foreign tax can be deducted in the following year only to the extent that the maximum of credit in the following year exceeds the amount of taxes to be credited in that year. The deduction is made only upon application by the taxpayer. In the new dividend taxation system dividend is in most cases only partly taxable. However, credit for foreign tax is granted for the whole amount of such tax and so none of it is deemed to have been withheld from the part which is tax exempt.

6.3.1.3 Exemption method

Income from a foreign state for which Finland, as part of an international agreement, has given up its right to tax, is considered chargeable income for an individual, partnership or undistributed estate. That part which corresponds to the ratio between the exempted income and the total income in that source of income, taking into account the type of income, is deducted from the tax on the taxpayer’s income (“exemption with progression”). In calculating the amount of the income from a foreign state, the expenses incurred in acquiring and maintaining income are deducted. Expenses and interest in excess of the income from a foreign state are not deductible, even if they would be deductible under the Income Tax Act, the Act on the Taxation of Farm Income or the Act on the Taxation of Business Proﬁ ts and Income from Professional Activities. Deduction from tax on income is made in proportion to the amounts of different taxes. In the case of a corporate body, the income from a foreign state for which Finland, as part of an international agreement, has given up its right to tax is not included in the chargeable income. Expenses and interest incurred in acquiring and maintaining exempt income are not deductible even though they would be deductible under the Income Tax Act, the Act on the Taxation of Farm Income or the Act on the Taxation of Business Proﬁ ts and Income from Professional Activities. However, expenses and interest relating to tax exempt dividends are always deductible.

6.3.1.4 Procedure

The taxpayer has to claim the credit for foreign taxes by making an application to the regional tax ofﬁ ce. The taxpayer should include the evidence necessary for the calculation of the tax credit, e.g. the amount of foreign tax, the basis on which the tax is paid, proof that the tax is ﬁ nal and that it has indeed been paid. If the taxpayer cannot present all this information but has shown that the conditions for granting a tax credit exist, the credit can be granted up to a reasonable amount.

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The taxpayer has to claim the tax credit before the end of ﬁ fth year calculated from the beginning of the year following the assessment year.

6.3.2 Double taxation agreements

Finland’s network of comprehensive double taxation agreements in the area of income and capital taxes comprises the agreements with the following states (in force as at 31 December 2004): Argentina (1994), Australia (1984), Austria (2000), Barbados (1989), Belgium (1976), Brazil (1996), Bulgaria (1985), Canada (1990), Czech (1994), China (1986), Croatia3, Denmark including the Faroe Islands4 (1996), Egypt (1965), Estonia (1993), France (1970), Germany (1979), Greece (1980), Hungary (1978), Iceland11 (1996), India (1983), Indonesia (1987), the Republic of Ireland (1992), Israel (1997), Italy (1981), Japan (1972), Korea, Republic of (1979), Kyrgysztan (2003) Latvia (1993), Lithuania (1993), Luxembourg (1982), Macedonia (2001), Malaysia (1984), Malta (2000), Mexico (1997), Morocco (1973), the Netherlands (1995), New Zealand (1982), Norway11 (1996), Pakistan (1994), the Philippines (1978), Poland (1977), Portugal (1970), Rumania (1998), Russia (1986), Serbia and Montenegro, Singapore (2002), Slovakia (1999), Slovenia (2003), South Africa (1995), Spain (1967), Sri Lanka (1982), Sweden11 (1996), Switzerland (1991), Tanzania (1976), Thailand (1985), Turkey (1986), Ukraine (1994), the United Arab Emirates (1996), the United Kingdom (1969), the United States of America (1989), Uzbekistan (1998), Vietnam (2001), Yugoslavia10 (1986) and Zambia (1978). The agreements, with the exception of a few (mainly old ones), are based on the OECD recommendations (the 1963 Draft Convention, the 1977 Model Convention and the 1992 Model Convention). Since the early 1970s, the basic method for eliminating double taxation used by Finland in its double taxation agreements with other states has been the ordinary credit method. The agreements usually incorporate some of the following features:

provisions concerning the taxation of Finnish real estate companies (see 2.5.14) in agreements concluded after 1968; article 9 (associated enterprises) emphasises the principle that an adjustment has to justiﬁ ed both in principle and as regards the amount (in accordance with OECD Model, Commentary on Article 9, paragraph 6);

3 After the dissolution of Yugoslavia, the Agreement concluded between Finland and Yugoslavia applies only between Finland on the one hand, and Croatia as well as Serbia and Montenegro on the other. 4 Multilateral Nordic Treaty.

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Finland favours a zero-rate tax on dividends, interest and royalties in the state of source; the exclusion from the royalty article of income from the leasing of equipment (taxed as business proﬁ ts); most pensions are taxed (”may be taxed” or ”shall be taxable only”) in the state from which they originate; the article on teachers and professors is not included in the agreements.

For the applicable treaty rates see Appendix 6. In addition Finland has concluded limited agreements for the avoidance of double taxation with Argentina, Russia, South Africa and the United States of America covering shipping and air transport profi ts only. Finland has concluded double taxation agreements concerning taxes on inheritances with France (1958), the Netherlands (1954), Switzerland (1956) and the United States of America (1952) and concerning taxes on inheritances and gifts with the other Nordic Countries (Denmark, Iceland, Norway and Sweden) in 1989. Finland has also concluded a multilateral agreement on administrative assistance in tax matters with the other Nordic Countries (Denmark, including the Faroe Islands and Greenland, and Iceland, Norway and Sweden) in 1989 and a bilateral agreement with Germany (1935). Moreover, Finland is a party to the OECD/Council of Europe Convention on Mutual Administrative Assistance in Tax Matters. As a Member State of the European Union, Finland has implemented the Directive concerning mutual assistance by the competent authorities of Member States in the fi elds of direct taxation and value added tax (77/799/EEC), and the Directive on mutual assistance for the recovery of claims resulting from operations forming part of the system of fi nancing the European agricultural guidance and guarantee fund, and of agricultural levies and customs duties, and in respect of value added tax and certain excise duties (76/308/EEC). Finland has signed the Convention on the elimination of double taxation in connection with the adjustment of profi ts of associated enterprises (90/436/EEC).

6.4 The arm’s length principle

If a taxpayer conducting business in Finland has, in his transactions with a foreign associated enterprise (a parent or subsidiary enterprise or enterprise under common control), agreed on commercial terms which differ from those which would have been agreed upon between independent enterprises (the “arm’s length” principle), and the profi ts are for this reason smaller than would otherwise have been the case, and the enterprise to whom the profi ts have accrued is not liable to tax in Finland, then the taxpayer is assessed at estimated profi ts, i.e. at profi ts that have been increased to what they would have been on an arm’s length basis.

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7 VALUE-ADDED TAX

7.1 General Value-added tax (VAT) is a general multi-stage, non-cumulative tax on consumption. VAT is a broad-based tax on most goods and services; it is levied at each stage in the production and distribution of goods and services; the accumulation of the tax is prevented by means of a deduction system. When a person liable to tax purchases taxable goods or services, the supplying enterprise charges VAT. The person liable to tax may deduct the tax paid by him on purchases (input tax) from the tax charged for his taxable supplies (output) tax. The difference between the output tax and the input tax is paid to the State. The ﬁ nal tax is borne by the consumer. In Finland, VAT replaced the Sales Tax at the beginning of June 1994. As a member of the European Union, Finland has subsequently harmonised its VAT system entirely with the EU rules by amending the VAT Act. The amendments came into force on 1 January 1995 and mainly concern the rules of trade between the EU Member States (“intra-Community trade”), the extension of the scope of VAT and the abolition of the special scheme for foodstuffs. Following new EU legislation, the rules concerning intra-Community trade were amended at the beginning of 1997. At the same time, certain other amendments relating, among others, to the scheme for marginal taxation of second-hand goods were introduced. The structure and levels of the reduced VAT rates were reformed from the beginning of 1998. A special scheme for investment gold was introduced at the beginning of 2000. Two years later, at the beginning of 2002, amendments due to the introduction euro were made. In 2003 followed amendments concerning the taxation of works of art and at the beginning of July in that same year amendments required by the EU-Directive concerning VAT treatment of electronically supplied services. At the beginning of 2004 amendments required by the EU-Directive on invoicing came into force, and also at the same time graduated tax relief related to the exemption threshold applicable to small enterprises was taken into use. At the beginning of 2005 amendments required by the EU- Directive on the place of supply of gas and electricity came into force.

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7.2 Tax system VAT is imposed on the sale of goods and services, on imports (see 7.12.3), on intra- Community acquisitions of goods (see 7.12.2) and on removals of goods from warehousing arrangements (see 7.12.4). In principle, the scope of application of VAT covers any consumption of goods and services. The supply of goods and services in the course of business is taxable unless explicitly exempted in the Act.

7.3 Persons liable to tax Any individual and legal person who sells goods or services in the course of their business is liable to tax. The tax is payable at every stage in the exchange of commodities. Thus manufacturers, wholesalers and retailers are liable to pay VAT. A precondition for the liability to tax is that the supply takes place in the course of business. The main criteria for fulfi lling this precondition are that the activity is carried out for the purpose of gaining profi t, is oriented towards a largely unrestricted body of customers, is continuous and carried out autonomously, and involves an element of business risk. If the annual turnover of the business activity does not exceed 8 500 euros, no tax is levied. When this threshold for VAT liability is exceeded, the enterprise receives a relief, which gradually decreases with the increase of the turnover. The full amount of VAT is levied when the annual turnover reaches 22 500 euros. The government bodies as well as the municipalities are liable to tax in the same way as private enterprises, but not in respect of activities in which they engage as public authorities. Corporate bodies for promoting the public good (e.g. charitable, philanthropic, cultural and sporting associations) are liable to tax if their income is deemed to be income from business according to the Income Tax Act. In the case of imports of goods it is the importer who is liable to pay tax and in the case of intra-Community acquisition the person who effects the acquisition. As regards the removal of goods from warehousing arrangements the person who causes the good to be removed from such arrangements is liable to tax. A reverse charge procedure is applied to taxable investment gold as well as gold material and semi-manufactured gold products of a purity equal to or greater than 325 thousandths. Instead of the seller, the purchaser is liable to tax if he has been registered for the VAT purposes in Finland. At their request, two or more enterprises supplying principally fi nancial or insurance services, as well as other enterprises controlled by them, can be considered to be a single taxable person for VAT purposes (i.e. through group registration). A precondition for

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such treatment is that the enterprises have their domicile or ﬁ xed establishment in Finland and closely bound to one another by economic, ﬁ nancial and organisational links. This group registration scheme enables the exemption from tax of the internal supplies of commodities within the group, which as such would be taxable supplies. All the group members are liable jointly and severally for VAT on the taxable activities of the group, but the representative member appointed by the group represents the whole group in relation to the tax authorities. The representative member is responsible for submitting the returns, for paying the tax and claiming refunds on behalf of the whole group. For practical reasons, reindeer owners and their herding co-operatives are subject to a special scheme of the same kind as the group registration.

7.4 Foreign enterprises The supply of goods or services in Finland is taxable regardless of whether the supplier is established in Finland or not. Liability to tax is caused by a single transaction in Finland if the supply is part of the business activities that a foreign enterprise carries out abroad. If a foreign enterprise does not have a fi xed establishment in Finland, the purchaser is usually liable to tax. In the case of distance sales, educational and scientifi c services, cultural, entertainment and sporting events, other similar services and passenger transport services, the supplier is liable to tax. This rule also applies if the purchaser is a private person or a foreign enterprise, which is neither established nor registered in Finland. At their request, foreign enterprises can always become liable for tax in Finland provided that they appoint a tax representative established in Finland. The tax representative is not responsible for paying the tax. The regional tax offi ce can demand a security from the enterprise.

7.5 Taxable transactions VAT is levied on the supply of goods and services. Moreover, VAT is imposed on imports, on intra-Community acquisitions of goods and on removals of goods from warehousing arrangements. The supply of goods means that, for a consideration, the owner of tangible property transfers the owner’s right to dispose of that property. According to the VAT Act, real property is also tangible property, although the supply of real property is in most cases exempted. Electric current, gas, heat, refrigeration and similar commodities are also deemed to be tangible property. The supply of services means any transaction, which does not constitute a supply of goods, effected for a consideration. Services related to goods, the leasing of goods, restaurant services, the transfer of different rights and the obligation to refrain from resuming a business activity are, inter alia, treated as supplies of services.

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The tax is also imposed on goods or services which have been purchased for a purpose that has entitled the entrepreneur to make a deduction or which have been produced in connection with an entrepreneur’s taxable activities if the goods or services are used for private consumption, disposed of free of charge or below the market value, or used for some other purpose which does not entitle the entrepreneur to a deduction (“own consumption”). A prerequisite for the taxation of services produced by the enterprise itself for its own consumption is that the enterprise produces same services for the market. However, to use such services for the enterprise’s exempt activities does not in principle render the entrepreneur liable to tax.

7.6 Exemptions

The following supplies of goods and services are exempted from VAT:

hospital and medical care undertaken by publicly administered hospitals and recognised private hospitals or other similar institutions, and the provision of medical care in the exercise of the medical professions; social welfare services; educational services which are provided in accordance with the law or which are subsidised from State funds in accordance with the law; ﬁ nancial services and transactions concerning securities (excluding consultation and safety-deposit services); insurance services and services performed by insurance brokers and insurance agents; transactions concerning bank notes and coins used as legal tender (excluding collectors’ items); lotteries and money games; the services of performing artistes, the sale of performances intended to be sold to arrangers and the transfer of copyright to literary and artistic works; real property, including building land; certain transactions carried out by blind persons; interpretation services for deaf persons; cemetery services rendered by a public cemetery; uncultivated berries and mushrooms sold by the person who picked them.

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The supplier of exempt goods and services does not have the right to a deduction or refund of (input) VAT on goods and services purchased for these transactions. In some cases the exemption has been realised through a refund to the supplier. This corresponds to zero rated tax. The following supplies are exempted in this way:

subscriptions to newspapers and periodicals (loose-copy sale is fully taxed); printing services for membership publications of corporate bodies for the public good; vessels (excluding those used for sport and leisure); exemption covers the sale, hire and charter of such vessels as well as repair, maintenance and other work carried out on them; supply of gold to the Central Bank.

Moreover, there are some exemptions with refunds associated with international trade (see 7.11). A special exemption scheme is applied to investment gold. Investment gold, strictly deﬁ ned, means gold of a high purity in the form of a bar or a wafer and certain gold coins. The exemption is also applied, for instance, to gold loans and swaps, futures, forward contracts and other similar contracts concerning the right of ownership or claim in respect of investment gold. As a main rule, the supply of investment gold and the services of intermediaries are exempted. However, enterprises producing investment gold and enterprises supplying normally in their business activity gold for industrial purposes, have a right of option for taxation. The right of option concerns also intermediaries of investment gold provided that the supplier has exercised his right of option. According to the special scheme, the enterprises supplying exempted investment gold and the enterprises producing investment gold, in cases where they do not opt for taxation, are entitled to a restricted refund of (input) VAT. The refund for (retail) sellers covers VAT included in the acquisition of taxable investment gold, in any other gold which is transformed into investment gold as well as in certain manufacturing services. The producers are entitled to a refund of VAT included in the acquisition of goods and services linked to the production.

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7.7 Construction and services related to real property Although the sale and rental of real property is exempted the following services are taxable:

construction services (including supplies of new buildings by property developers); the transfer of the right to take materials from the ground, right to fell trees as well as ﬁ shing and hunting rights; the hiring out of hotel rooms and camping sites and other similar accommodation; the hiring out of meeting rooms, exhibition space, places for sporting activities and other similar space; airport and harbour services for aircraft and vessels; the hiring out of safes; the hiring out of parking space; the hiring out of advertising space; the letting of space for gaming machines, vending machines or suchlike equipment.

The lessor of real property may opt for taxation when renting premises to persons liable to tax. In order to avoid distortion of competition, persons exempt from tax (real estate companies, banks and insurance companies, lessors of real property) are liable to pay tax on certain services which are related to real property and produced by themselves for themselves (construction services, cleaning, waste disposal, care taking and management services), if the salaries including social security contributions of the personnel engaged in these services exceed 35 000 euros per year. If the owner or possessor uses the real property mainly as his own residence, he is not liable to tax. 7.8 Taxable amount The tax base is the total selling price i.e. the consideration paid by the purchaser excluding VAT. It includes all additional costs and other taxes except VAT. However, it does not include discounts and other correction items. Subsidies directly linked to the price of goods and services are also included in the taxable amount. Second-hand goods, works of art, collector’s items and antiques sold by taxable dealers are subject to a special scheme. The taxable amount of the sale of such goods is only

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the margin of profi t accruing to the seller. The margin of profi t is calculated either on a transaction-by-transaction basis or according to the tax period. A special scheme is also applied to travel agents acting in their own name which supply goods or services of other enterprises in their provision of travel facilities. All these transactions are treated as a single service and the taxable amount is the travel agent’s margin of profi t. In the case of the enterprise’s own consumption of purchased goods or services, the taxable amount is the purchase price or, if lower, the market value. In the case of goods and services produced by the enterprise itself for its own consumption, the taxable amount is the full cost of production. The taxable amount for construction services and other services relating to real property is the cost price. 7.9 Tax rates The standard rate of VAT is 22 per cent (of the price excluding tax). A reduced tax rate of 8 per cent is applied to the following commodities:

books; medicines; passenger transport services; accommodation services; services enabling sporting activities; admissions to commercial sporting, cultural and entertainment performances, events and facilities; subsidies based on the licence fees from the radio and television fund to the Finnish Broadcasting Company and similar subsidies to Åland Radio and TV; the sale of a work of art by the artist and the importation of works of art.

A reduced tax rate of 17 per cent is applied to foodstuffs and animal feed, excluding restaurant services, live animals, drinking water, alcoholic beverages and tobacco products. For goods and services subject to zero-rate tax, see 7.6).

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7.10 Deductions When the tax payable is calculated, the tax included in the purchase price of goods and services (input tax) acquired for taxable business activities is deductible. The taxpayer also has a right to deduct the tax paid by him for goods acquired via import or intra-Community acquisition for the same purpose. However, as a consequence of certain restrictions, the following acquisitions are not deductible:

goods and services related to dwellings or buildings provided for the recreation of personnel; travelling costs of personnel between home and the workplace; representation and entertainment expenses; boats and aircraft used for sporting and leisure purposes, cars, motorcycles and caravans (any means of transport which are to be resold, rented out or used in professional passenger transport or in driving lessons as well as passenger cars used only for taxable transactions are deductible).

7.11 Refunds As an exception to the general rule that only persons liable to tax are entitled to make deductions, the following exempted persons are entitled to a refund of (input) VAT on goods or services purchased in Finland:

enterprises established abroad, provided that they would be liable to tax if they carried on business activities in Finland; foreign diplomatic missions and consular posts headed by career consular offi cers as well as the organs of the European Communities situated in Finland; enterprises supplying certain exempted goods and services (see 7.6); enterprises supplying goods and services outside the Community or certain services mainly related to such goods (see 7.12.3); enterprises supplying exempted fi nancial or insurance services or exempted bank notes and coins provided that the purchaser is an enterprise which does not have domicile or fi xed establishment in the Community or that the sale is associated with goods intended to be exported outside the Community; enterprises supplying goods via intra-Community supply (see 7.12.2).

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The refund for enterprises established abroad is granted upon application. The right to a refund is equal in extent to the deduction rights of enterprises liable to tax in Finland. Hence, tax is not refunded on those purchases that are not deductible (see 7.10). The competent authority in these cases is the Uusimaa Regional Tax Ofﬁ ce. In order to ensure neutrality between services provided by the municipalities themselves and purchased services, the municipalities are entitled to refunds on (input) tax related to their tax exempt functions.

