Clarifying tax status and the extent of tax liability are one of the most important issues in taxation. Only after this can one sort out the various tax obligations and examine the tax treatment of a particular income.

The Territorial Dimension of Taxability

The scope of tax liability in Finland is laid down in section 9 of the Income Tax Act (1992/1535). There are two so-called tax liability categories in Finland: resident taxpayers and non-resident taxpayers. Depending on the category which the taxpayer belongs to has a significant impact on taxation since resident taxpayers have unlimited tax liability being liable to tax on their worldwide income whereas non-resident taxpayers are liable to tax only on their Finnish sourced income. In practice, one could say that the category of non-resident taxpayers includes all those who do not belong to the resident taxpayer category.

Until the end of 2020, the category of resident taxpayers included a natural person resident in Finland, a Finnish corporate entity, a joint benefit and a Finnish estate of a deceased person. A corporate entity established or registered abroad was always subject to limited tax liability in Finland and thus obliged to pay tax to Finland only on its Finnish sourced income and only within the limits set by a possible tax treaty. Basically, the only situation in which a foreign corporate entity had to pay tax on other than income received from Finland was a situation in which the foreign corporate entity had a permanent establishment in Finland and such income was attributable to the foreign corporate entity’s Finnish permanent establishment.

Since the beginning of year 2021, a foreign corporate entity may have been regarded as a resident taxpayer in Finland if its place of effective management is located in Finland. As a resident taxpayer it is obliged to report all its worldwide income in its Finnish income tax return in the same manner as a domestic corporate entity is. This is, in general, a significant change compared to the past. For the sake of clarity, a foreign corporate entity is, however, still not considered domestic due to the fact that, according to the Finnish Income Tax Act, an entity is domestic only if it is incorporated or registered under Finnish law.

The Definition of the Place of Effective Management

Under the new provisions, the place of an effective management of a foreign corporate entity is located where the key day-to-day management decisions of the entity are made by the board of directors or another legal body corresponding to the board of directors. When the place of effective management is in Finland, the unlimited tax liability of the foreign corporate entity starts when the place of effective management is formed, which is at earliest the moment when the foreign corporate entity is established or registered.

It is clear, that the key day-to-day management decisions will be clarified as a concept in the future alongside with the development of case law. Examples of currently unclear questions are for example: 1) what kind of other legal body qualifies as other decision-making body corresponding to board of directors, 2) what is considered as a key day-to-day management decision, 3) where and on what basis those decisions are considered to be made, and 4) what other organizational and business related factors should need to be taken into account in this assessment and how much weight should be given to those when assessing the place of effective management?

In general, the board of directors is usually specified in the corporate law of the country in which the corporate entity is incorporated or registered or in the articles of association of the corporate entity. The other decision-making body could refer, for example, to a legal body which corresponds to the board of directors and which is stipulated in its articles of association or in the corporate law of the country where the foreign corporate entity is incorporated or registered. The key day-to-day management decisions are probably the most difficult objectively definable concept and there is no explanatory help for this in the government’s proposal either. Regarding the place of decision-making itself, emphasis is most likely given to the location of the meetings i.e. where the decisions are actually made. In an interpretative situation, where, for example, meetings are held in different places, emphasis is likely given to place where the headquarters and executive management is located and, where the administrative and financial center of foreign corporate entity is located in general.



In practice, the legislative changes extend Finland’s right to tax compared to the past, as the new provision allows Finland to tax foreign corporate entities that have not been taxed in Finland before – at least not as resident taxpayers. The provisions are also applicable to all kinds of corporate entities without exceptions. The provisions may have an impact, for example, on the valuation of the assets of the foreign corporate entity at the beginning and at the end of the unlimited tax liability or, for example, on the realization of the so-called exit taxation in the country of incorporation of the foreign corporate entity.

It is important to note that the extent of a foreign corporate entity’s tax liability and its respective tax liabilities differ depending on whether the foreign corporate entity is considered as a resident taxpayer in Finland or as a non-resident taxpayer with a Finnish permanent established or as a non-resident taxpayer without a Finnish permanent establishment. In situations where the new provision becomes applicable, it is also recommendable to be prepared for possible international tax conflicts and different interpretations.

The new provisions have entered into force on 1 January 2021 and are applied from tax year 2021 onwards.

If your company is foreign but board meetings are held in Finland and/or important decisions are made in Finland by the board of directors or other corresponding decision-making body and/or company’s executive management is located in Finland, we recommend a more profound assessment whether your company’s place of effective management could be located in Finland. Fiscales’ experienced tax advisors will be happy to help clarifying this matter.

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Tax advisor Mr Nico Fontanili
Nico Fontanili
Tel. +358 50 540 1635