VAT Deduction - Application of the general deduction rule

As a general rule, while a company carries on business operations subject to VAT, it is allowed to deduct the amount of VAT paid relating to its purchases, from VAT relating to its sales. In principle, the right to deduct is extensive and is limited only in situations expressly stated in law. Where the goods or services acquired are intended to be used also for purposes other than business operations subject to VAT, the deductible share is limited to the corresponding utilization rate of the commodities in business operations. Only VAT paid in Finland can be deducted.

However, there are certain situations where the general deduction rule of the Value Added Tax Act is not applicable. Here, special provisions shall apply which enable the VAT burden to be eliminated, with effects equivalent to deduction of VAT. The following is a brief overview of the special provisions concerning Finnish businesses with tax-free activities or activities related to foreign trade and refunds to foreign companies and municipalities.

VAT return for companies exercising foreign trade and tax-free activities

In certain situations, domestic businesses are entitled to a refund of VAT paid, although the general deduction rule would not otherwise be applicable. This is made possible by a provision that applies to situations, where the acquired goods or services relate to, for example, international trade, sales of construction services or sales abroad. From the point of view of the entity seeking to be reimbursed for the VAT it has paid, this exception has the same outcome as the general deduction rule of the Value Added Tax Act.

For construction services, the provision becomes applicable when the buyer of the service is designated as the party liable for the payment of VAT, instead of the normal taxpayer, the seller. This is called a reverse charge (Link VAT on construction services blog).

Consultancy service sold to an individual outside the EU is one example of sales made abroad. Such a service is not considered to have been sold in Finland, so without a special rule the seller would have to bear VAT of purchases related to this. Here, in order for a VAT refund to be possible on sales abroad, similar sales in Finland should have been subjected to tax or have been eligible for a refund.

In order to qualify for a refund, you must enter the VAT register. In practice, the amount claimed for refund is stated on your tax return in the same way as the standard VAT deduction.

Refund of VAT to foreign businesses

Foreign companies are not required to pay VAT to Finland on sales made outside Finland, or on sales where reverse charge is applied and the buyer is VAT liable. If the foreign company is not VAT liable in Finland, it can’t deduct the Finnish VAT included in its purchases. In order to prevent the foreign company from having to bear the hidden VAT, the foreign company can apply for a refund of the VAT included in the purchases made in Finland. The right to a refund corresponds to the general VAT deduction rule, but the procedure is different.

The condition for foreign businesses to obtain the VAT refund is that the purchases are related to activities carried on abroad which, if carried on in Finland, would have caused VAT liability and the corresponding deduction. Refunds are also available when reverse charge is applied. It’s also required that the purchases have been made for business that causes VAT deduction right in the country of establishment. If the company carries on in the country of establishment also activities that don’t cause VAT deduction right, this is taken into account when calculating the amount of VAT refund.

When the foreign company is established in an EU country, the company applies for a VAT refund from its own tax administration, which then submits the application electronically to the Finnish tax administration. In the case of companies established in non-EU countries, VAT refunds to foreign businesses are filed directly with the Finnish tax authorities on paper.

Respectively a Finnish company may apply for VAT refund of tax paid to another EU country by submitting an application to the Finnish tax administration. It is also possible to apply for a refund of VAT paid to a non-EU country if the legislation of that country allows it.

Refund of VAT to municipalities

Much of the activities of municipalities are VAT exempt because of being actions taken by the authorities or healthcare or educational services that are also VAT exempt. However, purchases of these services often include VAT. In order to avoid this VAT being borne by the municipalities and to prevent the municipalities from providing the services they need by themselves for purely VAT-related reasons, a wide-ranging separate right of refund is provided to them. A municipality is in principle always entitled to get a refund on the VAT they have paid, either as a deduction or a refund.