Tax treaties are made to eliminate double taxation
The primary purpose of tax treaties is to eliminate double taxation. Tax treaty divides right to tax in a situation where more than one country has the right to tax the same income. When carrying on international activities, moving abroad or receiving income from abroad the rules of tax treaties need to be taken into account beforehand, so that the tax consequences can be taken into account and tax obligations are properly taken care of.
Tax treaties have usually specific rules on how to tax and how to eliminate double taxation of business income, dividends, interests, royalties, capital gains, salaries and wages and pensions. In addition, tax treaties include criteria based on which country of residence for tax treaty purposes of an individual or a company is determined in a situation where an individual or a company is considered tax resident in two countries. Country of residence for tax treaty purposes is important because country of residence is usually liable to eliminate double taxation in a situation where income is taxed in both source country and country of residence.
Finland has a tax treaty with about 70 countries
At the moment, Finland has a tax treaty with about 70 countries. Tax treaties made by Finland are based on the OECD Model Tax Convention. Tax treaties are mainly bilateral, but the Nordic Countries have one joint tax treaty. In addition to the tax treaties Finland has joined the Multilateral Convention (MLI) which aims to prevent tax base erosion and profit shifting, and which is applied between counties that have joined it.
Double taxation is eliminated using credit or exemption method
According to its tax treaties, Finland eliminates double taxation mainly using the credit method. In this method, if both countries have right to tax the same income according to the tax treaty, credit is granted in Finland when Finland is the country of residence for tax treaty purposes. Few tax treaties have still rules concerning exemption method. In this method, Finland has given up its right to tax income that is according to the tax treaty taxed in the other country.
Agreements on exchange of information and inheritance agreement
In addition to income tax treaties, Finland has made agreements on exchange of information, broader agreements on administrative assistance and sporadic inheritance and gift agreements. Finland has joined the Convention on Mutual Administrative Assistance in Tax Matters with over 100 countries. Agreements on administrative assistance include rules on exchange of information, recovery of tax claims and tax audits. Finland has also more narrow agreements with different countries concerning exchange of information and the so called FATCA agreement with the United States. The purpose of the agreements on exchange of information is to ensure that Finland has extensive information for tax assessment. Agreements on exchange of information help authorities to receive information about e.g. assets in tax havens.
National rules and the OECD Model Tax Convention need to be taken into account when applying tax treaties
In international situations the number of rules that need to be taken into account is multiplied. When applying tax treaties national rules need to be reviewed. Here we use our comprehensive worldwide expert network of Nexia International. As for interpreting tax treaties mastering the OECD Model Tax Convention is central. Our experts have extensive experience of various questions related to international taxation. Our experts help you to ensure that the taxation of your business operations is as optimal as possible also in international situations and that the tax obligations are appropriately taken care of.