7.12 Foreign trade The only transactions to be taxed are those that take place in Finland. On the other hand, according to the principle of destination, VAT is meant to be levied on goods and services that are consumed in Finland. As a consequence, the importation of goods is taxed whereas the sale of goods abroad is exempted. Since the effective end of importation and exportation following the abolition of ﬁ scal frontiers in intra-Community trade, the principle of destination is carried into effect by the taxability of intra-Community acquisition and the exemption of intra-Community supply. As far as services are concerned, the principle of destination is mainly realised by provisions concerning the place of supply.

7.12.1 Place of transactions

VAT is only levied on transactions that occur in Finland.

Supply of goods The supply of goods is effected in Finland, if:

goods are in Finland when the supply takes place; dispatched or transported goods are in Finland when the dispatch or transportation begins; dispatched or transported goods are imported by the supplier to be handed over to the purchaser in Finland; goods are transported from another EU Member State and installed or assembled by the supplier in Finland; the point of departure of the transportation is in Finland when goods are sold on board ships, aircraft or trains during the transportation of passengers effected within the Community.

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A special rule is applied to distance sales effected in the Community i.e. sales of goods transported to Finland from another Member State and vice versa, when the supplier arranges the transport. The rule is applied only when the purchaser is a person whose acquisition does not qualify as intra-Community acquisition (see 7.12.2). Goods transported to Finland from another Member State are deemed to be sold in Finland if the total value of distance sales of the supplier exceeds 35 000 euros in the same calendar year or the preceding year. Correspondingly, the supply of goods transported from Finland to another Member State is effected in Finland if the total value of such sales does not exceed the applicable distance sales threshold in that other Member State. Irrespective of the value of the distance sales, the supplier has a right to opt for taxation in the country of destination.

Supply of services

As a general rule, services are sold in Finland if the supplier has a fi xed establishment in Finland from which the service is supplied. When the service is not supplied from any fi xed establishment, the service is deemed to be sold in Finland if the supplier has his domicile in Finland. However, as to hiring out the means of transport, the service is deemed to be sold in Finland if the service is actually consumed only in Finland. The services of agents and intermediaries who act for and on behalf of another person are deemed to take place principally in Finland if the mediated goods or services are sold in Finland. However, as far as intra-Community trade is concerned, if the purchaser uses a Finnish VAT identifi cation number in the purchase, the services are in every case deemed to be sold in Finland. Correspondingly, if the purchaser uses a foreign VAT identifi cation number, the services do not take place in Finland. In the following cases the supply is deemed to take place in Finland:

services connected with real property if the property is situated in Finland; transportation services where the transport takes place in Finland. However, transportation services from Finland directly to another country and vice versa are not deemed to be sold in Finland. Intra-Community transport is deemed to be sold in Finland if the transport begins in Finland or the purchaser uses a Finnish VAT identifi cation number. Intra-community transport means the transport of goods from one Member State to another and includes such transport within a Member State, which is directly linked, with transport from one Member State to another. Correspondingly, if the purchaser uses a foreign VAT identifi cation number the service is not deemed to take place in Finland; educational and scientifi c services, cultural, entertainment and sporting events, ancillary transport services, the valuation of and work on movable tangible property if the service is provided in Finland; however, as to intra-Community transportation of goods, the

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supply of ancillary services is deemed to take place in the Member State which issued the purchaser with the VAT identifi cation number being used; the last-mentioned rule also applies to the valuation of and work on movable tangible property provided that the goods are transported out of the Member State where the service was carried out. the transfer of rights, patents, licences and similar rights, advertising services, consultancy services, data processing and supplying of information, fi nancial services, the supply of personnel and hiring out of movable tangible property (excluding the means of transport), the obligation to refrain from resuming a business activity, the provision of access to and transport or transmission through natural gas and electricity distribution systems and provision of other directly linked services, and the services of agents who act for and on behalf of another person when they arrange such services provided that in all these cases the purchaser has a fi xed establishment in Finland for which the service is supplied or the purchaser has his domicile in Finland. If the purchaser has his domicile in Finland or in some other Member State, this special rule applies only when the purchaser is an enterprise.

This rule also applies to telecommunication services, radio and television broadcasting services and electronically supplied services. In addition, these services are deemed to be sold in Finland if they are supplied from a fi xed establishment outside the Community or if they are not supplied from any such fi xed establishment, the seller has its domicile outside the Community and the purchaser is not an enterprise and has his domicile or a permanent establishment, for which the services are supplied, in Finland. A special scheme is applied to electronic services (see 7.13). The supply of gas through the natural gas distribution system or supply of electricity is sold in Finland if they are delivered to a fi xed establishment that a taxable dealer has in Finland. If these goods are not supplied to such fi xed establishment, the goods are sold in Finland if a taxable dealer has his domicile here. The expression ‘a taxable dealer’ means a taxable person whose principal activity is reselling such products and whose own consumption is negligible. The supply of gas through the natural gas distribution system or supply of electricity to other than a taxable dealer is sold in Finland if the customer actually consumes them here. Non-consumed goods are consumed in Finland if goods are supplied to the customer’s fi xed establishment situated in Finland. If these goods are not supplied to a fi xed establishment, they are consumed in Finland, if the customer’s domicile is here.

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7.12.2 Intra-Community acquisition and supply of goods

Intra-Community acquisition is defi ned as the acquisition of the owner’s right to dispose of movable tangible property effected for a consideration when the property is transported to Finland from another Member State. Correspondingly, intra-Community supply is the corresponding sale of such property when the property is transported from Finland to another Member State. The rules concerning intra-Community acquisition and supply apply only to transactions between enterprises liable to tax. However, such acquisition made by exempt enterprises and non-taxable legal persons is subject to VAT if they acquire goods from another Member State for a value in excess of 10,000 euros in the same calendar year or the preceding year. The acquisition of goods subject to excise duties effected by exempted enterprises and non-taxable legal persons is always deemed to be a taxable acquisition. Moreover, irrespective of the purchaser, the acquisition of new means of transport is always considered to be a taxable intra-Community acquisition. In certain cases the acquisition is not taxable, for example when the importation is exempt from tax. Intra-Community acquisition is deemed to be effected in Finland if the goods are in Finland at the time the transport to the purchaser ends. However, acquisition made under a Finnish VAT identifi cation number takes place in Finland unless the purchaser can establish that it has been subject to tax according to the general rule in another Member State. The intra-Community supply of goods is exempted from VAT. A precondition for the exemption is that the purchaser is liable to tax on the intra-Community acquisition and that the goods are transported to another Member State. The supplier has to prove that the transport to another Member State has taken place by means of a bill of lading, transport invoice or some other corresponding document. The supplier is entitled to a refund of (input) VAT on goods and services purchased for the intra-Community supply. In one case the transfer of goods is also deemed to be intra-Community acquisition and supply. The transfer from Finland to another Member State of goods, which form part of the entrepreneur’s business assets for the purposes of his enterprise there, is treated as an intra-Community supply. The entrepreneur is liable to pay tax on intra-Community acquisition in the Member State to which the goods are transported. Correspondingly, goods transferred from another Member State to Finland are taxable in Finland. A simplifi cation measure is applied in the case of triangulation i.e. when enterprise A established in member state A sells goods to enterprise B established in member state B, which then sells them forward to enterprise C established in member state C, triangulation is said to take place when the goods are then transported directly from member state A to member state C. In order to release enterprise B from the obligation to be registered in member state C, it is not liable to tax on the intra-community acquisition taking place in member state C and enterprise C is designated as the person liable to pay the tax on the sale from B to C.

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7.12.3 Importation and exportation

The importation of goods is subject to VAT. The importation means any importation of goods into the Community. In principle, the importation takes place in Finland if the good is in Finland at the time it is imported into the Community. The importer is liable to pay the tax. The tax rates are the same as in domestic sales. In certain cases, the importation is exempt from tax i.e. if the domestic sale is exempt. The tax is levied on the border as part of the customs procedure. VAT is not levied on goods that are consumed abroad. Thus many exemptions from VAT are associated with international trade, i.e. the sale of goods transported outside the Community, the sale of aircraft used by airlines operating for a consideration mainly on international routes as well as the sale of goods for the provisioning of vessels and aircraft operating on international routes. The supplier is entitled to a refund of (input) VAT on goods and services purchased for export. In the international trade in services, the principle of consumption is realised by the rules concerning the place of transaction (see 7.12.1). The rules concerning international trade apply only to certain services, which are mainly associated with goods transported outside the Community.

7.12.4 Warehousing arrangements

The aim of warehousing arrangements and other such arrangements is to simplify the taxation of chain transactions. Supplies of goods, which will be or are placed under warehousing arrangements, in a free zone or in a free warehouse are on certain conditions exempt from the VAT even though the goods are in Finland. Also the supplies of services related to such goods and provided under the arrangements are exempt. The VAT on such supplies of goods and services must be paid at the time the goods cease to be covered by the arrangements. The taxable event then is the removal of goods from warehousing arrangements, sale or importation. If the good is transported directly outside the Community no tax is levied. 7.13 Tax procedure The normal tax period for VAT is one month. For primary producers and artists the tax period is one year; they may however opt for the application of the normal tax period. The tax payable is the difference between taxes on supplies and deductions attributed to each tax period. The tax becomes chargeable when the goods are delivered or the services are performed. The deduction can be made when the goods or services have been

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received. In the case of advance payments, the time of payment is decisive. A taxpayer may account for the tax according to the issuing of the invoice during the accounting period. Certain small-scale enterprises may account for the tax on the basis of the receipt of payment. The VAT due is to be paid at the latest on the fi fteenth of the second month following the tax period. The taxpayer submits a periodic VAT return when paying the tax due. If the taxpayer has neglected the obligation to submit the return or has submitted a defective or false return, the tax may be increased (minimally by 10 per cent, maximally by 200 per cent). The intra-Community supplies are declared quarterly in a separate recapitulative return. A fi ne may be imposed in the event of failure to submit this return. The minimum amount is 80 euros and the maximum 1,700 euros. When services are provided to consumers by electronic means, a seller established outside the European Community may opt to operate a special scheme, where the seller fulfi ls his obligations concerning the fi ling of tax returns and paying the tax through only on Member State. In the special scheme the tax period is a quarter year and the tax return is given and tax is paid electronically within 20 days from the end of the tax period. All taxpayers can fi le their applications of registration and tax returns electronically. In VAT due on importation the customs rules are followed.

7.14 Invoicing The conditions concerning invoicing for VAT purposes have been harmonised through a EU-Directive on the subject. According to the general requirements the following details must appear on an invoice:

1) the date of issue; 2) a sequential number, based on one or more series, which uniquely identifi es the invoice; 3) the VAT identifi cation number under which the taxable person supplied the goods or services; 4) the customer’s VAT identifi cation number in reverse charge procedure or intra- Community trade; 5) the name and address of the seller and customer; 6) the quantity and nature of the goods supplied or the extent and nature of the services rendered;

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7) the date on which the supply of goods or of services was made or completed or the date on which the payment on account was made, insofar as that date can be determined and it differs from the date of issue of the invoice; 8) the taxable amount per rate or exemption, the unit price exclusive of tax and any discounts or rebates if they are not included in the unit price; 9) the rate applied; 10) the amount payable in euros; the invoice must not indicate the VAT, if the seller applies the scheme for marginal taxation of second-hand goods, works of art, collector’s items and antiques. 11) where an exemption is involved or where the customer is liable to pay the tax, indication that the supply is exempt or subject to the reverse charge procedure; 12) the particulars concerning a new means of transport sold to another member State; 13) where the scheme for marginal taxation of second-hand goods, works of art, collector’s items and antiques is applied, indication that the scheme has been applied or reference to the corresponding provision; 14) in the case of supply of travel services, an indication that the special scheme for marginal taxation of travel agents or operators is applied or reference to the corresponding provision; 15) if the supplier of investment gold opts for taxation of supply, an indication that the supply is taxable; 16) if an invoice amends a previously drawn up invoice, reference to that invoice.

However, only simpliﬁ ed contents are required in the following cases: 1) invoices for total of up to 1,000 euros (see Appendix 13 concerning Government proposal 1); 2) invoices issued for retail sales or made almost exclusively to private individuals; 3) invoices for catering services or passenger transport excluding services, which are to be sold on; 4) receipts printed out by parking meters and other similar devices. In these cases the invoices must have the following information: 1) the date of issue; 2) the name of the seller and his VAT identiﬁ cation number; 3) the quantity and nature of the goods supplied and nature of the services rendered; 4) the amount of tax per rate or the tax base per rate.

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These simplifi ed invoicing requirements are not applied to intra-Community transactions, resale by an acquirer in an intra-Community transaction, distance sales of goods and sales of goods that are transported from an other Member State and assembled or installed here by the seller. Besides ordinary invoices an invoice means also other certifi cates that act as invoices and fulfi l the requirements concerning the informational contents. An invoice may be sent either on paper or, subject to acceptance by the customer, by electronic means. There are no particular conditions for electronic invoicing in the VAT Act. A summary invoice may be drawn up for several separate supplies of goods or services. An invoice may be comprised of several separate documents.

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8 EXCISE DUTIES

In order to ensure the functioning of the internal market and because the Member States are not allowed to exact taxation at the borders and carry out border checks, the European Union has harmonised the indirect taxation, in other words, excise duty and value-added tax. For administration, appeals and advance rulings see 10.3.

8.1 Arrangement for suspending duty Excise duty is levied in the Member State where the products subject to excise duty are released for consumption. Before the release goods can move within and between Member States exempt of duty under a special arrangement. This arrangement for suspending duty (the ‘duty-suspension arrangement’) is allowed only in certain speciﬁ ed cases and between certain persons. The main features of the arrangement are:

goods may move between the tax warehouses of authorised warehousekeepers; an authorised warehousekeeper may send products under the duty-suspension arrangement, if the recipient is a registered trader in the other Member State or a similar non-registered trader; traders are not allowed to hold or dispatch products under the duty-suspension arrangement; products coming from third countries to which community customs suspension procedures are applied, and products in duty-free zones and warehouses are temporarily exempt from excise duty.

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The system is applied to mineral oils, alcohol and alcoholic beverages and manufactured tobacco. It is also applied – to a certain degree – to products which are subject to national laws on excise duties. Such products are soft drinks, coal, milled peat, natural gas, electricity, pine oil, certain lubricating oils, drink containers and cigarette paper. Provisions concerning the production, processing, holding and movement of products as well as certain tax exemptions for and the procedure relating to products subject to excise duty are included in the Directive 92/12/EEC. In Finland they are included in the Excise Taxation Act which has been in force as of 1 January, 1995. According to the Excise Taxation Act, authorised warehousekeepers, registered traders and tax representatives must apply to the National Board of Customs for a licence. The same procedure is followed in the case of the holdings of tax warehouses under duty- suspension arrangements. In order to cover the risks associated with the movement of goods under the duty- suspension arrangement, a guarantee corresponding to the amount of excise duties is obligatory. Goods moving under the duty-suspension arrangement between Member States are accompanied by a document for which there is a separate registration and information system in the EU. The use of this document serves to monitor the movement of goods without border formalities. For goods moving within a single Member State other documents may be substituted for the accompanying EU document. An authorised warehousekeeper dispatching products under the duty-suspension arrangement has to draw up the accompanying document. The consignee has to return a signed copy of the document within a speciﬁ ed time to the consigner to conﬁ rm the (the consigner’s) exemption.

8.2 Taxpayers The following are liable to pay excise duty: authorised warehousekeepers, registered and non-registered traders (in the system of duty-suspension arrangement) and tax representatives, a person who is in the position of debtor according to the customs legislation of the European Community (for goods imported from the area outside the Community), persons who have acquired duty-exempt products that have not been used for duty-free purposes and persons who hold products already taxed in another Member State in the course of their business in Finland.

8.3 Time and rate of charge of duty Excise duty is chargeable according to the rules in force on the date on which the product is released for consumption from the duty-suspension arrangement or when a shortage is recorded there and the shortage cannot be regarded as tax-exempt. In the case of registered

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and non-registered traders and goods on which excise duty has already been paid in another Member State, the excise duty is levied when goods are received in Finland. As far as the importation of goods from third countries is concerned, the excise duty is levied according to the rules in force on the date on which the customs declaration of the goods is received by customs authorities if the duty-suspension arrangement is not applicable. Authorised warehousekeepers are liable to pay the excise duty for products which have been released for consumption from a tax warehouse or for which a shortage has been recorded during any given calendar month. In the case of registered traders and tax representatives, the excise duty is levied on the products that have been received during a given calendar month. Others have to pay the excise duty on products upon receipt.

8.4 Exemptions In addition to products actually exempted from the excise duty under the duty-suspension arrangement, the following products are exempted:

products exported outside the EC, including goods placed under the customs warehousing procedure or moved to tax -free shops; a shortage or loss of products under certain conditions; fuels and lubricating oils as well as provisions for vessels and aircraft in international commercial trafﬁ c; fuels (for own use and in fuel tanks) of other vessels coming from outside the EC; products intended for delivery in the context of diplomatic or consular relations, and products for international organisations or their members under certain conditions; products delivered to the organs of the EC (subject to certain restrictions); products intended for consumption under an agreement with third countries or international organisations provided that such an agreement is allowed or authorised with regard to exemption from VAT; certain non-commercial gifts of minor value (excluding alcoholic beverages) sent by an individual from a third country to an individual in Finland and the fuel of motor vehicles coming from third countries; these gifts and fuels are exempt under the same conditions under which they are exempt from customs duty; products that have been granted exemption in various excise tax Acts.

The exemption is usually implemented through tax declarations. A refund is possible in certain cases.

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8.5 Travellers’ allowances The excise duty on products imported by private individuals for their own use is levied in the Member State where the products have been acquired. A traveller is entitled to import tax-free for his own use without any quantitative restrictions alcoholic beverages and tobacco products that he has acquired inclusive tax in an other EU Member State. Such importation is tax-free on the condition that the traveller brings the products along and they are intended for the traveller’s or his family’s personal use or to be given as a present. In the case of countries that became EU members on 1 May 2004 the tax-free importation of tobacco products has been limited during the period of transition. The limitations are not applied to Cyprus and Malta.

Member State Products End of period of transition Czech Republic 200 cigarettes or 100 cigarillos 31.12.2007 (max. weight 3 g) or 31.12.2006 50 cigars or 31.12.2006 250 g pipe- and smoking tobacco 31.12.2006 Slovenia 200 cigarettes 31.12.2007 Slovakia 200 cigarettes 31.12.2008 Hungary 200 cigarettes 31.12.2008 Poland 200 cigarettes 31.12.2008 Lithuania 200 cigarettes 31.12.2009 Latvia 200 cigarettes 31.12.2009 Estonia 200 cigarettes or 31.12.2009 250 g pipe- and smoking tobacco 31.12.2009

If the products are imported from a third country, maximum tax-free quantities of smoking products are 200, 100, 50 pieces or 250 grams. The quantities of alcoholic beverages are the following:

1 litre of distilled alcoholic beverages and spirits with an alcoholic strength exceeding 22 % volume; or

2 litres of distilled alcoholic beverages, spirits and aperitifs with a wine or alcohol base of an alcoholic strength not exceeding 22 % volume or sparkling wines or fortiﬁ ed wines;

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2 litres of still wines; 16 litres of beer.

8.6 Declaration and payment of excise duty Authorised warehousekeepers, registered traders and tax representatives have to fi le a tax declaration not later than on the eighteenth day following the fi scal period (calendar month). Other taxpayers have to fi le a tax declaration not later than on the second weekday after the receipt of the products. In the case of an authorised warehousekeeper, the excise duty is assessed by the district customs offi ce within which jurisdiction the warehouse falls. In other the cases the residence of the taxpayer is decisive. The excise duty must be paid not later than on the twenty-seventh day of the month following the tax period. Non-registered traders and certain other taxpayers must pay the duty not later than on the tenth weekday after receiving the products.

8.7 Excise duty on manufactured tobacco Excise duty on manufactured tobacco is levied on cigarettes, cigars and cigarillos, fi ne- cut tobacco for the rolling of cigarettes and other smoking tobacco. The duty is also levied on other products containing tobacco and on cigarette paper in retail form (Combined Nomenclature code 4813). The defi nitions of the different products correspond to the defi nitions of the EC directive. Also products manufactured in whole or in part of substances other than tobacco (“substitute products”) are subject to excise duty. Products used for medical purposes (which do not contain tobacco), products supplied to the authorities as samples, and products used in the manufacture of other products subject to the same excise duty are exempted excise duty. The rates of excise duty are as follows:

TABLE 4. Rates of excise duty on manufactured tobacco 1.1.2005

Product group Euro per unit % of the retail sales price 1) cigarettes 15.13/1000 pcs 50.0 2) cigars and cigarillos - 22.0 3) pipe and smoking tobacco 3.62/kg 48.0 4) ﬁ ne-cut tobacco for rolling of cigarettes 3.62/kg 50.0 5) cigarette paper - 60.0 6) other products containing tobacco - 60.0

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A minimum excise duty is levied on cigarettes and ﬁ ne-cut tobacco for the rolling of cigarettes. It is 90 per cent of the excise duty on the product in question in the price category most in demand. The retail selling price is the highest retail selling price declared by the taxpayer, including all taxes. This price may be set freely by the taxpayer.

8.8 Excise duty on alcohol and alcoholic beverages

Excise duty on alcohol and alcoholic beverages is levied on beer, wine, intermediate products (i.e. aperitifs) and ethyl alcohol. The rates are as follows:

TABLE 5. Rates of excise duty on alcohol and alcoholic beverages 1.1.2005

Product and ethyl alcohol strength Rate % volume (exceeding the lower but not the upper limit; litre or centilitre)

Beer – more than 0.5 but at most 2.8 1.68 cent/cl ethyl alcohol – more than 2.8 19.45 cent/cl ethyl alcohol Wines and other distilled alcoholic beverages – more than 1.2 but at most 2.8 4.54 cent/l of fi nished product – more than 2.8 but at most 5.5 103.0 cent/l of fi nished product – more than 5.5 but at most 8.0 152.0 cent/l of fi nished product – more than 8.0 212.0 cent/l of fi nished product Wines – more than 15 but at most 18 212.0 cent/l of fi nished product Intermediate products – more than 1.2 but at most 15 257.0 cent/l of fi nished product – more than 15 but at most 22 424.0 cent/l of fi nished product Ethyl alcohol CN-code 2208 – more than 1.2 but at most 2.8 1.68 cent/cl ethyl alcohol – more than 2.8 28.25 cent/cl ethyl alcohol Others 28.25 cent/cl ethyl alcohol

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Products used mainly for purposes other than drinking are exempted, e.g. for the production of medicines and foodstuffs. The excisable rate for beer produced in a legally and economically independent brewery is lowered by

– 50 per cent if the maximum annual production is 200,000 litres; – 30 per cent if the maximum annual production is more than 200,000 but at most 3,000,000 litres; – 20 per cent if the maximum annual production is more than 2,000,000 but at most 5,500,000 litres. – 10 per cent if the maximum annual production is more than 5,500,000 but at most 10,000,000 litres. The packaging of beer into retail packages is not taken into account in calculating the amounts of production. If two or more such breweries co-operate in production, they are not understood to be legally or economically dependent. Co-operation in production is deﬁ ned as purchasing raw materials and equipment, and the packaging, marketing and distribution of beer. A further condition is that the breweries’ annual aggregate production must not exceed 10,000,000 litres.

8.9 Excise duty on soft drinks The excise duty on soft drinks, a national excise duty, is levied on soft drinks including lemonades, mineral waters and juices. The basic rate for soft drinks is 4.5 cents/litre. The duty on solid ingredients for drinks is 34 cents/kg. In the case of liquid products used for production of soft drinks (including juices to be diluted) the duty is levied on the basis of the volume of drink they produce. Separate rules are applied to artiﬁ cial sweeteners. The duty is not levied on soft drinks produced by a legally and economically independent producer if the maximum annual production of the drinks is 50,000 litres. Exempt are soft drinks used for the manufacturing of sweets, soft drinks, medicines or alcoholic beverages.

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8.10 Excise duty on certain beverage packages

Under the Act on Excise Duty on Certain Beverage Packages a new excise duty on beverage packages has been levied as of 1 January 2005. This excise duty which is widely based on environmental aspects replaces the additional duty that has been levied on alcoholic beverages and soft drinks. The assessment and the administration are a part of customs authorities tasks, whereas the environmental authorities monitor the functioning of beverage package systems. Subject to tax are retail packages made of various materials (with the exception of packages made of liquid packaging board) for alcoholic beverages, soft drinks, water and certain other beverages taken as such. Packages which are recoverable and used in a package deposit system are tax exempt. The rate of the duty for beverage packages which are used in a package deposit system and as raw material is for the three ﬁ rst years 8.5 cents/litre. After this period of transition also packages used as raw material become tax exempt. The duty for non-returnable packages outside all beverage package systems is 51 cents/litre. A corresponding three year period of transition is also applied to any new products which are subject to tax under the act. 8.11 Excise duties on energy products An excise duty has been levied on trafﬁ c fuels, heating oils and other energy sources for several decades. In the early 1990’s Finland began to levy an excise duty on fossil fuels on the basis of environmental criteria. The duty rate depended, on the one hand, on the carbon content of the fuel and indirectly on the amount of carbon dioxide emissions arising from their combustion and, on the other hand, on the energy content of the product. In the 1996 energy tax reform the taxes on input fuels for production of electricity were replaced by taxes on the end product, i.e. electricity and the CO2/energy taxes on electricity generation, and energy taxes on nuclear and hydro-power and imported electricity were removed. Instead, a general tax is levied on electricity generated by various energy sources e.g. by using wind power, wood or wood chips. Renewable energy sources were taken into account by subsidising power plants generating electricity by using wind power, hydropower or wood chips. The tax rate for electricity is the same, regardless of the energy sources used. However, the rate is differentiated for consumers. Industry and professional glasshouse growers pay the lower rate of taxation (0.44 cent/kWh) whereas the rest of the electricity consumers are charged at a higher rate (0.73 cent/kWh). The input fuels are taxed according to their CO2 emissions. The rate of CO2 tax has been raised to 18.05 euros/CO2 tonne). The tax on energy content has been removed. As a result, the total tax burden on heating fuels has increased.

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The energy taxation is based on two laws, the Act on Excise Duty on Liquid Fuels (1994) and the Act on Excise Duty on Electricity and Certain Fuels (1996).

8.11.1 Excise duty on liquid fuels The excise duty on liquid fuels is levied on certain mineral oils. In practice the most important taxable products are motor petrol and gas oil used as propellant as well as gas oil (light fuel oil) for commercial, industrial or heating purposes, and heavy fuel oil. The duty consists of a basic duty and an additional duty. For environmental reasons, Finland has a derogation from EC rules according to which the duty on sulphur-free petrol and sulphur-free gas oil used as a propellant may be differentiated. A duty corresponding to the duty on motor petrol or gas oil used as a propellant is also levied on other than the above-mentioned products if they are used as motor fuels. Correspondingly, the duty on light or heavy fuel oil is levied on all mineral oils and hydrocarbons used as heating fuel. Additives and extenders in fuels are subject to the excise duty under the same principles as the fuel to which they are added. Gas oil, motor petroleum and parafﬁ n oil used for heating purposes must contain a reactive reagent to reveal unauthorised use.

Rates (cent per litre): Basic duty Additional Strategic duty stockpile fee Petrol – reformulated and with extremely low sulphur content 53.85 4.23 0.68 – normal grade 56.50 4.23 0.68 Gas oil used as propellant – reformulated and with extremely low sulphur content 26.83 4.76 0.35 – normal grade 29.48 4.76 0.35 Gas oil for commercial, industrial and heating purposes 1.93 4.78 0.35 Heavy fuel oil — 5.68 cent/kg 0.28 cent/kg

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The strategic stockpile fee is levied separately on these fuels. The following are exempt from excise duty:

1) waste oil, which is reused as a fuel directly after recovery or after a process of recycling; 2) fuels which are sold, delivered or imported for the purposes of emergency supply; 3) fuels used as a source of energy in an oil reﬁ ning process; 4) fuels used in industrial production as a raw material or auxiliary material or consumed as immediate inputs in the manufacturing of goods; 5) fuels consumed in vessels used for commercial purposes inside Finnish territorial waters or on inland waterways; 6) fuels used in electricity production except: a) fuels for generating electricity by using a generator with a capacity of less than 2 MVA if the electricity is not transmitted to an electricity network; b) fuels used in electricity production in a vessel, train, car or other transport vehicle if the electricity is used for the vessel’s or vehicle’s own need; c) fuels used in electricity production in small power plants.

A person who practises professional greenhouse cultivation may apply for a refund (minimum refund 580 euros) of 3.4 cent/l for gas oil and 1.4 cent/kg for heavy fuel oil used in professional greenhouse cultivation. An authorised warehousekeeper is entitled to deduct from the excise duty and strategic stockpile fee which it has to pay for a tax period the corresponding duty and fee it has to pay (on the basis of release for consumption) for hydrocarbons which have been recovered from motor petroleum. A further condition is that the recovered hydrocarbons are liqueﬁ ed to petroleum in a tax warehouse. The amount of hydrocarbon which entitles to the deduction is 0.14 per cent of the volume of petroleum released for consumption if the hydrocarbons are recovered both in a tax warehouse and service station and 0.07 per cent if the hydrocarbons are recovered in a tax warehouse. The refund is calculated on the basis of the duty on unleaded petrol, normal grade. The warehousekeeper from whose tax warehouse the motor petroleum has been released for consumption is entitled to the deduction. Exempted from the strategic stockpile fee are fuels mentioned in items 2), 3), 5) and 6) as well as fuels which are shown to be used in the manufacture, repair, ﬁ xing, improvement or coating of exported goods, excluding liquid fuel which is used for the working or maintenance of machines or equipment.

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8.11.2 Excise duty on electricity and certain energy sources Excise duty on certain energy sources is levied on coal, electricity, milled peat, natural gas and pine oil. The duty consists of a basic duty and an additional duty. The basis for determining the additional duty is the same as for liquid fuels.

8.11.2.1 Electricity

TABLE 8a. Rates of excise duty on electricity and certain energy sources 2005

Product duty Basic Additional Strategic duty stockpile fee Electricity cent/kWh – category I – 0.73 0.013 – category II – 0.44 0.013

Electricity is taxed on the basis of category II if it is used in the mining of minerals, industrial manufacturing and processing of goods or professional glasshouse cultivation and if the amount of electricity can be measured by delivery. All other cases fall under category I. See also the paragraph concerning tax period below. In the case of electricity, the following are liable for duty:

electricity networks operators; persons who produce electricity in their earning activity; persons who have produced or bought electricity taxed at the rate of category II when the electricity has been used or delivered for the purposes of category I; and persons other than possessors of electricity networks, who receive electricity in their earnings activity from another EU Member State or import electricity from outside the Community, if the electricity does not ﬂ ow through a network in Finland.

The tax period is one calendar month. The duty must be paid for the amount of electricity which

1) the electricity network operator delivers for consumption; 2) is produced by a person who produces electricity in his earning activity; 3) is used by persons who have produced or bought electricity taxed at the rate of category II when the electricity has been used or delivered the purposes of category I; the tax is then calculated as a difference between duties in categories I and II;

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4) persons other than possessors of electricity network receive in their earning activity from another EU Member State or import from outside the Community.

As an exception to items 1) and 3), the amount of electricity can be based on the amount that has been invoiced by the possessor of the network while some ﬂ exibility over tax periods is also written in the law. Exempted from the excise duty and strategic stockpile fee is electricity which

an electricity network operator transmits to another possessor of an electricity network; is delivered to an electricity network by persons who produce electricity in their earning activity; is delivered to an electricity network by persons other than possessors of electricity networks, who in their earning activity, receive electricity from another EU Member State or import electricity from an area outside the Community; or is delivered to an area outside of the Community, or is delivered to an area in the Community to be consumed outside Finland; is delivered to be used directly in rail trafﬁ c.

If the electricity is produced by using wind power, wood, recyclable fuel, biogas or forest processed chips or by using hydro generator with a nominal maximum capacity of 1 MVA or by using peat in a combined heat and power plant with a nominal maximum capacity of 40 MVA, the producer of the electricity may apply for a refund for electricity delivered to the network. The refund is 0.42 cent/kWh but for electricity produced by using wind power or forest processed chips 0.69 cent/kWh and for electricity produced by using recyclable fuel 0.25 cent/kWh. If the electricity is produced by heat of reaction created by chemical processes or by using industrial waste gas derived from metallurgical processes, the producer of the electricity may apply for a refund of 0.42cent/kWh for electricity delivered to the network. If the electricity is not delivered to the network (i.e. if it is used by the producer or another company), no excise duty is levied. If the electricity is produced in a combined heat and power plant, the duty (on fuels used for producing the heat) is paid for the amount of fuel that is calculated by multiplying the amount of heat delivered for consumption by 0.9.

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8.11.2.2 Coal, lignite, milled peat and natural gas

TABLE 8b. Rates of excise duty on electricity and certain energy sources 2005

Product duty Basic Additional Strategic duty stockpile fee Coal, lignite euro/tonne – 43.52 1.18 Milled peat euro/MWh – 1.59 Natural gas cents/nm3 – 1.82 0.084

In the case of coal and lignite, the following are liable for duty and the strategic stockpile fee:

authorised warehousekeepers for the amounts which have been released for taxable consumption during the tax period; and authorised warehousekeepers for the amount used for their own consumption.

Exempted from the excise duty and strategic stockpile fee is coal

used in industrial production as raw material or auxiliary material or consumed as immediate inputs in the manufacturing goods; delivered by an authorised warehousekeeper for consumption in another area of the Community other than Finland; used in the production of electricity; this exemption does not apply to coal used in the production of electricity by using a generator with a capacity of less than 2 MVA if the electricity is not transmitted to an electricity network or to coal used in the production of electricity in a vessel, train, car or other transport vehicle if the electricity is used for the vessel’s or vehicle’s own need or coal used in electricity production in small power plants.

In certain cases, the authorised warehousekeeper is entitled to a deduction for coal on which the duty has been paid and which is used by him or delivered for a taxable or non- taxable use. Milled peat is excisable only if its use in heat production exceeds 25,000 MWh in any calendar year. In the case of natural gas, persons liable for duty and strategic stockpile fee are those who import natural gas from areas outside the Community, and those to whom natural gas has been transferred tax exempt under the Act on Excise Duty on Electricity and Certain Other Fuels, if the gas has been used for other than tax-exempt purposes.

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Exempted from the duty and fee is natural gas which is

used in industrial production as a raw material or auxiliary material or consumed as immediate inputs in the manufacturing of goods; used as a source of energy in an oil reﬁ ning process; or used in the production of electricity; this exemption does not apply to natural gas used in the production of electricity by using a generator with a capacity of less than 2 MVA if the electricity is not transmitted to an electricity network or natural gas used in the production of electricity in a vessel, train, car or other transport vehicle if the electricity is used for the vessel’s or vehicle’s own need or natural gas used in electricity production in small power plants.

See also Appendix 13, item 4.

8.11.2.3 Pine oil

TABLE 8c. Rates of excise duty on electricity and certain energy sources 2005

Product duty Basic Additional Strategic duty stockpile fee

Pine oil cent/kg 5.68 – –

Persons who are involved in industrial production and use pine oil for heating purposes are liable for duty on pine oil.

126 8 Excise dutie

8.11.3 Refund of excise duties on energy products to energy intensive enterprises An enterprise is regarded as energy intensive if the total amount of the excise duty on electricity and certain energy sources (electricity, coal, natural gas, lignite, milled peat or pine oil, see 8.9.2 ) and the excise duty on liquid fuels on light fuel oil and heavy fuel oil paid by the enterprise or included in the purchase price of corresponding products acquired by the enterprise during its accounting period (usually a calendar year) exceeds 3.7 per cent of the value added. For the excess such an enterprise may apply for a refund for 85 per cent of excise duty paid on the products or included in their purchase prices. The refund is only paid for amounts exceeding 50,000 euros and its maximum is the amount of the excise duty on electricity and certain energy sources (paid for or included in the purchase price of electricity, coal, natural gas, lignite, milled peat or pine oil). In calculating the amount of excise duties, the energy tax refunds, which have not been taken into account in the excise taxation of the enterprise, and subsidies for professional greenhouse cultivation, are subtracted. If the enterprise has further disposed of these products, the amount of excise duties paid by the enterprise for these products is not taken into account in calculating the amount of excise duties. The value added is defi ned as the total amount of the operating income (or loss), write-offs, value adjustments and personnel costs calculated according to the confi rmed fi nancial statements of the corresponding accounting year.

127 128 9 Other taxes and other tax revenues

9 OTHER TAXES AND OTHER TAX REVENUES

This chapter lists and describes taxes, which differ widely in character.

9.1 Road traffi c taxes and other traffi c taxes 9.1.1 General Motor vehicles and fuel used for road traffi c are subject to the following taxes: Road traffi c taxes applicable to motor vehicles registered in Finland:

car tax on passenger cars, delivery vans and motorcycles (Car Tax Act of 29 December 1994); vehicle tax on diesel driven vehicles (tax on the propelling force; Act on Vehicle Tax of 30 December 2003); vehicle tax on passenger cars and vans (basic tax; Act on Vehicle Tax of 30 December 2003). excise duty on fuel (see 8.9.1); VAT on the sales value of vehicles and fuel, levied at the standard rate of 22 per cent; fuel fee (Act on Fuel Fee of 30 December 2003).

Taxes applicable to motor vehicles registered abroad:

ﬂ at rate tax levied for each day of use in Finland and kilometre tax on distance travelled in Finland Act on Vehicle Tax of 30 December 2003); fuel fee (Act on Fuel Fee of 30 December 2003).

129 9 Other taxes and other tax revenues

9.1.2 Car tax

The car tax is a purchase tax, which must be paid before the ﬁ rst registration or use of the vehicle in Finland. The car tax is levied on the following vehicles: a) passenger cars (category M1); b) delivery vans (category N1) (see exemptions below) and other cars weighing less than 1,875 kg ; c) motorcycles (categories L3e and L4e) and tricycles and quadricycles (categories L5e and L7e)

The tax on a new car and a car manufactured after 2002 and taxed as a used car is 28 per cent of the taxable value of the car minus 450 euros (if the propelling force is diesel oil) or 650 euros (if the propelling force is other than diesel oil). The tax on a new motorcycle and a motorcycle manufactured after 2002 and taxed as a used motorcycles is calculated on the basis of engine capacity or energy source as follows:

TABLE 9. Rates of car tax for motorcycles in 2005

Engine capacity in cubic centimetres (cc) Rate of tax as a percentage of taxation value up to 130 8 131 – 255 10 256 – 355 13 356 – 505 16 506 – 755 18 756 or more 20 Electric vehicles in category L 10

The tax on a new van is 85 per cent of the taxable value of the van (delivery van, delivery car) minus 770 euros. The tax is recharged on earlier registered vehicles (cars or motorcycles) if at least 50 per cent of their parts have been changed. If the vehicle has been used or registered abroad and has been registered for at least six months, it is taxed as used vehicle . If the vehicle has been used or registered abroad for less than six months, its taxation is based on the tax of a corresponding new vehicle with the exception of a reduction of tax for a vehicle that has been used or registered for at least

130 9 Other taxes and other tax revenues

three months. The reduction is determined according to a system, which is based on the age and course of prices and information on market prices. If there is no information on the model in question, the reduction is 0.8 per cent for each month. For more information see www.tulli.fi . If a car or a motorcycle has been manufactured before 2003 and it is taxed as used vehicle, the tax is that share of tax of the taxation value, which was in the ordinary retail values of similar vehicles when those vehicles were new. The National Board of Customs confi rms the tax shares in a table that it publishes. If the tax share has not been published, the tax is in the case of passenger car 30 per cent of the taxation value (if the propelling force is diesel oil) or 29 per cent of the taxation value (if the propelling force is other than diesel oil) and in the case of a motorcycle 9–23 per cent of the taxation value according to the engine capacity. Tax on a van taxed as a used van is the tax on a new vehicle of a corresponding kind reduced per month by 0.8 per cent of the residual value of the tax calculated at the end of each preceding month. The taxation value for a car or a motorcycle is the vehicle’s ordinary retail value on the Finnish market at the time of the taxation. This means the price that would be generally obtained when one similar vehicle (with tax included) is sold on the Finnish market to a buyer who is in the position of a consumer. If a value based on the ordinary selling prices is not available, the ordinary retail value is determined starting from the price for which similar vehicles are generally offered for sale and reduced by an amount representing customary discounts. The taxation value for a van is the acquisition value for the taxpayer. When a used van is taxed by calculating the tax starting from the tax on a corresponding new van, the taxation value of the corresponding new van is 46 per cent of the ordinary retail value of a corresponding new vehicle. The following vehicles, inter alia, are exempt: fi re engines, ambulances and lorries, motor caravans and caravans with unladen weight of at least 1,875 kg, cars used by foreign diplomatic missions and consular posts headed by career consular offi cers, as well as members of their personnel who are not Finnish nationals, three wheeled delivery cycles, cycles for disabled people and mopeds. Cars owned and used by EU bodies located in Finland and cars owned and used by persons who have been permanently resident elsewhere than Finland and who have been engaged by such bodies are exempt. For vans designed exclusively for the transport of goods, the tax is under certain conditions 35 per cent. Cars for disabled people may be partly exempted on application. Cars used as taxi cabs are granted a reduction of up to 9,600 euros.

131 9 Other taxes and other tax revenues

Non-residents are entitled to import their vehicles for their own use tax-exempt for a period of six or twelve months (a customs district may extend the period up to two years). When persons who have been abroad for at least one year move to Finland, the car tax on cars that they import (tax relief is only given for one such car) as removal goods is lowered by 13,450 euros, if they or their spouse have owned (or have had the kind of possession of the car that leads to ownership) and used the car abroad for at least six months. If they have imported a removal car earlier, a further condition (for the importation of another removal car with a lowered tax) is that they have before the second removal owned or had the possession of this car and also used it for at least three years at least one of which is in Finland. This exemption is not granted to persons under the age of eighteen at the time of the removal and persons who have earlier been resident in Finland and have been abroad mainly for studies. A person who is liable to pay car tax is also liable to pay VAT on the car tax according to VAT Act. If a car has been taken into use before the entry into force of the Car Tax Act, the VAT rate is: before 1.1.1967 11,20 %, 1967–1976 12,40 %, 1977–31.5.1983 16,28 %, 1.6.1983–31.5.1989 19,05 %, 1.6.1989–30.11.1989 19,76 %, 1.12.1989–31.12.1990 20,48 %, 1.1.1991–30.9.1991 21,21 %, 30.9.1991–22,00 %. The car tax must be paid before a vehicle can be registered or taken into use in Finland. The primary obligation to pay car tax lies with the importer or, if the vehicle has been manufactured in Finland, the manufacturer.

9.1.3 Vehicle tax

1) Basic tax Owners of passenger cars, vans and special-purpose cars that have a maximum unladen weight 3,500 kg are liable to pay vehicle tax if the vehicle has been or should have been registered in Finland. The tax is 26 cents per day on vehicles in use before 1 January 1994, otherwise 35 cents per day. The tax is assessed for 12-month tax periods.

2) Tax on the propelling force The tax on the propelling force is levied annually on all vehicles using, entirely or partly, fuel other than petrol, i.e. diesel oil, kerosene, liqueﬁ ed petroleum gas or electricity. The tax is assessed for 12-month tax periods. The rates per day are as follows: for passenger cars and dual-purpose cars, 6.7 cents/100 kg of the total weight or a fraction thereof and for motor caravans and delivery vans 0.9 cents /100 kg; for two axled lorries 1.0 cent/100 kg and up to 12,000 kg, and 2.2 cents for each additional 100 kg; for three axled lorries 1.3 cents/100kg and for four axled lorries 1.2 cents /100 kg, and for ﬁ ve- or more axled lorries 1.1 cents/100 kg;

132 9 Other taxes and other tax revenues

for lorries with a bogie construction 3.1 cents/100 kg if the vehicle has two axles, 2.3 cents/100 kg, if it has three axles, 2.0 cents/100 kg, if it has four axles, and 1.8 cents/100 kg, if it has fi ve axles or more; for lorries with a bogie construction approved and used for the traction of semi trailers or trailers 3.1 cents/100 kg if the vehicle has two axles, 2.5 cents/100 kg if it has three axles, 2.3 cents/100 kg if it has four axles, and 2.0 cents/100 kg, if it has fi ve axles or more. Certain vehicles owned by the State, fi re engines, ambulances and lorries less than 12,000 kg unladen, cars used by foreign diplomatic missions, etc. and members of their personnel who are not Finnish nationals (under the condition of reciprocity) and buses are just some examples of exempted vehicles. Also passenger cars and vans using natural gas or biogas are exempt if they fulfi l certain criteria of exhaust emissions. The tax is refunded for lorries transported by rail in Finland (subsidy for combined transports). The transport has to be a part of an international transportation and the minimum distance must be at least a 100 km radius. The refund is 50 euros for each transportation.

9.1.4 Fuel fee

Fuel fee is payable if certain more lightly taxed fuels are substituted for highly taxed fuels. The purpose is to prevent the use of such fuels in vehicles (e.g. heating oil in diesel-driven vehicles). The amount of the fee is 100–1,000 euros a day according to the vehicle group. Passenger cars, vans, buses and lorries using liquid gas, natural gas or biogas are exempt if they fulﬁ l certain criteria of exhaust emissions (EURO 4).

9.1.5 Road taxes applicable to motor vehicles registered abroad

Motor vehicles registered abroad and using fuel other than petrol are subject to a ﬂ at-rate tax for each day of use and a tax based on the number of kilometres travelled in Finland, if they are used temporarily in Finland. Persons liable to pay the tax are the owner or possessor of the motor vehicle or a person by whose order the vehicle is used in Finland.

133 9 Other taxes and other tax revenues

TABLE 10. Rates of road taxes applicable to motor vehicles registered abroad

Flat rate tax, Kilometre tax, Minimum kilometre euro/day euro/km tax, euro/day delivery van 13 0.10 33 bus 15 0.15 60 lorry 25 0.60 225 trailer 15 0.20 85

Vehicles registered in a state, which is a party to the Geneva Road Traffi c conventions, are exempt from the fl at-rate tax. Vehicles registered in an EU Member State are exempt from the fl at rate tax and kilometre tax. Finland grants reductions or exemptions through bilateral agreements with several states or through rulings made by the Ministry of Finance. In those few cases where the tax is levied, it is done by the Customs administration.

9.1.6 Track tax In order to partly fi nance the State’s costs for maintaining a rail network a track tax is levied on the use of the network. Liable to tax are persons who carry on railway traffi c. In the transport of persons the rate is 0.01 cent/gross tonne kilometre and in the transport of goods the corresponding rates are 0.05 cent if the propelling power is electricity and 0.1 cent if it diesel oil. A gross tonne kilometre means a train’s total weight multiplied by the amount of kilometres run. The weight consists of the weight of all the machinery and the weight of the load. Traffi c for museum purposes is exempt. The rate is based partly on the amount of environmental costs of goods and passenger transport (which are highest when diesel oil is used) and also on the paying capacity in each type of transport. Taxpayers have to give a monthly declaration on their own initiative. Track tax is administered by Finnish Rail Administration. 9.1.7 Tonnage tax According to the Tonnage Tax Act of 2002 resident limited liability companies or permanent establishments of companies resident in a EU Member State can choose to be taxed only on the basis on their net tonnage instead of being taxed on their net profi t, if they carry on international sea traffi c. A company or a permanent establishment can become liable to tonnage tax only on an application.

134 9 Other taxes and other tax revenues

The rate is 0.4 euro/100 tonnes/day up to 1000 net tonnes, then 0.3 euro/100 tonnes/ day up to 10,000 tonnes, then 0.2 euro/100 tonnes/day up to 25,000 tonnes and ﬁ nally 0.1 euro/100 tonne/day if the tonnage is more than 25,000 tonnes. Tonnage Tax Act includes separate rules concerning at arm’s length principle, taxation of activities outside the scope of tonnage tax and income taxation after the tonnage taxation ends. Tonnage tax is paid to the State. Tonnage tax is administered by the Tax Ofﬁ ce for Major Corporations.

9.2 Municipal tax on real property A municipal tax on real property is levied on all real property situated in Finland unless a particular statutory exemption applies. The revenue goes to the municipality in which the property is situated. The most important exemptions are water areas, forests and agricultural land. Other exemptions are almost exclusively of an administrative or technical nature having little economic signifi cance. Diplomatic and consular property is exempt from the tax to the extent provided for in international agreements. The tax is payable by those who own taxable property at the beginning of the calendar year. In the case of residential housing companies and other corporations that are the legal owners of their properties, it is the company or corporate body, which is liable for the tax. The tax due is determined by the taxable value of each property and by the tax rates set annually by each municipality. For the most part, the tax is based on the values assessed for the wealth tax. Municipal councils determine annually the applicable tax rates within statutory limits. Councils have to set at least two tax rates: a general tax rate and a rate for buildings used primarily as permanent residences. The general rate may vary between 0.5 and 1.0 per cent whereas the rate for permanent residences may vary between 0.22 and 0.5 per cent. Moreover, the council can decide that a special tax rate, which is no more than 0.6 percentage units higher than the rate for permanent residences, is applied to buildings used as second residences (i.e. summer residences) and that a rate that may vary between 1.0 and 3.0 per cent is applied to vacant lots. The council can also decide upon separate tax rates to be applied to power plants; this rate cannot exceed 1.4 per cent, with the exception of nuclear power plants for which the maximum rate is 2.2 per cent. In the case of non- profi t-making organisations’ buildings, the rate may be less than 0.2 (down to zero) per cent if the building is mainly used for public or non-profi t-making purposes.

135 9 Other taxes and other tax revenues

9.3 Tax withheld at source from interest Under the Act on Tax Withheld at Source from Interest (1990), a fi nal tax is withheld at source at a rate of 28 per cent on the gross amount of the interest received by resident individuals and the domestic estates of deceased persons from domestic bank deposits and deposits in fi nancial services offi ces and from bonds offered to the public for subscription.

9.4 Tax on insurance premiums The taxation of insurance services is covered by a separate Act and is similar in certain respects to the VAT. Tax is imposed on insurance premiums when the insured property or other insured interest is situated in Finland or the insured interest is related to activity exercised in Finland. Premiums related to a personal or credit insurance agreement or a reinsurance agreement or transport insurance for imported goods or goods in transit as well as premiums related to insurance for transport equipment are exempt from the tax. The insurer is liable to the tax if the insurer runs its business in Finland. If the premium is paid to an insurer, which does not carry on its business in Finland, the policyholder is liable to the tax. The rate of tax is 22 per cent of the premium, net of tax. The tax is payable monthly.

9.5 Tax on dogs Owners of dogs are liable to pay tax on dogs if the municipality has decided to levy such a tax. The maximum amount chargeable is 50 euros per year.

9.6 Tax on honorary titles Tax on honorary titles is levied on certain honorary titles. Its amount varies between 50 and 48,400 euros. The amount depends on the category to which the title belongs and also on whether the recipient of the title is still on duty (eligible employers are the State, municipalities and churches).

136 9 Other taxes and other tax revenues

9.7 Transfer tax 9.7.1 General The transferee of real property or securities is liable to pay transfer tax under the Transfer Tax Act (1996). The revenue goes to the State. The following entities are exempted from the transfer tax: the State and its institutions excluding the State’s business institutions, the Social Insurance Institution, Enterprise Development and Financing Ltd, the Bank of Finland, the Fund for Industrial Co- operation Ltd (Finnfund), Finnish National Fund for Research and Development and the Government Guarantee Fund. Individuals aged between 18 and 39 years are not liable to pay the tax when they purchase their ﬁ rst owner occupied dwelling, whether by buying at least half of the shares carrying the right to the possession of a ﬂ at in a residential housing company or by buying real property and at least half of a building on it. The following transfers are exempted:

transfers of real property or securities to a corporate body which continues a previous activity in connection with a change in a corporate body’s form, a merger or a division where the corporate body that is to be divided dissolves; the reorganisation must be realised under the legislation concerning the type of corporate body in question; this exemption is also applied when real property of a savings bank or a co-operative fi nancial institution is transferred to a fi nancial institution which has been founded to carry on their activity; transfers where the basis for the transfer is inheritance, bequest, gift, dissolution of joint ownership and, in most cases, distribution of matrimonial assets; transfers of real property and securities to an EU organ situated in Finland, if the property or securities have been acquired for its offi cial use.

In the case of a transfer of assets (see 2.5.11.2) the tax levied on the transfer of real property or securities is refunded on an application by the recipient corporate body. Furthermore, if the consideration, which has been used in the transfer, is real property or securities (i.e. if the transfer is an exchange) the tax must be paid for both transfers.

137 9 Other taxes and other tax revenues

9.7.2 Transfer of real property The following are subject to tax: a transfer of ownership of real property; a transfer of real property to general or limited partnerships, limited companies or other corporate bodies if the consideration is a share or a part or if the transfer has been made in the same way as any other capital investment; and a transfer made as a consequence of the dissolution of a corporate body and the transfer into private use of an asset by a partner or any other distribution of assets.

Where real property has been acquired on behalf of an unregistered company, a transfer of founders’ shares in such a company is made commensurate with a transfer of the real property. Besides ordinary real property, real property also includes the following items: unseparated parcels and speciﬁ ed shares of real property; leasehold or usufruct of real property, which must be registered under the Land Law Code; buildings and constructions for the permanent use on the real property.

The tax rate is 4 per cent. The tax base may be the transfer price, the value of any other consideration or the market value. The tax must be paid at the latest when applying for registration of the deed and title to the acquired real property. If the registration has not been applied for or an application is not necessary, the tax must be paid within six months of concluding the transfer contract. If the tax has not been paid for transfers that have been realised within ten years prior to the transfer in question, the transferee must also pay the tax for these transfers. The Province of Åland, municipalities, local communities of a church or registered religious communities are not liable to pay tax on transfers of real property. 9.7.3 Transfer of securities The following are subject to tax: a transfer of ownership of securities; a transfer of securities to general or limited partnerships, limited companies or other corporate bodies if the consideration is a share or a part or if the transfer has been made in the same way as any other capital investment; and

138 9 Other taxes and other tax revenues

a transfer made as a consequence of the dissolution of a corporate body and transfer into private use of an asset by a partner or any other distribution of assets.

Securities are defi ned as shares and interim certifi cates of share issues, certifi cates of participation, bonds or other certifi cates of claim issued by a corporate body where the interest is calculated on the basis of the debtor’s dividend or annual result or where the bond or certifi cate carries the right to participate in the debtor’s profi ts, letters of right of subscription and electronic book entries in a computerised trading system. Transfer of securities issued by an unregistered corporate body is also liable to tax. The following are exempted: a transfer of securities through the Stock Exchange as well as the transfer of certain options, forward contracts and security lending contracts; a transfer of securities issued by a foreign corporate body; and certain transfers based on the municipalities’ right of redemption and their housing management (temporarily in force in 2004–2007).

No tax is levied if neither of the parties to the transfer is resident in Finland, a branch situated in Finland and belonging to a foreign credit institution, a foreign investment service company or a foreign fund management company. In other situations the tax liability is dependent on the status of the transferee so that if the transferee is a non-resident but not a branch situated in Finland and belonging to a foreign credit institution, a foreign investment service company or a foreign fund management company, the transferor has to recover the tax from the transferee. However, the tax is always levied for the transfer of a share in a residential housing company or other real estate company or corresponding co-operative society. The tax rate is 1.6 per cent. The tax base is either the transfer price, the value of any other consideration or the market value. The tax must be paid when the transfer contract is concluded if: one of the parties to the transfer is a dealer in securities (deﬁ ned as an investment service company, a credit institution or a Finnish branch of a foreign investment service company or credit institution) or if such a dealer acts as a broker or commission agent for one of the parties to the transfer; the security is sold at an auction; or the transfer is made through a real estate agent.

139 9 Other taxes and other tax revenues

In all these cases the dealer in securities or the auctioneer is obliged to recover the tax from the transferee and to pay the tax on their behalf. In the case of shares in certain residential housing companies (mainly companies which have commissioned new dwellings), the tax must be paid within two months of the transfer of ownership. In other cases, the tax must be paid within two months of concluding the transfer contract. Besides the transferee, the tax may also be recovered from a dealer in securities or a real estate agent. When a security other than one traded in the computerised trading system (book-entry system) is reported for entry into a register of a corporate body (e.g. a residential housing company), the transferee or other person liable to pay the tax must present evidence that the tax has been paid. If the transfer has been registered without the presentation of such evidence, the corporate body is liable to pay the tax.

9.8 Tax on lottery prizes According to the Act on Tax on Lottery Prizes (1992) persons who hold public lotteries or prize and guessing games in Finland are liable to pay tax on lottery prizes. The tax is paid to the State. The tax base is the aggregate purchase value of the prizes or the proceeds of a lottery (i.e. the difference between turnover and prizes paid to the players). The tax rate varies between 5 and 30 per cent of the value of the prizes or between 1.5 and 9.5 per cent of the proceeds of the lottery. The tax must be paid within 1-2 months following the month in which the lottery took place. Paid-out prizes are not subject to income tax.

9.9 Tax on waste Landfi ll site operators are liable to pay tax on waste under the Waste Tax Act (1996). Operators are obliged to register themselves for this purpose. Tax on waste is levied on deliveries of waste to landfi lls. Waste is defi ned as any substance or object, which the holder discards, or intends or is obliged to discard. Waste from explosives, nuclear waste and radioactive waste are excluded. The disposal of waste is an operation aimed at rendering the waste harmless or permanently depositing it. The recovery is an operation aimed at leading to the separation and further use of the material or energy contained in the waste. A landfi ll is a waste disposal site for the deposit of waste onto or into land, and one

which is operated by a municipality or any other body on behalf of a municipality; or which is operated by any other entity for the purpose of receiving waste primarily produced by other entities excluding waste produced by a company of the same group.

140 9 Other taxes and other tax revenues

A site where waste is deposited separately from other waste and temporarily for a period of less than three years before its disposal or recovery, is not considered a landﬁ ll (in this case there is an obligation to keep records concerning the deposited waste). The Waste Tax Act is not applied to

sites where only soil and stone materials are deposited; sites where separately collected biological waste and sewage sludge are treated biologically in a separate area; sites for waste recovery.

The following kinds of waste are exempted (assuming that they are separated from other waste when they are delivered to a landﬁ ll site):

contaminated soil, which may be deposited at the landfi ll site in question; waste from the de-inking of waste paper; fl y ash and desulphurisation waste from power plants; waste (excluding glass waste and uncrushed concrete waste which consists of blocks with a diameter of more than 150 millimetre), which is used at a landfi ll in constructions or buildings, which are necessary for establishment, use, closure or aftercare of the site.

The landfi ll operator is entitled to a credit for taxes paid or payable on waste, which has been removed from the landfi ll site during a tax period. The tax base is one tonne of waste and the tax rate is 30 euros per tonne of waste. In order to determine their taxable weight, a conversion coeffi cient based on the volume of the waste is applied to the waste, which has not been weighed. Tax is accounted for quarterly on the basis of waste delivered to the landfi ll site. The landfi ll operator has to fi le a tax declaration not later than on the 12th day following this tax period and the tax must be paid not later than on the 27th day.

9.10 Postal fee

Under the Act on the Postal Fee for Securing the Services in Rural Areas (1997) a postal fee, which has the character of a tax, is charged of persons who have been entitled to carry on postal activities on a limited scale, e.g. in urban areas only. The aim is to secure that the level of postal services is maintained in the rural areas. The basis is the price of the postal service (excluding the fee and VAT). The tax rate (percentage rate) is calculated by dividing the density of population of the area in question by 50. The maximum percentage rate is 20.

141 9 Other taxes and other tax revenues

9.11 Excess profi ts of Veikkaus Oy (the Finnish National Lottery Ltd) and Raha automaattiyhdistys ry (the Slot Machine Association) Raha-automaattiyhdistys ry is a registered association the members of which are non- profi t-making organisations. The association is entitled to maintain slot machines and is also entitled to run a casino. The excess profi ts (net revenue) of the association are annually distributed to non-profi t-making organisations to used for charitable purposes. The distribution is decided by the Government. Veikkaus Oy (the Finnish National Lottery Ltd) is a State-owned company. The Government has granted the company a licence to run the national lottery. The excess profi ts of the company (net revenue from betting) are annually accounted for to the Ministry of Education.

9.12 Fire insurance levy According to the Act on Fire Protection Fund of 11 April 2003 (306/2003) all persons who run insurance business in Finland are liable to pay an annual fi re insurance levy. The base is the total gross amount of annual premiums paid for fi re insurance policies. The rate is 3 per cent. The levy is deductible in income taxation. It is collected by County Administrative Boards and goes to the State’s Fire Protection Fund to be used for the purposes of fi re protection.

9.13 Pharmacy fee According to the Act on Pharmacy Fees of 21 February 1946 (148/1946) pharmacies are liable to pay a levy to the State. The basis of the levy is the annual turnover (after VAT and excluding the turnover of non-medical products) of a pharmacist’s retail outlet. One third of a branch’s turnover and at least 50,500 euros is deducted and if the turnover is less than 50,500 euros, the whole amount of the turnover of the branch is deducted. The deduction is not granted for branches in which ﬁ ve years after the year when they were founded the turnover corresponds to at least 50 per cent of the average annual turnover of the private Finnish pharmacies in the preceding year.

142 9 Other taxes and other tax revenues

TABLE 11. Rates of pharmacy fee

Rate: Turnover: Basic tax amount Rate within (euro) (euro) brackets (%) 635 186 — 740 697 — 6 740 697 — 952 427 6 331 7 952 427 — 1 163 920 21 152 8 1 163 920 — 1 482 334 38 071 9 1 482 334 — 1 904 852 66 728 9,5 1 904 852 — 2 328 545 106 868 10 1 328 545 — 2 752 003 149 237 10,25 2 752 003 — 3 493 405 192 641 10,5 3 493 405 — 4 551 343 270 489 10,75 4 551 343 — 384 217 11

The levy is assessed and collected by the National Agency for Medicines and it goes to the State.

9.14 Seamen’s welfare and rescue levy According to the Act on Seamen’s Welfare and Rescue Levy (1936), all Finnish vessels which are under registration duty and which are used in international shipping trade as well as foreign vessels which are used in shipping trade into Finland, are liable to pay a seamen’s welfare and rescue levy. The tax base is the whole number, which shows the tonnage of the vessel multiplied by 10 cents. In certain cases of emergency there is no obligation to pay the levy. The levy it assessed and charged annually by Customs districts and goes to the State.

9.15 Oil waste duty The oil waste duty is charged according to the Act on Oil Waste Duty (1986) on lubricating oils and solid lubricants (greases) falling under CN-codes 2710 00 81–2710 00 98. It is also charged on lubricating preparations falling under CN-codes 3403 19 10 – 403 19 99 and 3403 99 10–3403 99 90. The revenue yielded by the duty is used to cover the expenses caused by treatment of oil waste. The duty is levied at a rate of 0.042 euros/kg.

143 9 Other taxes and other tax revenues

9.16 Oil damage duty

According to the Act on Oil Damage Fund (2004), a duty at a rate of 0.5 euro/ton is levied on oils falling under Customs Tariff headings 27.07, 27.09 and 27.10. The duty is levied at a rate of 1 euro/ton if a tanker, which does not have a double bottom, transports oils. The duty is collected by the Customs administration. The revenue yielded by the duty goes to the National Oil Damage Fund and is used to cover the expenses arising from oil damage as well as the acquisition of response equipment and the maintenance of response preparedness.

9.17 Game management fee and hunting licence fee

According to the Act on Game Management Fees and Hunting Licence Fees all game hunters are liable to pay a game management fee. The annual game management fee is 24 euros. It is used for management purposes. (A deer hunting licence fee must be paid by all persons who hunt deer (Cervidae). The fee varies between 8 and 100 euros according to the age of the prey. The revenue goes to the State and is used primarily for paying for the damage caused by deer).

9.18 Fishing management fee According to the Act on Fishing persons who fi sh or catch crayfi sh are liable to pay a fi sh management fee. Anglers (including ice anglers) and persons under the age of eighteen and persons over the age of sixty-fi ve are exempt. The annual fi sh management fee is 20 euros. Alternatively a fee of 6 euros can be paid for any period of seven days. For fi shing with a lure an annual lure fi shing fee of 27 euros is levied for each province or alternatively 6 euros for any period of seven days and for every Province. In addition to the age-related exceptions mentioned in the preceding paragraph the fee is not levied in the case of fi shing in a public waters. There is no separate fee for ice angling. The revenue goes to the State.

9.19 Forest management fee According to the Act on Forest Management Associations (1998), the forest owners (in the municipality where the forest is situated) are liable to pay a forest management fee.

144 9 Other taxes and other tax revenues

The fee consists of a basic fee and a hectare fee. Every forest owner must pay the basic fee, which is 70 per cent of the arithmetic mean of the average price of a wooden cubic metre in Finland calculated over the three preceding calendar years (for 2001 2003 30,91 euros). The maximum hectare fee is 1.5, 3, 7 or 11 per cent of this arithmetic mean. The maximum amount payable to each separate forest management association is the arithmetic mean multiplied by 30. The hectare fee is set annually in advance for the following year by each forest management association. If the forest area is very small, the forest management fee is not levied. If the management of the forest is sufﬁ ciently well organised, the owner may be granted an exemption on application. The forest management fee is assessed and collected by the local tax ofﬁ ces and it goes to Forest Management Associations to be used for forest management purposes.

9.20 Channel fee (Fairway fee) Under the Act on Channel Fee of 16 August 2002 persons engaged in shipping in the Finnish territorial waters by using a registered Finnish or foreign vessel are liable to pay channel fee. Vessels used in foreign trafﬁ c pay the fee as they arrive in Finland. The fee is determined on the basis of the following table:

Net tonnage of the vessel

below 2 000 2,000–9,999 10,000 or more Ice classiﬁ cation BF BF UF BF UF I A Super 1.68 3 360 1.43 14 800 1.26 I A 3.36 6 720 2.86 29 600 2.52 I B 5.65 11 300 4.81 49 780 4.24 I C 7.55 15 100 6.42 66 460 5.67 II 8.49 16 980 7.22 74 740 6.37 III 9.44 18 880 8.02 83 040 7.08

BF is the fee on the lower limit of the net tonnage. UF is the fee per every unit that exceeds the lower limit. The part of the fee that exceeds 109 140 euros is not levied. Vessels without a motor have to pay half of the fee in ice classiﬁ cation category III.

145 9 Other taxes and other tax revenues

For domestic traffi c the fee is 5,8 euros multiplied by the vessel’s net tonnage but if the net tonnage is under 1,000 tonnes the fee is half of the that amount. When the fee has been paid for a passenger ship registered for at least 120 passengers for at least 32 visits and for any other vessel for at least 10 visits, the fee is no longer levied in the same calendar year if there are no ”negative” changes (increasing the rate) in the facts which form the basis for determining the amount of the fee. In the case of such changes an additional fee has to be paid. Vessels in domestic traffi c (cabotage) pay an annual fee. It is calculated by multiplying the unit fee 5,80 euros by the vessel’s net tonnage. If the tonnage fi gure is less than 1000, the fee is half of the ordinary amount. If a vessel for which the fee of domestic traffi c has been paid, comes to Finland from abroad in the same calendar year, the fee is half of the foreign traffi c’s ordinary fee. Vessel used only in inland water transport, vessels owned by the State, certain emergency cases, etc. are exempt. The fee is levied by the customs districts and it goes to the State.

9.21 Plant breeding fee Under the Act on Promotion of Plant Breeding Activities of 8 December 1977 persons who wish to have their plant seeds inspected (certiﬁ ed) are liable to pay plant breeding fee for plants that are not subject to legislation concerning plant breeders’ rights (UPOV). Basis of assessment and rates are as follows:

Cereals and leguminous plants 1,59779 euros/100 kg Grasses 9,58671 euros/100 kg Oleiferous plants and ﬁ bre plants 20,18255 euros/100 kg Potato 0,58866 euros/100 kg

The fee is collected by the Plant Production Inspection Centre and it goes to the State.

146 10 Tax administration, procedure ...

10 TAX ADMINISTRATION, PROCEDURE AND APPEALS

10.1 Income and capital tax administration 10.1.1 Organisation

Taxation in Finland is administered on a two-tier basis: the National Board of Taxes is the central taxation authority (directly under the Ministry of Finance) and beneath it are eight regional tax offi ces which are profi t centres for the National Board of Taxes. A unit with nation-wide powers, the Tax Offi ce for Major Corporations, is competent in the taxation of large companies. Each regional tax offi ce consists of a regional offi ce and a number of local tax offi ces which serve their respective geographical territories called tax districts. There are currently 91 local tax offi ces. The regional offi ces serve as central units for certain functions (such as VAT administration, audits and the collection of taxes) in one province (or if the scale of the activity so requires, several provinces). Each tax district covers one or more municipalities, and has a tax offi ce under the management of a tax director. Income tax and capital tax are assessed by the tax offi ce in the municipality where the taxpayer was resident at the end of the year preceding the tax year in question. This principle also applies to corporate bodies. The basis on which the income, net wealth, profi t and losses of a partnership are allocated to its partners is determined by the tax offi ce in the municipality where the partnership was resident at the end of the tax year preceding the one in question.

10.1.2 Administrative procedure A person who has received chargeable income during the tax year or who owned chargeable assets at the end of the year must ﬁ le a tax return on the prescribed form with the tax ofﬁ ce in the district where he was resident at the end of the preceding year. Corporate

147 10 Tax administration, procedure ...

bodies and partnerships must fi le, together with the return and the accompanying income statement and balance sheets, an audit report, extracts from the minutes of shareholders’ meetings and certain extracts from the business records. The tax offi ce may also demand any additional information pertinent to the return. A non resident fi les his return with the Uusimaa Regional Tax Offi ce or any Finnish embassy abroad. However, if he has no other income, the following rules apply:

if a non-resident has owned, has had the possession of or has disposed of real property or if a non-resident conducting business has a permanent establishment, he must fi le his return with the regional tax offi ce in the district where the real property or permanent establishment is located; if a non-resident has owned, has had the possession of or has disposed of shares or parts in a company or a co-operative society which entitle him or her to the enjoyment of real property or part of it, he or she must fi le his or her return with the regional tax offi ce in the district where the company or co-operative society is resident; if the income is derived from the Province of Åland, the return must be fi led with the South-western Finland Regional Tax Offi ce.

The tax return must be fi led by the end of January in the assessment year (i.e. the year following the tax year). Taxpayers or partnerships which are engaged in agriculture or forestry must fi le their returns on the last day of February at the latest. For taxpayers who practice a profession or business partnerships whose accounting year has ended on 31 October or later, the last day for fi ling the tax return is the fi rst of April. Corporate bodies must fi le their tax returns within four months of the end of their accounting year and in the meantime they may make supplementary payments in order to avoid the interest on tax. Employers, insurance companies, payers of royalties, stockbrokers and other third parties are required (in some cases only on a particular request) to supply information on payments made. A pre-fi lled tax proposal is sent to certain groups of taxpayers (e.g. retired persons) whose income is reported to the tax administration by the payer of the income (e.g. a pension insurance company). If the taxpayer doesn’t have any other income, deductions, wealth or debts than those indicated in the proposal he is not liable to fi le a tax return. The tax year usually corresponds to the calendar year. If the taxpayer’s accounting period is different from the calendar year, the tax year is the accounting period (or periods) which ends during the calendar year preceding the assessment year. In the assessment, the amounts of taxable income and net wealth must be determined scrupulously, due consideration being given both to the taxpayer’s interests as well as those of the State and the municipality.

148 10 Tax administration, procedure ...

The assessment is made by the regional tax offi ce. The assessment is completed in the assessment year and at the latest in October. When the assessment has been completed, certain information concerning the taxable income of a taxpayer becomes publicly available. At the same time tax demand notes are sent to taxpayers. In the assessment the principles of impartiality and objectivity must be followed. As a general rule, an unclear case or a case open to various interpretations must be decided in favour of the taxpayer, if he has acted in good faith and has followed the tax authorities’ instructions or their established practice. In such cases the tax authorities generally waive penal surcharges. The burden of proof lies with the party which has the best practical possibilities to give evidence. If the taxpayer has had transactions with a non-resident and the tax authorities cannot get the necessary information on the transaction or the party through a Double Taxation Agreement, the burden of proof lies primarily with the taxpayer. The regional tax offi ce may, for the purposes of the fi nal assessment, deviate from the return fi led by the taxpayer without giving prior notice to the taxpayer. In such a case the decision must be motivated. The taxpayer has the right to present his case if the tax return is found to be inaccurate and the assessment must be made on the basis of estimated income. There are three cases in which the tax offi ce may subsequently amend a taxpayer’s assessment:

if a taxpayer was not assessed at all or the assessment made was too small, and the reason for the defective assessment was that the taxpayer failed to fi le his return or that the return or other information given by him was incomplete, misleading or false, an additional assessment may be made up until the end of the fi fth year following the assessment year; in the case of an estate of a deceased person the term is two years after the year in which the inventory was given to the tax offi ce (additional assessment); if the defective assessment was no fault of the taxpayer’s, but the result of an arithmetical error or similar error on the part of the tax authorities or if the assessment has been left partly unexamined, a corrective assessment may be made by the tax offi ce up until the end of the second year following the assessment year (corrective assessment to the disadvantage of the taxpayer); if an arithmetical or other similar error has led to an excessive assessment, the tax offi ce may then correct the assessment up to the end of the fi fth year following the assessment year (corrective assessment in favour of the taxpayer).

A condition for these two last-mentioned cases is that a court decision concerning the assessment has not been given. In the case of additional assessment and corrective assessment against the taxpayer, the taxpayer must be given a hearing if at all practicable before the ﬁ nal decision is made.

149 10 Tax administration, procedure ...

Minor amounts of income assessed in an additional assessment may be allocated to a tax year for which the assessment has not yet been made. In order to improve the collection of taxes from corporate bodies, interest at the rate of the reference rate of the Ministry of Finance plus two percentage points is calculated on the tax defi cit (when the tax imposed exceeds the preassessment). Accordingly, an interest at the rate of the reference rate of the Ministry of Finance less two percentage points is calculated on the tax refund. The interest is calculated from the last day for fi ling the tax return to the fi rst date the tax defi cit is due or to the end of the month preceding the tax refund. If the taxpayer pays withholding after the last date for fi ling the tax return, the interest is calculated on the decreased defi cit from the day after the day of payment. Interest is also calculated on the tax defi cits and refunds of other taxpayers. The interest is the reference rate of the Ministry of Finance less two percentage points and it is calculated from 1 April of the year following the tax year to the fi rst date the defi cit is due or to the end of the month preceding the tax refund. In the cases mentioned in two preceding paragraphs the taxpayer may avoid the interest on defi cits by paying supplementary prepayments (see 4.1). A surtax is levied in the case of unpaid taxes which must be paid at one’s own initiative to the State, municipalities, local communities of the Evangelical-Lutheran Church or Orthodox Church and Social Insurance Institution. A tax which must be paid at the taxpayers’ own initiative is defi ned as a tax whose amount taxpayers have to calculate themselves and which they have to pay to the relevant authority on a day provided for in the law. The rate is the reference rate of the Ministry of Finance (as of 1 January 1999 4 per cent per annum) plus seven percentage points. The minimum amount is 3 euros. A penal interest is charged for debited tax. It is set at the same rate as the surtax.

10.1.3 Appeals and advance rulings

A taxpayer dissatisfi ed with the ordinary assessment has a right to appeal to the assessment adjustment board which is the fi rst instance of appeal in every tax district. The chairman and other members of the board are appointed by the National Board of Taxes on the recommendation of the regional tax offi ce. One quarter of the seats is reserved for the offi cials of the regional tax offi ce, one quarter for the representatives of the municipalities (or for the representatives of the Association of Finnish Local and Regional Authorities, if the territory of the board covers the whole of Finland) and one half for the representatives of different taxpayer groups. An appeal to the board must be made before the end of the fi fth year following the assessment year. However, the appeal may be made within sixty days after the taxpayer received notifi cation of the decision against which he is appealing.

150 10 Tax administration, procedure ...

The representatives of the State, the municipality, local communities of the Evangelical- Lutheran and Orthodox Churches and the Social Insurance Institution are also entitled to appeal to the assessment adjustment board. The appeal must be made within eight months from the end of the date when the assessment of the taxpayer’s income has been completed. An appeal against a decision of the assessment adjustment board to the regional Administrative Court, which is an intermediate administrative court, may be fi led by the taxpayer or the above-mentioned authorities. The taxpayer must fi le the appeal to the regional Administrative Court of the province where he is resident, or if he is a non- resident, to the Administrative Court of Helsinki. For the taxpayer, the appeal period is fi ve years calculated from the beginning of the year following the assessment year but in any case sixty days after the taxpayer received notifi cation of the decision against which he is appealing. For the authorities, the appeal period is eight months from the end of the date when the assessment of the taxpayer’s income has been completed but in any case sixty days from the date on which the assessment adjustment board made its decision. The appeal must be fi led with the local tax offi ce. Appeals against the decisions of an Administrative Court may be made, both by the taxpayer and the representatives of the State and the municipality etc., within 60 days to the Supreme Administrative Court if the court grants permission for a retrial on the basis of the following criteria:

the hearing of the appeal has an important bearing on other similar cases or for securing the uniformity of legal practice; there are special grounds for granting permission because an obvious error has been made in the case; there are other important grounds for granting permission.

Advance rulings on the tax consequences of proposed transactions are given by the Central Tax Board (which has its offi ce in the premises of National Board of Taxes) and regional tax offi ces. An advance ruling is only given upon application by the taxpayer. The Central Tax Board will give an advance ruling if it fi nds the case to be of special importance either to the taxpayer personally or as a precedent. Essentially, the Board indicates the tax consequences of planned transactions; it does not issue advice regarding the best way to minimise taxes. Both the taxpayer and the representatives of the State and the municipality, etc., are entitled to appeal against the decision of the Central Tax Board within 30 days from notifi cation to the Supreme Administrative Court. If the Board decides not to give an advance ruling, this decision may not be appealed against. The advance ruling is not binding on the taxpayer, but it is, if requested by the taxpayer in his tax return, binding on the State and the municipality. The taxpayer has to pay a fee for the advance ruling.

151 10 Tax administration, procedure ...

10.2 Other taxes 10.2.1 General The administration and procedure adopted in levying and collecting other taxes follows in many respects the pattern of the income tax administration. Thus, the principle of the right to correct one’s own decisions is applied extensively in order to alleviate the workload of the courts. The last instance of appeal is the Supreme Administrative Court and appeals to the Supreme Administrative Court are always subject to permission for a retrial. The conditions for granting the permission are the same as in the case of income tax, see 10.1.3

10.2.2 Administration, appellate court and advance rulings

The general administration of car tax belongs to the National Board of Customs (as most cars in Finland are imported cars). The National Board of Customs is in charge of the car tax concerning taxation before the fi rst registration of a car (including cars manufactured in Finland). The National Board of Taxes has some administrative functions with respect to the Vehicle Administration Centre. If the structure or classifi cation of a registered car is changed or ownership of the car is transferred, the taxation is administered by the Motor Vehicle Administration. The fuel fee, tax on diesel-driven vehicles and vehicle tax are administered either by the Vehicle Administration Centre, the National Board of Taxes or the National Board of Customs. These taxes are levied by the Vehicle Administration Centre together with the Customs Administration (responsible for taxes levied on borders). The appellate court is the Administrative Court of Helsinki. Advance rulings are given only for car tax and tax on diesel-driven vehicles and they are given by the National Board of Customs or the Vehicle Administration Centre. Tax on insurance premiums and VAT are administered by the National Board of Taxes and levied by the regional tax offi ces. The appellate court is the Administrative Court of Helsinki. Advance rulings are given by regional tax offi ces and the Central Tax Board and for VAT by the National Board of Customs (in the case of imports). Inheritance tax and gift tax, real property tax, stamp duty, tax on lottery prizes and transfer tax are administered by the National Board of Taxes and levied by the regional tax offi ces (a transfer tax must usually be paid at one’s own initiative). Appellate court is the regional Administrative Court and advance rulings are given by the regional tax offi ces. In the case of non-residents advance rulings for stamp duty and transfer tax are given by the Uusimaa Regional Tax Offi ce.

152 10 Tax administration, procedure ...

The dog tax is administered and levied by the municipalities. The appellate court is the regional Administrative Court. (Advance rulings are not available). The process whereby tax is withheld from interest at source is monitored under the auspices of the regional tax ofﬁ ces. The appellate court is the regional Administrative Court and advance rulings are given by the Central Tax Board or regional tax ofﬁ ces.

10.3 Penalties The penalty system includes administrative fi nes and penalties imposed by general (criminal) courts. Administrative fi nes, up to the amount of the tax assessed, are levied in the case of intentionally or negligently false returns (and for failure to fi le a return on time). Serious violations are a criminal offence and punishable by law. Under the Penal Code, the punishment for tax fraud is a fi ne or imprisonment. When the tax fraud is the result of defective book-keeping for instance, the minimum punishment is four months’ imprisonment.

10.4 Confi dentiality According to the Act on Publicity and Secrecy of Tax Information (1346/1999), tax secrecy applies to all taxation documents concerning a taxpayer’s economic situation and documents containing information on an identifi able taxpayer. Confi dential taxation documents and information include tax returns, tax proposals, tax audit reports and appeal documents, including their annexes. Information provided by employers and others obliged to disclose information for taxation purposes are also covered by confi dentiality. Tax administration may give information concerning a document subject to tax secrecy only in the cases provided in the Act. In the case of individuals the following information on income and net wealth taxation is public (former tax rolls):

1) name of the taxpayer, date of birth and place of domicile, all subject to certain restrictions (Personal identity codes and addresses are conﬁ dential); 2) taxable earned income in State taxation; 3) taxable investment income and net wealth in State taxation; 4) taxable (earned) income in municipal taxation; 5) aggregate amount of taxes on the income and net wealth in 1)–4); 6) tax paid in advance (advance withholding); 7) back taxes to be collected or tax to be refunded.

153 10 Tax administration, procedure ...

Similarly, the following information on income and net wealth taxation is public if the taxpayer is a company etc.:

1) name of the taxpayer, place of domicile, Business Identity Code; 2) taxable income and net wealth; 3) tax paid in advance (advance withholding); 4) residual tax to be collected or tax to be refunded.

All this information is public as such as it was when the assessment was terminated and it becomes public in November following the tax year. Concerning the municipal tax on real property and certain other cases the following information is public:

1) the amount of the calculated municipal tax on real property and the name of the taxpayer liable to tax; 2) the documents concerning the tax classiﬁ cation of real property; 3) information on the value (in net wealth taxation) of certain shares and other securities; 4) tax concessions granted to non-proﬁ t-making organisations: name of the organisation and tax years in which the concession is applied; 5) names of taxpayers who have been accepted as persons liable to tonnage tax, the date when the tax period begins and withdrawal of the acceptance.

Also certain information concerning unpaid taxes may be published. National Board of Taxes may, on application, give conﬁ dential information to persons who need the information in order to take care of their interests, rights or obligations in the following cases:

1) to a widow, spouse, executor designated by a court etc. for the administration of personal estate of a deceased person and for division of such an estate; 2) to a trustee in bankruptcy for administrating the property; 3) to a municipality for taking care of its statutory obligations; 4) to local communities of the Evangelical-Lutheran and Orthodox Churches for solving applications concerning discretionary tax reliefs; 5) to employers and pension institutions for the preassessment and withholding of tax.

154 10 Tax administration, procedure ...

The information must not be used for purposes other than those they were given for. The applicant must also secure a sufﬁ cient protection of the information. Tax administration may also, on its own initiative, disclose information (usually under the condition that the information is necessary for performing the task in question) in the following cases:

1) to authorities of State and municipalities and to certain public or other corporations or foundations if there is reason to doubt that certain crimes (subsidy fraud, aggravated subsidy fraud, subsidy misuse and subsidy violation) have been committed; also subsidies from the EU budget or another budget maintained by or for the European Communities are covered; 2) to authorities of State and municipalities and to corporations with public duties for the purpose of monitoring, in the context of their public duties, whether a crime has been committed; the maximum punishment for the crime must be more than 6 months of imprisonment; 3) to public authorities, pension and accident insurance institutions, corporations or foundations in charge of statutory pension and accident insurance coverage for monitoring whether an employer or other person has fulﬁ lled his statutory obligations; 4) to authorities in charge of prosecuting and criminal investigations (pre-trial investigations) or prosecuting and investigating tax and bookkeeping crimes and for court proceedings;

Information received under 1)–4) may be further disclosed to prosecuting and investigating crimes. The information must be destroyed immediately when it is no longer needed unless the special character of the task requires it to be stored permanently. Tax administration has the right, on application to, to disclose information in a particular case to authorities in charge of prosecuting and criminal investigation in the following cases:

1) for hindering, investigating and prosecuting crimes; 2) for imposing or extending a business prohibition; 3) for determining the amount of day-ﬁ nes (in this case information is given also to courts).

155 10 Tax administration, procedure ...

Tax administration has the right to disclose information to:

1) execution authorities for cases of execution; 2) various public or other authorities that grant subsidies or monitor their use; 3) population register authorities; 4) State Treasury for the management of loans and guarantees etc.; 5) to authorities dealing with the arranging of lotteries in certain cases.

Section 30 of the Act on Publicity in the Authorities’ Activity provides that secrecy rules do not prevent Finnish tax authorities to exchange information in accordance to tax treaties or other international agreements. Moreover, Finnish tax treaties usually reproduce the language in Article 26(1) of the OECD Model Tax Convention, or a text to similar effect. Contains rules about a taxpayer’s right of access to the contents of a document which is not in the public domain, if they may infl uence or may have infl uenced the consideration of his matter. According to Act on the Openness of Government Activities (621/1999) the taxpayer concerned has the right of access to information contained in an offi cial document and pertaining to him.

156 11 The status of the province Åland

11 THE STATUS OF THE PROVINCE OF ÅLAND

Under the Finnish Constitution, the insular Province of Åland (situated to the south-west of mainland Finland) enjoys a large measure of internal self-government (autonomy) but forms an integral part of the Republic of Finland. The Province has a legislative assembly and an executive council of its own. The Finnish Parliament has the general power to legislate on matters relating to taxation for the Republic (including the Province). As part of the self-government, the provincial legislature has the exclusive right to enact provincial legislation on matters concerning additional tax on income, temporary income tax, business and entertainment taxes, payable to the Province, as well as taxes payable to the municipalities (e.g. communal income tax). Thus, the Income Tax Act does not apply to communal income tax in the municipalities of the Province, which has enacted a Municipal Income Tax Act of its own. The Åland Municipal Income Tax Act is, however, similar in most respects to the national legislation. The excise duty legislation also applies in the Province (which has no power to legislate on indirect taxation). However, since the European Union Act of Accession provides for the Province’s exemption from the regime for the harmonisation of indirect taxation, the procedure concerning import and export is applied to movements of products between the Province and the EU Member States, including the Finnish mainland. As to VAT, the Province is subject to the general power of legislation for the Republic. As a general rule, the same VAT rules as apply to the mainland are applied to transactions taking place in the Province. As regards the transactions between the Province and EU Member States, including mainland Finland, the Province is considered to be a third country in accordance with the European Union Act of Accession. The Province is a part of the Finnish and Community customs territory. Double Taxation Agreements concluded by Finland are applied in the province. The Province constitutes one single income tax district comprising all municipalities within the Province.

157 158 Appendix 1

APPENDIX 1

Rates of state income tax on earned income 2005 (EURO)

Taxable income Basic tax amount Rate within (euro) (euro) brackets (%) 12,000 — 15,400 8 10.5 15,400 — 20,500 365 15.0 20,500 — 32,100 1,130 20.5 32,100 — 56,900 3,508 26.5 56,900 — 10,080 33.5

The state income tax on investment income is levied at a ﬂ at rate of 28 per cent.

159 160 Appendix 2

APPENDIX 2

Rates of state net wealth (capital) tax 2005 (euro)

Taxable net wealth Basic tax amount Rate in respect of net wealth in excess 250,000 (per cent) 250,000— 80 0.8

This rate of state capital tax applies to individuals and the estates of deceased persons. The rate of state capital tax for corporate bodies is 1 per cent.

161 162 Appendix 3

APPENDIX 3

Rates of inheritance and gift tax 2005

Taxable inheritance or gift Basic tax amount Rate within brackets (euro) (euro) (per cent) 3.400 — 17.000 85 10 17.000 — 50.000 1.445 13 50.000 — 5.735 16

These tax class I rates cover the following relationship between the beneﬁ ciary (correspondingly the donee) and the deceased (correspondingly the donor): spouse, child including the child of the surviving spouse, adopted child, father, mother, adoptive parents and direct heir of a child or an adopted child or in some cases also the ﬁ ancé(e). Class I rates also apply if the provisions of the Income Tax Act concerning spouses are applicable for the year of death to the deceased and an individual who had lived with the deceased in free union, i.e. class I rates are applied to spouses who previously have been married to each other and who have had or are having a child together. The tax class II rates apply to a brother, sister, half-sister, half-brother and their descendants. The tax class III rates apply to other relatives and all non related persons. The tax rate is double in tax class II and triple in tax class III.

163 164 Appendix 4

APPENDIX 4

Deductions and allowances 2005 (earned income)

Deductions and allowances granted in both state and municipal income taxation of earned income: 1) A discretionary allowance of up to 1,400 euros for circumstantial incapacity to pay taxes. On the basis of expenses arising from sickness, the capacity to pay is deemed to be affected only if the taxpayer’s or his or her family’s expenses are at least 700 euros and amount to 10 per cent of the aggregate earned income (after natural deductions) and investment income for the tax year in question. 2) Standard deduction for work related expenses 620 euros the maximum being the amount of employment income (expenses incurred in acquiring and maintaining chargeable employment income and not relating to travel expenses or membership fees paid to employment organisations are deductible only if their amount exceeds 620 euros). 3) Deductions for forest workers are based on the use of certain equipment, tractors and working animals. 4) Deduction for pension insurance premiums

1. A taxpayer is entitled to deduct from his earned income (after natural deductions have been made) employees’ statutory pension insurance contribution and unemployment insurance contribution, contributions paid for taxpayer’s own and his spouse’s obligatory pension insurance. A further requirement for the deductibility of premiums paid by the taxpayer or his spouse is that the premiums for the same insurance (policy) have not been deducted from agricultural or business income. Premiums paid for statutory pension insurance are deducted from the income of the spouse who has claimed the deduction. Such claim must be made before the end of the

165 Appendix 4

assessment concerning the year for which the deduction is made. If the deduction cannot be made in the manner the spouses have claimed, the deduction is made primarily from the income of the spouse with higher earned income (after natural deductions) in state income taxation.

2. A taxpayer is entitled to deduct from his earned income (after natural deductions have been made) contributions to supplementary collective pension benefi ts system organised through a pension fund, pension society or an insurance company. The deduction is 5 per cent of the salary or wages paid to the taxpayer by the employer who has arranged the benefi ts, but not more than 5,000 euros and not more the amount that the employer has paid for the supplementary pension benefi ts. The pension may be paid as an old-age pension when the insured person is 60 years old at the earliest. Supplementary collective pension benefi ts mean a pension benefi ts system organised by the employer to a circle consisting of his employees. This circle has to be defi ned on the basis of groups within every industry or according to any other similar criterion and in such a way that it does not refer to any named or otherwise identifi ed physical persons. The supplementary collective pension benefi ts system does not cover systems which are meant to be applied to only one employee of the employer at a time. Premiums for a voluntary pension insurance issued by an insurance institution resident in a non-EEA-State or having a permanent establishment in such a State are not deductible. However, if the insured person moves into Finland and has not been resident in Finland in the fi ve years preceding the year of his removal, he is entitled to deduct the premiums for the year of removal and three following years if the premiums are based on an insurance taken out at least one year before the removal.

3. Premiums paid for a lump-sum pension or a separately granted disability pension are not deductible. This applies also to premiums paid by a taxpayer for an individual voluntary pension insurance taken out for him by his employer. Premiums paid by a taxpayer for a voluntary pension insurance taken out by him are deducted from his investment income. If the taxpayer does not have suffi cient investment income the exceeding part is deducted as a credit for the defi cit (investment income defi cit) from the tax on earned income, see 2.3.9.4.

Deductions and allowances granted in state income taxation

1) Deduction granted to sailors is 18 per cent of the total income derived on board a vessel, up to 6,650 euros. The deduction is made from chargeable earned income after natural deductions.

166 Appendix 4

2) The maximum amount of the pension allowance is the lowest taxable income of the progressive tax scale (12,000 euros) deducted from the full amount of national pension for single persons (in 2005 6,048.82 euros) multiplied by 2.22 and rounded up to the nearest ten euros (e.g. 2,22 * 6,048.82 euros – 12,000 euros = 1,430 euros) . The pension income is the upper limit. If the taxpayer’s net earned income exceeds the maximum pension allowance, the allowance is reduced by 70 per cent of the excess. If the net earned income exceeds 3,473.00 euros the deduction is not granted.

Deductions and allowances granted in municipal income taxation

1) The earned income allowance is deducted from the earned income after natural deductions. The allowance is calculated on the basis of a taxpayer’s chargeable wages and salaries, earned income from work done and services provided to another person, the earned income share of business proﬁ ts which are to be apportioned and a partner’s earned income share of agricultural income and business proﬁ ts from a partnership. The allowance is 49 per cent of such aggregate income exceeding 2,500 euros and up to 7,230 euros and 26 per cent for the part exceeding 7,230 euros. If the taxpayer’s earned income after natural deductions exceeds 14,000 euros, the amount of the allowance is reduced by 4 per cent of the excess. The maximum amount of the allowance is 3,850 euros. The allowance is lost when the earned income is at least 110,870 euros. 2) The deduction granted to sailors is 30 per cent of the total income derived on board a vessel, up to 11,350 euros. This amount is increased by 170 euros for every full calendar month in which the taxpayer has worked on board and the vessel has been outside Finnish territorial waters (i.e. the ‘cross-trade increase’). The deduction is made from net earned income after the natural deductions have been made. 3) The maximum pension income allowance is the maximum amount of basic allowance (1,480 euros) deducted from the full amount of national pension (in 2005 6,048.82 euros for single person euros and 5,330.50 euros for spouses) multiplied by 1.37 and rounded up to the nearest ten euros. The upper limit is the pension income. If the taxpayer’s net earned income exceeds the amount of maximum pension allowance, the allowance is reduced by 70 per cent of the excess. If the net earned income exceeds 16,539 euros in the case of a single person and 14,159 euros (in the case of spouses, the deduction is not granted. In 2005, the maximum amount of the deduction is 5,830 euros for spouses and 6,810 euros for single persons. 4) A disabled person’s allowance is 440 euros if the degree of disability is 100 per cent. In other cases, the allowance is made according to the degree of disability if it is at least 30 per cent. The maximum amount is also restricted by the rule that the allowance may not exceed the amount of other net earned income (income after natural deductions) than pension income. The last-mentioned restriction is not applied to persons who already received pension in 1982. The allowance is subtracted from earned income.

167 Appendix 4

5) A student grant allowance is granted to taxpayers who have received a student grant (under a special law). The maximum is 2,200 euros but not more than the grant. The allowance is reduced by 50 per cent of the amount of earned income exceeding 2,200 euros and thus if the earned income is at least 6,600 euros the allowance is no longer granted. The allowance is subtracted from the earned income. 6) A basic allowance for individuals with a small income is granted provided they have been resident in Finland during the whole tax year. A maximum of 1,480 euros is granted when the earned income after pension income allowance, disabled person’s allowance and student grant allowance does not exceed 1,480 euros; if the amount of such earned income exceeds this total, the allowance is reduced by 20 per cent of the excess. The allowance is subtracted from the earned income.

168 Appendix 5

APPENDIX 5

Tax credits against state income tax 2005

1) Child maintenance credit is granted to a taxpayer who has paid maintenance for a minor on the basis of a legally binding agreement or a court decision. The tax credit is one eighth of the maintenance paid, subject to a maximum of 80 euros for minor. 2) Disability credit is 115 euros for a person who has lived in Finland for the most part of the tax year if his degree of disability is 100 per cent. In other cases the credit is the part of 115 euros which corresponds to the degree of disability, if it is at least 30 per cent. Disability credit is set off against tax on earned income. 3) Study loan credit Study loan credit is given to a taxpayer who has passed a qualifying examination within a prescribed period of time. Such person is entitled to deduct annually from his tax an amount corresponding to the instalment of a study loan that he has paid. The aggregate maximum amount of deductions that are to be granted annually is 30 per cent of the loan capital that exceeds 2,500 euros. Loan capital is determined on the basis of a nine-month academic term and without capitalizing interests. The credit is ﬁ rst deducted from both the State taxes on investment income and earned income, and if the deduction exceeds the amount of those taxes it is deducted from the communal income tax, employees’ health insurance contribution and church tax, following the principle of proportionality in all these cases. If the credit still cannot be deducted, the taxpayer is entitled to deduct the credit or credits (in the order in which they are incurred) over the next ten years from the corresponding taxes. The maximum period is in any case ﬁ fteen years after the year in which the taxpayer passed his examination. The credit is also granted in cases where a taxpayer belongs to a study loan system of the Provincial Government of Åland or any EEA Member State.

169 Appendix 5

It is up to the Social Insurance Institution to decide whether a taxpayer is entitled to the credit and what is its maximum amount. 4) A credit for domestic work is granted on the basis of following types of domestic work: – ordinary housekeeping – nursing and provision of care and maintenance excluding health care services which are exempted from VAT – the repair of dwellings (excluding repair and installation of domestic appliances). The work must be done in a dwelling or second residence (summer residence) used by some of following persons: the taxpayer, his spouse, deceased spouse, their parents, adoption parents, foster parents and all their relatives in the direct line of ascent and their spouses.

The taxpayer is entitled to deduct a) if he hires an employee: – employers’ social security contribution and obligatory employment pension contribution – accident insurance contribution – unemployment insurance contribution – group life insurance contribution – 30 per cent of the wages.

b) if he buys the service: – 60 per cent of remuneration paid to a non-proﬁ t-making organisation for ordinary housekeeping, nursing and provision of care and maintenance. – 60 per cent of the remuneration paid (for work done) to a person registered in the prepayment register.

The credit is granted on the basis of the deductions listed above. The maximum annual amount of credit is 1,150 euros, but the credit is granted only for that part of deductions which exceed 100 euros. The credit is not granted if other subsidies are paid for the same work. The credit is deducted primarily from state income tax and after other credits granted in state taxation. If the credit exceeds the amount of state income tax, the exceeding part is deducted from municipal tax, the health insurance contribution and church tax in proportion. The credit is granted to both spouses and according to their demand. If the demand cannot be accepted the credit is granted to the spouse with the higher state income tax (after credits against tax have been deducted). If the amount of credit exceeds the amount of tax the excess is transferred to the other spouse. The taxpayer has to apply for the credit before the end of assessment.

170 Appendix 6

APPENDIX 6

Withholding tax rates

The following table gives only a general outline of the withholding tax rates (as a percentage and as whole numbers) on payments to foreign companies and non-resident aliens. The relevant agreement should be studied for the exceptions included in the agreements. For historical data, see 6.3.2.

Country Dividends Interest Royalty Individuals and Qualifying companies companies Argentina 0 0 15 3/5/10/15 Australia 0 0 10 10 *Austria 10 0 0 5 Barbados 15 5 5 0/5 Belgium 15 5 10 0/5 Brazil 0 0 15 10/25/15 Bulgaria 10 10 0 0/5 Canada 15 10 10 0/10 China 0 0 10 10 Croatia 15 5 0 10 Czech 0 0 0 0/1/5/10 Denmark 15 0 0 0 Egypt 10 10 0 25 Estonia 5 0 10 5/10 Faroe Islands 15 0 0 0 France 0 0 10 0 Germany 15/25 10 0 0/5 Greece 13 13 10 0/10 Hungary 15 5 0 0/5 Iceland 15 0 0 0 India 0 0 10/0 15/20 (97-01), then 15/10

171 Appendix 6

Country Dividends Interest Royalty Individuals and Qualifying companies companies

Indonesia 15 10 10 10/15 Ireland 0/15 0/15 0 0 Israel 0 0 10 10 Italy 15 10 15 0/5 Japan 15 10 10 10 Korea (Rep.) 15 10 10 10 Kyrgysztan 15 5 10/0 5 Latvia 5 0 10 5/10 Lithuania 5 0 10 5/10 Luxembourg 15 5 0 0/5 Macedonia 15 0 10/0 0 Malaysia 15 5 15 5 Malta 15 5 0 0 Mexico 0 0 10/15 10 Morocco 15 15 10 10 Netherlands 0 0 0 0 New Zealand 15 15 10 10 Norway 15 0 0 0 Pakistan 0 0 10/15 10 Philippines 28 15 15 15/25 Poland 0 0 0 0/10 Portugal 15 10 15 10 Rumania 0 0 5 2.5/5 Russia 12 5 0 0 Serbia and Montenegro 15 5 0 10 Singapore 10 5 5/10 5 Slovakia 0 0 0 1/5/10 Slovenia 15 5 5/0 5 South Africa 0 0 0 0 Spain 15 10 10 5 Sri Lanka 15 15 10 0/10 Sweden 15 0 0 0 Switzerland 5 0 0 0 Tanzania 20 20 15 20 Thailand 28 20/15 25/10 15 Turkey 20 15 15 10 Ukraine 0 0 5/10 0/5/10 United Arab Emirates 0 0 0 0 United Kingdom 0 0 0 0 United States 15 5 0 0/5 USSR 0 0 0 0 Uzbekistan 0 0 5 5/10 Vietnam 15/10 5 10/0 10 Yugoslavia 15 5 0 10 Zambia 15 5 15 0/5/15

172 Appendix 6

Interest paid to non-residents is exempt from withholding tax under the national legislation. Withholding tax is not levied on dividends paid to a company resident in an EU Member State (Austria, Belgium, Cyprus, Czech, Denmark, Estonia, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden and the United Kingdom), if the company directly owns at least 20 per cent of the capital of the Finnish distributing company. This rule applies only if the recipient of the dividend is a company mentioned in Article 2 of the EU Parent–Subsidiary Directive (90/435/EEC). In the case of dividend, a qualifying company is usually a company with a holding of at least 25 per cent of the capital or at least 10 per cent of the voting power of the distributing company. In some treaties, a zero rate is applied without any such conditions.

The following new or revised double taxation agreements have been signed:

Country Dividends Interest Royalty Individuals and Qualifying companies companies Morocco 0 0 10 10 Philippines 5 0 15 15/25 Azerbaidztan 10 5 10 5/10

173 174 Appendix 7

APPENDIX 7

Incentive for the shipping industry

An allowance of 3 per cent of the acquisition cost of a ship of at least 100 registered tons is granted in the case of the income derived from shipping. The allowance is granted for the tax year when the ship is fi rst used and the following tax year. The ship must fulfi l certain criteria relating to the classifi cation of its navigational durability in icy conditions. The ship must have been ordered in 1999 or 2000 from an EEA Member State and delivered to the customer at the latest in 2003. This allowance is applied for the last time in 2005.

175 176 Appendix 8

APPENDIX 8

Taxation of companies and their non resident shareholders when there is no double taxation agreement between ﬁ nland and the state of residence of the shareholders

I Rates of income tax (corporate bodies) Corporate income tax rate 26 %

II Taxation of the company Proﬁ ts 1,000 Corporate income tax 26 % 260 The total tax burden is the corporate income tax 26 %, i.e. 260

III Taxation of non resident shareholder Gross amount of dividends received 740 28 % ﬁ nal withholding tax less 207.2 Remittable abroad 532.8

IV Total effective tax burden for non resident shareholder Company proﬁ ts 1,000 Corporate income tax (cf. II above) 260 Shareholder’s tax (cf. III above) 207.2 Total amount of tax (II + III) 467.2

TOTAL EFFECTIVE TAX BURDEN: 467.2 x 100 = 46,72 % 1,000

177 178 Appendix 9

APPENDIX 9

Glossary

English - Finnish - Swedish

Act on Assessment Procedure of 18 December 1995 (1558/1995) – Verotusmenettelystä annettu laki – Lag om beskattningsförfarande; Act on Central Tax Board of 26 July 1996 (535/1996) – Laki keskusverolauta¬kunnasta – Lag om centralskattenämnden; Act on Channel Fee of 16 August 2002 (708/2002) – Väylämaksulaki – Lag om farledsavgift; Act on Contributions between Afﬁ liated Companies of 21 November 1986 (825/1986) – Laki konserniavustuksesta verotuksessa – Lag om koncernbidrag vid be¬skattningen; Act on Elimination of International Double Taxation of 18 December 1995 (1552/1995) – Laki kansainvälisen kaksinkertaisen verotuksen poistamisesta – Lag om undanröjande av internationell dubbelbeskattning; Act on Exceptions for the Province of Åland with respect to Valued-added Tax Legislation and Excise Tax Legislation of 30 December 1996 (1266/1996) – Laki Ah¬venanmaan maakuntaa koskevista poikkeuksista arvonlisävero- ja valmisteverolain ¬säädäntöön – Lag om undantag för landskapet Åland i fråga om mervärdesskatte- och accislagstiftningen; Act on Excise Duty on Alcohol and Alcoholic Beverages of 29 December 1994 (1471/1994) – Laki alkoholi- ja alkoholijuomaverosta – Lag om accis på alkohol och alkoholdrycker; Act on Excise Duty on Certain Beverage Packages of 3 December 2004 (1037/2004) – Laki eräiden juomapakkausten valmisteverosta – Lag om accis på vissa dryckesförpackningar Act on Excise Duty on Electricity and Certain Fuels of 30 December 1996 (1260/1996) – Laki sähkön ja eräiden polttoaineiden valmisteverosta – Lag om accis på elström och vissa bränslen;

179 Appendix 9

Act on Excise Duty on Liquid Fuels of 29 December 1994 (1472/1994) – Laki nestemäisten polttoaineiden valmisteverosta – Lag om accis på ﬂ ytande bränslen; Act on Excise Duty on Soft Drinks of 29 December 1994 (1474/1994) – Laki ma¬keis- ja virvoitusjuomaverosta – Lag om sötsaks- och läskedrycksaccis; Act on Excise Duty on Tobacco of 29 December 1994 (1470/1994) – Laki tupak¬kaverosta – Lag om tobaksaccis; Act on Fire Protection Fund of 11 April 2003 (306/2003) – Palosuojelurahastolaki – Lag om brandskyddsfonden; Act on Fishing of 16 April 1982 (286/1992) – Kalastuslaki – Lag om ﬁ ske; Act on Forest Management Associations of 10 July 1998 (534/1998) – Laki met¬sän hoitoyhdistyksistä – Lag om skogsvårdföreningar; Act on Fuel Fee of 30 December 2003 (1280/2003) – Laki polttoainemaksusta – Lag om bränsleavgift; Act on Game Management Fee and Hunting Licence Fee of 28 June 1993 (616/1993) – Laki riistanhoitomaksusta ja pyyntilupamaksusta – Lag om jaktvårdsavgift och jaktlicensavgift; Act on Municipal Tax on Real Property of 20 July 1992 (654/1992) – Kiinteistö¬verolaki – Fastighetsskattelagen; Act on Oil Damage Fund of 30 December 2004 (1406/2004) – Laki öljysuojara¬hastosta – Lag om oljeskyddsfonden; Act on Oil Waste Duty of 5 December 1986 (894/1986) – Laki öljyjätemaksusta – Lag om oljefallsavgift; Act on the Openness of Government Activities of 21 May 1999 (621/1999) – Laki viranomaisten toiminnan julkisuudesta – Lag om offentlighet i myndigheternas verk¬samhet; Act on Pharmacy Fee of 21 February 1946 (148/1946) – Laki apteekkimaksusta – Lag om apoteksavgift; Act on Postal Fee for Securing the Services in Rural Areas on 24 July 1997 (708/1997) – Laki haja-asutusalueiden postitoiminnan turvaamiseksi perittävästä mak¬susta – Lag om avgift för tryggande av postförmedling i glesbygden; Act on Promotion of Plant Breeding Activities of 8 December 1977 (896/1977) – Laki kasvinjalostustoiminnan edistämisestä – Lag om främjande av växtförädlingsverk¬sam heten; Act on Publicity and Secrecy of Tax Information of 30 December 1999 (1346/1999) – Laki verotustietojen julkisuudesta ja salassapidosta – Lag om offentlig¬het och sekretess i fråga om beskattningsuppgifter; Act on Seamen’s Welfare and Rescue Levy of 8 May 1936 (189/1936) – Laki läs¬timaksusta – Lag om lästavgift; Act on Surtax and Penal Interest of 18 December 1995 (1556/1995) – Laki veron¬lisäyksestä ja viivästyskorosta – Lag om skattetillägg och förseningsränta;

180 Appendix 9

Act on Tax on Certain Insurance Premiums of 20 December 1966 (664/1966) – Laki eräistä vakuutusmaksuista suoritettavasta verosta – Lag om skatt på vissa försäk¬ringspremier; Act on Tax on Lottery Prizes of 26 June 1992 (552/1992) – Arpajaisverolaki – Lotteriskattelag; Act on Tax Withheld at Source from Interest of 28 December 1990 (1341/1990) – Laki korkotulon lähdeverosta – Lag om källskatt på ränteinkomst; Act on the Taxation of Business Proﬁ ts and Income from Professional Activities of 24 June 1968 (360/1968) – Laki elinkeinotulon verottamisesta – Lag om beskattning av inkomst från näringsverksamhet; Act on the Taxation of Farm Income of 15 December 1967 (543/1967) – Maa¬tilatalouden tuloverolaki – Inkomstskattelag för gårdsbruk; Act on the Taxation of Non residents’ Income and Capital of 11 August 1978 (627/1978) – Laki rajoitetusti verovelvollisen tulon ja varallisuuden verottamisesta – Lag om beskattning av begränsat skattskyldig för inkomst och förmögenhet; Act on the Taxation of Shareholders in Controlled Foreign Companies 16 December 1994 (1217/1994) – Laki ulkomaisten väliyhteisöjen osakkaiden verotukses¬ta – Lag om beskattning av delägare i utländska bassamfund; Act on Withholding Tax for Foreign Employees of 18 December 1995 (1551/1995) – Laki ulkomailta tulevan palkansaajan lähdeverosta – Lag om källskatt för löntagare från utlandet; Book-keeping Act of 30 December 1997 (1336/1997) – Kirjanpitolaki – Bok¬föringslagen; Capital Tax Act of 30 December 1992 (1537/1992) – Varallisuusverolaki – För¬mög enhetsskattelagen; Car Tax Act of 29 December 1994 (1482/1994) – Autoverolaki – Bilskattelagen; Dog Tax Act of 29 June 1979 (590/1979) – Koiraverolaki – Lag om hundskatt; Excise Taxation Act of 29 December 1994 (1469/1994) – Valmisteverotuslaki – Lag om påförande av accis; Health Insurance Act of 4 July 1963 (364/1963) – Sairausvakuutuslaki – Sjukför¬säkringslagen; Income Tax Act of 30 December 1992 (1535/1992) – Tuloverolaki – Inkomst¬skattelagen; Inheritance and Gift Tax Act of 12 July 1940 (378/1940) – Perintö- ja lahjavero¬laki – Lag om skatt på arv och gåva; Prepayment Act of 20 December 1996 (1118/1996) – Ennakkoperintälaki – Lag om förskottsuppbörd; Tax Accounting Act of 10 July 1998 (532/1998) – Verontilityslaki – Lag om skatteredovisning;

181 Appendix 9

Tax Administration Act of 18 December 1995 (1557/1995) – Verohallintolaki – Lag om skatteförvaltningen; Tonnage Tax Act of 5 June 2002 (476/2002) – Tonnistoverolaki – Tonnage¬skattelag; Transfer Tax Act of 29 November 1996 (931/1996) – Varainsiirtoverolaki – Lag om överlåtelseskatt; Value-added Tax Act of 30 December 1993 (1501/1993) – Arvonlisäverolaki – Mervärdesskattelagen; Vehicle Tax Act of 30 December 2003 (1281/2003) – Ajoneuvoverolaki – Lag om fordonsskatt; Waste Tax Act of 28 June 1996 (495/1996) – Jäteverolaki – Avfallsskattelag; Åland Municipal Income Tax Act of 19 June 1993 (37/1993) – Kommunal¬skattelagen för landskapet Åland; Bank of Finland (Central Bank) – Suomen Pankki – Finlands Bank; Central Tax Board – Keskusverolautakunta – Centralskattenämnden; District customs house – Piiritullikamari – Distriktstullkammare; Local tax ofﬁ ce – Verotoimisto – Skattebyrå; National Board of Customs – Tullihallitus – Tullstyrelsen; National Board of Taxes – Verohallitus – Skattestyrelsen; Regional tax ofﬁ ce – Lääninverovirasto – Länsskatteverk; Social Insurance Institution – Kansaneläkelaitos – Folkpensionsanstalten; Supreme Administrative Court – Korkein hallinto-oikeus – Högsta förvaltning¬domstolen; Vehicle Administration Centre – Ajoneuvohallintokeskus – Fordonsförvaltnings¬ce ntralen

182 Appendix 10

APPENDIX 10

Abbreviations and information concerning euro

cl – centilitre CN-code – Combined Nomenclature code g – gram(me) kg – kilogram(me) kWh – kilowatt-hour l – litre MWh – megawatt-hour MVA – megavoltampere nm3 – normal cubic metre

On 27 April 2005 one euro corresponded to 1.2963 US$ (1 US$ = 0,7714 €).

183 184 Appendix 11

APPENDIX 11

Index

Accident insurance contribution 2.1.6 Buildings and other constructions Accruals basis 2.5.6 - depreciations Advance rulings Business profi ts 2.5 and 2.5.1 - income taxation 10.1.3 - other taxes 10.2.1 Calculation of assets 2.3.4.2 Affi liated company 2.5.10 Capital gains 2.3.5, 2.3.6.1, 2.3.6.2 and 2.5.5 Agriculture 2.3.6.1 Capital losses 2.3.5 Allocation of business expenses 2.5.7 Cars with low exhaust emissions 9.1.2 - accruals basis 2.5.7 CFC 2.5.12 - buildings and other constructions 2.5.7 Child allowance contribution 2.1.6 - declining balance method 2.5.7 Company’s form 2.5.10 - degree of manufacture 2.5.7 Consular posts, see Diplomats - depreciations, 2.5.6 Controlled foreign company 2.5.12 - FIFO 2.5.7 Corporate bodies 2.2.4 - fi xed assets 2.5.7 Credit for foreign direct taxes 6.1 - inventories 2.5.7 Credit for domestic work 2.4.3 (E) and Appendix 5 - investments 2.5.7 Credit method 6.3.1.2 - proceeds of sales 2.5.7 - replacement reserve 2.5.7 Declining balance method Allocation of income of individuals 2.3.1 Deduction of foreign direct taxes 6.1 Amendment of assessment 10.1.2 Deductions and allowances Appeals - business taxation 2.5.5 - income taxation 10.1.1 - for persons who are resident in Finland only for - other taxes 10.2.1 part of the tax year 2.4.3 Artistes 2.4.4, 6.2.1, 6.2.2.1; 7.1, 7.9 and 7.13 - in the category of earned income 2.4.3 and (VAT) Appendix 4 Assessment year 10.1.2 - in the category of investment income 2.3.9 Associated enterprises 6.3.2 Degree of manufacture 2.5.6 Demergers (divisions) 2.5.11.2 Breweries 8.8 Depreciation allowances

185 Appendix 11

- as a basis for employers’ social security EU organs contributions 2.1.6 EU personnel Diplomats Euro Appendix 9, - capital (net wealth) tax 3.2 European Economic Interest Grouping 2.2.5 - car tax 9.1.2 Exchange gains 2.3.5 - inheritance and gift tax 5.3.3 and 5.4 Exchanges of shares 2.5.11.2 - remunerations and compensations 2.4.2 Excise duties - residence (Finnish diplomats) 2.2.2 - declaration and payment 8.6 - serving in Finland 2.2.7 - duty suspension arrangement 8.1 - VAT 7.11 - exemptions 8.4, 8.7–8.10 Dissolutions 2.5.11.2 - medicine 8.7, 8.8 and 8.10 Dividends - reactive reagent 8.9 - business taxation 2.5.3.1 - retail containers 8.8 and 8.10 - domestic situations 2.5.3.2 - small breweries 8.8 - dividends from EU-countries 2.5.3.3 - time and rate of charge of duty 8.3 - dividends from non-EU countries 2.5.3.4 - travellers’ allowances 8.5 - partnerships 2.3.6.2 Exemption method 6.3.1.3 - taxation of individuals 2.3.4 Expenses - withholding tax 6.2.2.1 - children’s education, dwelling, removal, travel - zero-rate tax 6.3.2 and private servants 2.4.2 Divisions 2.5.11.2 Domestic work 2.4.3 (E) Appendix 5 Farmers Double taxation agreements 6.3.2 - social security contributions 2.1.6 FIFO EC Council (Merger) Directive 90/434/ Filing of the tax return 10.1.2 EEC 2.5.11.2 Finnish nationals 2.2.2 and 2.2.7 EC Council (Parent–Subsidiary) Directive Fire insurance levy 9.11 90/435/EEC 2.3.4.3, 2.5.3.3, 2.5.5, 6.2.2.1 and Fishing management fee 9.18 Appendix 6 Fixed assets EC Council (Assistance in Recovery) Directive Flat 2.3.4.2, 2.3.6.2 and 6.2.2.2 76/308/EEC 6.3.2 Foreign currency 2.3.5 EC Council (Mutual Assistance) Directive 77/799/ Foreign dividends 2.5.3.3 and 2.5.3.4 EEC 6.3.2 Foreign employees 6.2.2.2 EC Council (Excise Duty) Directive 92/12/ Foreign shareholders 2.5.3.5 EEC 8.11 Forestry 2.3.8.2 and 9.19 EU Council (Savings) Directive 2003/48/EC 6.2.2.1 Forward contracts 2.3.5 EU Council (Interest and Royalty) Directive Free union 2.2.3.1, 5.1 2003/49/EC 6.2.2.1 Electronic invoicing 7.14 Gains on foreign currency 2.3.5 Electronic service 7.1, 7.12.1 and 7.13 Game management fee 9.17 EU Council Directive 2003/49/EC Gas 7.1, 7.5, 7.12.1 (VAT) and 8.11.2 Employee investment fund 2.2.7, 2.4.2 and 3.2 Gold 7.1, 7.3 and 7.6 Employees’ insurance contributions 2.1.6 Group life insurance 2.1.6 Employers’ insurance and social security Guarantee provision 2.5.7 contributions 2.1.6 Guarantee fund 3.2 Employment abroad 2.4.2 Energy 8.9 Health insurance contribution 2.1.6, 2.1.9, 2.3.9.4, Energy intensive enterprises 8.9.3 2.4.2, 4.1, 6.2.2.3 and Appendix 5

186 Appendix 11

Hunting licence fee 9.17 Partners - deduction from earned income 2.3.6.2 Incentives, see Tax incentives, Appendix 7 - fl at used as a dwelling of a partner 2.3.6.2 Income from forestry 2.3.8.2 - loans taken up by partners 2.3.6.2 Income from real property 2.3.5 and 2.3.8.3 - social security contributions 2.1.6 Income from sports Appendix 12 Partnerships Income spreading 2.4.4 - dividends from shares belonging to Individuals living together in free union, see partnerships 2.3.6.2 Married persons - distributions made by partnerships 2.5.4 Insurances 2.1.6, 2.3.8.4–2.3.8.5, 2.3.9.1–2.3.9.2, - general principles 2.2.5 2.3.9.4, 2.4.1, 2.4.3, 2.5.6, 6.2.1, 6.2.2.1 and - income from partnerships 2.3.6.2 Appendix 4 - remunerations paid to partners 2.2.5 Interest income 2.2.1, 2.3.1, 6.2.1 and 6.3.2 - transfer tax 9.7.3 Interest expenses 2.3.9.1 Penal interest 10.1.2 Inventory reserve 2.5.6 Permanent establishment Investment fund 2.2.7, 3.2 and 6.2.2.1 - defi nition, 2.2.5 Investment income share 2.3.2, 2.3.6.1– 2.3.7 - in mergers, divisions and transfers of assets Investments 2.5.2 (footnote) and 2.5.6 2.5.11.2 Irrevocable order for the purchase of goods 2.5.7 - prepayment register 6.2.2.3 - tax liability 2.2.1 Leasing of equipment 6.3.2 - withholding tax 6.2.2.1 Limited tax liability 2.2.1 Persons living in free union 2.2.3.1 and 5.1 Loans taken up by shareholders 2.3.4.2 Permanent home 2.3.5 Locally employed persons 2.4.2 Pension foundations 2.5.7 Long-term debts Pension insurance institutions 2.5.7 Losses 2.3.9.2 and 2.5.8 Pensions in double taxation agreements 6.3.2 Pension insurance contributions 2.1.6 Married persons 2.2.3.1 Pharmacy fee 9.12 Maximum combined rate of tax 2.1.9 Postal fee 9.10 Members of Parliament 2.4.2 Pre-fi lled tax proposal 10.1.2 Mergers 2.5.11.2 Province of Åland 12 Minors 2.2.3.2 Provision for bad and doubtful debts 2.5.7

Non-proﬁ t-making organisations 2.2.7, 3.2 and 7.3 Radio and television broadcasting service 7.12.1 Non-resident 2.2.2 Rates for withholding tax 6.2.2.1 - non-resident spouse 2.2.3.1 Real estate companies 2.5.13 and 6.3.2 - health insurance contribution 6.2.2.2 Real property 2.3.5, 2.3.8.3, 2.5.2 and 2.5.6 Non-residents’ cars 9.1.2 Removal goods 9.1.2 Reserves and provisions OECD/Council of Europe Convention on Mutual - guarantee provision 2.5.7 Assistance in Tax Matters 6.3.2 - inventory reserve 2.5.6 Ofﬁ cials of the United Nations 2.2.7, 2.4.2 and 3.2 - irrevocable order for the purchase of goods Oil waste duty 9.15 2.5.7 Oil damage duty 9.16 - operating reserve 2.5.7 Operating reserve 2.5.7 - provision for bad and doubtful debts 2.5.7 Options 2.4.2 and 9.7.3 - replacement reserve 2.5.6 Ordinary credit 6.3.1 Residents 2.2.2 Retired persons

187 Appendix 11

- national pension contributions 2.1.6 - health insurance contributions 2.1.6 VAT - deductions and allowances 2.4.3 - annual turnover criterion 7.3 Royalties 6.3.2 - construction 7.7 Rural areas 9.10 - corporate bodies for promoting the public good 7.3 Seamen’s welfare and rescue levy 9.14 - deductions 7.10 Security lending contracts 2.5.4 and 9.7.3 - exemptions 7.5, 7.6 Shareholder loan 2.3.2, 2.3.4.2 and 2.3.9.1 - exportation 7.12 and 7.12.3 Six months’ rule 2.4.2 - foreign enterprises 7.4 Social security contributions 2.1.6 - foreign trade 7.12 Source rules 6.2.1 - general structure 7.1, 7.2 Sportsman’s fund 2.4.4 - government bodies 7.3 Sportsmen 2.4.4, 6.2.1 and 6.2.2.1 - group registration 7.3 Spouses - importation 7.12.3. Substitute dividend 2.5.3.1 and 6.2.2.1 - intra-Community acquisition and supply 7.12.2 Supplementary payments 4.1 - municipal authorities 7.3 Statistics 1.2 - own consumption 7.5 Students 6.2.2.1 - persons liable to tax 7.1 Surtax 10.1.2 - place of transaction 7.12.1 - procedure 7.13 Tax credit - rates 7.9 - for the investment income deﬁ cit 2.3.9.3 - real property 7.5 and 7.7 - child maintenance credit 2.4.3 - refunds 7.11 - disability credit 2.4.3 - reindeer owners 7.3 Tax incentives 2.5.9 and 6.1 - services related to real property 7.7 Tax year 10.1.2 - taxable amount 7.8 Taxation of energy - taxable transactions 7.5 Taxation of municipalities 2.2.7 Vehicle tax 9.1.6 Taxation of religious communities 2.2.7 Voluntary pension insurance 2.4.3 Teachers 6.3.2 Telecommunication service 7.12.1 Waste 9.9 Three-year rule 2.2.2 Waste tax 9.9 Trainees 6.3.2 Works of art 7.1, 7.8, 7.9 and 7.14 Training fund 2.4.4 Transfers of assets 2.5.11.2 Zero-rate tax 6.3.2 Transfer of real property 9.7.2 Transfer of securities 9.7.3 Åland 11 Transfer of taxes to another Nordic country 4.1 Transferring company 2.5.11.2

Undistributed estates of deceased persons 2.2.2, 2.2.5 and 2.5.4 Unemployment fund 2.2.7 Unemployment insurance contribution 2.1.6 Unilateral relief 6.3.1 United Nations, see Ofﬁ cials of the United Nations Unlimited tax liability 2.2.1

188 Appendix 12

APPENDIX 12

Addresses

Helsinki District Customs House: Helsingin piiritullikamari, Vilhovuorenkatu 12 B, 00580 Helsinki; tel.: 6141; telefax: 614 2958. Helsinki Tax Offi ce: Helsingin verotoimisto, Rajatorpantie 8 A Vantaa (Myyrmäki); Postal adress PL BOX 400, 00052 VERO; tel.: 731120; telefax: 7311 2791. Also: Mannerheiminaukio 1, 00100 Helsinki and Itäkatu 5 00930 Helsinki and Opastinsilta 12 S (on street level), Helsinki. National Board of Customs: Tullihallitus, Erottajankatu 2, 00120 Helsinki; Postal adress: PL 512, 00101 Helsinki; tel.: 6141; telefax: 020 492 2852; http://www.tulli.fi . National Board of Taxes: Verohallitus, Haapaniemenkatu 4 A 00530 Helsinki; Postal address: PL BOX 325, 00052 VERO Helsinki; tel.: 731136; telefax: 7311 3595; http:// www.vero.fi . Administrative Court of Helsinki: Helsingin hallinto-oikeus, Ratapihantie 9, Postal address: PL BOX 120 00521 HELSINKI; 120, 00521 Helsinki; tel.: 010 36 42000; telefax: 010 36 42079. e-mail: helsinki.hao@om.fi Uusimaa Regional Tax Offi ce: Uudenmaan verovirasto, Ratapihantie 9, Helsinki; Postal Address: PL1, 00052 VERO; tel.: (09) 731120; telefax: 7311 4395. Vehicle Administration Centre: Ajoneuvohallintokeskus, Fabianinkatu 32, 00100 Helsinki; Postal address: PL 120, 00101 Helsinki; tel.: 01007800; telefax: 09 6185 3600; http://www.ake.fi /. When calling from outside Finland the number for Helsinki Tax Offi ce is 358 (the Finnish country code) 9 (Helsinki and Uusimaa) 731120.

189 190 Appendix 13

APPENDIX 13

The government’s proposals to parliament in the autumn 2005

The Government has presented following proposals to the Parliament: 1) that the limit for simpliﬁ ed invoices be lowered from the current 1,000 euros to 250 euros (see 7.14). 2) that lottery prizes from lotteries organised on the EEA area be tax exempt in income taxation (the amendment would apply already in 2004 tax year); 3) that certain rules concerning transfer of assets of the VAT Act be amended; these rules concern mainly real property and transfer of a business; 4) that the excise duty (excise duty on electricity and certain energy) on milled peat and the subsidy granted to milled peat in electricity production be abolished. 5) that a non-resident sleeping partner in a Finnish limited partnership be liable to tax for only that part of his share in the partnership’s income which would be taxable income when derived directly from Finland; further conditions are that the Finnish limited partnership is a venture capital fund and an agreement for the avoidance of double taxation is applied to the partner. 6) that the withholding tax system applied to non-residents income from Finland be amended (implementation of the Schumacker case of the European Court of Justice). The biggest changes are obligatory assessment procedure in the case of pensions (A.1), optional assessment procedure for pensioners resident in EEA Member States in the case of other earned income (A.2) and optional assessment procedure for wage and salary earners from EEA Member States in the case of their earned income (see B.2 b). A new deduction is also introduced for the withholding procedure.

191 Appendix 13

If the proposal is accepted non-residents are taxed as follows:

A. Non-resident pensioners

1. Non-resident pensioners receiving only pension from Finland Pensions arising in Finland and paid to non-resident pensioners are taxed in the same way as pensions paid to resident pensioners:

the rule covers all types of pensions and both pensions taxed as earned income (e.g. employment pensions) and pensions taxed as investment income (e.g. pensions based on voluntary pension insurances and benefi ts from life insurance policies); progressive State income tax scale is applied to pensions taxed as earned income; all the deductions of the Income Tax Act are granted; pensions are subject to municipal income tax; for pensioners who are non-resident during the entire tax year the rate is the average of all municipal income tax rates of the preceding tax year, for pensioners who are non-resident only for a part of a tax year the applicable rate is the rate of the municipality where pensioner is resident (and the tax goes to the municipality); in the case of pensions taxed as investment income the ordinary state income tax on investment income is levied at a fl at rate of 28 per cent; Income Tax Act and the ordinary assessment procedure are applied; the currently tax exempt na¬tional pension paid by the Social In¬surance Institution and the survivor’s pension paid on the basis of the Survivor’s Pension Act are made taxable; non-resident pensioners have to declare their income (a pre-fi lled tax return will be widely used); pensions are subject to the same prepayment procedure that is used in the case of resident taxpayers (PAYE, pay as you earn).

2. Non-resident pensioners who are resident in an EEA Member State and receive pension and other earned income from Finland If a non-resident pensioner

is resident in an European Economic Area Member State (Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, France, Germany, Greece, Hungary, Iceland,

192 Appendix 13

Ireland, Italy, Latvia, Lithuania, Luxembourg, Liechtenstein, Malta, Netherlands, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, United Kingdom), receives from Finland pension but also other earned income (usually salary or wages), and his aggregate earned income from Finland (pension and salary) is at least 75 per cent of his worldwide aggregate earned income, the other income received by him from Finland is also taxed in the assessment procedure if the pensioner so demands. The income is ﬁ rst subjected to the ordinary withholding procedure. The rate is 35 per cent and a monthly/daily deduction of 510/17 € is granted. This tax is then deducted from the tax calculated in assessment procedure.

For the calculation of the 75 per cent , see 2 b) below.

3. Non-resident pensioners who are resident outside European Economic Area and receive pension and other earned income from Finland and cases where the 75 per cent rule is not fulﬁ lled.

If a non-resident pensioner is resident outside European Economic Area (see the list of EEA member states above) the other income is always taxed in the withholding procedure at the rate of 35 per cent. A monthly (510 €) or daily (17 €) deduction (see B.1 and 2) below) is granted. This rule is also applied to cases where the 75 per cent limit is not fulﬁ lled.

B. Non-resident wage and salary earners

1. Withholding tax of 35 per cent and a monthly/daily deduction of 510/17 € Salary and wages (and other earned income) received by non-resident persons is taxed by applying the current 35 per cent withholding tax rate. This category also includes some particular categories, e.g. distributions and surpluses of personnel funds and hidden distribution of dividend received by an individual as well as other payments taxed as earned income on the basis of Income Tax Act. However, a monthly or daily deduction is granted for the following income:

salary and wages, hidden distribution of dividend received by an individual, and other payments taxed as earned income according to the Income Tax Act (e.g. many social security payments).

193 Appendix 13

The monthly deduction is 510 € and the daily 17 € (for income accruing in a period shorter than a month). These deductions are made from the eligible total income. The maximum deduction is the amount of eligible income. This deduction is the only deduction applied in the withholding procedure. The deduction is not granted for distributions paid by and surpluses of personnel funds (employee investment funds) and remuneration paid on the basis of membership of a board of directors or another similar organ of a Finnish corporate body or partnership. The deduction is also granted to students. The current rules concerning a deduction granted only to students is abolished. In order to receive the deduction the non-resident taxpayer has to present to the payer of the taxable payment a withholding tax card issued to by a tax ofﬁ ce. If the amount of withholding tax levied on the income received from the same payer during one calendar month is at most 10 €, the withholding tax is not levied. For optional assessment procedure on the basis of 75 per cent rule, see below 2 b).

2. Taxation in assessment procedure a) Mandatory assessment procedure

Taxation in assessment procedure is always the only alternative (mandatory assessment procedure) in the case of income that is not subject to withholding procedure. Such income are business income and income from agriculture or forestry as well as payments made in consideration for the use of, or the right to use, cinematograph ﬁ lms. b) Optional assessment procedure (residents of EEA Member States)

If a non-resident taxpayer (wage or salary earner)

is resident in an European Economic Area Member State, and his earned income from Finland is at least 75 per cent of his worldwide earned income (income received by him from Finland and elsewhere), he is entitled to have his income assessed if he so demands.

If a non-resident taxpayer has carried on business (or practised a profession) through a permanent establishment situated in Finland also income subject to withholding is taxed in the assessment procedure if the income is attributable to the permanent establishment. The taxpayer can demand assessment as long as the assessment can be adjusted (before the end of the ﬁ fth year following the assess¬ment year). Taxpayer has to present to the

194 Appendix 13

tax offi ce a certifi cate issued by the tax authorities of his State of residence, which clarifi es the income derived from that and State elsewhere and the deductions. If a taxpayer is taxed in the assessment procedure and he is non-resident during the whole tax year he has to pay municipal tax at a rate corresponding to the average rate of municipal income tax rates of the preceding tax year. A person who has been resident in Finland for a part of a tax year pays municipal tax (for the whole tax year) to the municipality where he has been resident and according to the municipal income tax rate of that municipality. All municipal tax deductions are granted. c) Calculating the 75 per cent share

The 75 per cent share is calculated by applying the following rules:

– earned income is deﬁ ned as earned income less natural deductions; – earned income received from Finland includes also income received by non-residents employed on board Finnish ships or aircraft, that is to say wage income derived from work done on board and work done temporarily elsewhere for the ship or aircraft by the employer’s order, pension income which is directly or indirectly based on such wage income; foreign ships and aircraft leased with only a minor crew or without any crew, bare boat leasing, by a Finnish employer are considered to be Finnish for tax purposes; – earned income (less natural deductions) received by a non-resident taxpayer from elsewhere includes salary, wages and pensions as well as payments based on social security, which are taxable income in the taxpayer’s State of residence; – dividend is not taken into account as earned income; – if a taxpayer has been non-resident for only a part of the tax year (has been resident in Finland for the rest of that tax year, e.g. has moved abroad during the tax year), all the earned income received by him from Finland in that tax year is taken into account; – income received from Finland includes only income that Finland is entitled to tax under an international agreement and that is taxed under the Act on Assessment Procedure.

C. Miscellaneous

The tax goes to the State also in those cases where the assessment is applied. It goes to the municipality only when a person has been resident in Finland for a part of the tax year.

195 Appendix 13

Persons liable to levy tax on a non-resident taxpayer’s salary or wages are the non- resident taxpayer himself, his employer and a foreign employer’s representative who is resident in Finland. The Uusimaa Tax Offi ce is entitled to decide to make the employer liable for the tax if the non-resident taxpayer has not paid the tax (although required to do so) and if administrative assistance on the basis of EU Directive 76/308/EEC or a binding international agreement cannot be applied. However, the employer is not liable if he has followed instructions concerning prepayment of tax in a tax card and did not know or should not have known that the taxpayer is a non-resident. If a person is non-resident for the whole tax year the competent tax offi ce is the Uusimaa Regional Tax Offi ce. However, if he received income from the Aland Island, the competent tax offi ce is the Southwestern Finland Regional Tax Offi ce. According to some current rules of the Income Tax Act a taxpayer has to be resident in Finland for a certain minimum period of time in order to get a deduction. These requirements are to be abolished.

7) that the net wealth tax be abolished as of 1 January 2006 (see Section 3).

196

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