FINLAND TAX DESKBOOK

Transcription

1 LEX MUNDI INTERNATONAL TAX DESKBOOK EDITORS: John R. Barsanti, Jr. and Robert Lewis Jackson Armtrong Teasdale LLP One Metropolitan Square St Louis, Missouri FINLAND TAX DESKBOOK PREPARED BY Gunnar Westerlund ROSCHIER HOLMBERG, ATTORNEYS LTD. Keskuskatu 7 A Helsinki Finland Updated January

2 LEX MUNDI WORLD TAX DESKBOOK INTRODUCTION 1. Types of Taxes The Finnish tax system comprises direct taxes and indirect taxes. Typical direct taxes are income tax and net wealth tax. The principal indirect taxes are value added tax (VAT), which is charged on the sale of goods and services as well as on imports, and excise tax, which is charged on imports of certain products, energy and raw materials. The following summary is based on the tax laws of Finland as in effect on 1 January Sources of Tax Law Tax laws enacted by the parliament are the primary source of tax law. In addition, several tax laws provide the National Board of Taxes with the power to rule on details of the laws by statutory orders. Both tax laws and statutory orders are generally binding. Following is a list of the most important tax laws: - Income Tax Act of December 30, 1992; - Business Income Tax Act of June 24, 1968; - Advance Withholding Tax Act of December 20, 1996; - Value-Added Tax Act of December 30, 1993; - Inheritance and Gift Tax Act of July 12, 1940; - Transfer Tax Act of November 29, 1996; - Wealth Tax Act of December 30, 1992; - Real Estate Tax Act of July 20, 1992; - Act on Proceedings in Taxation of December 18, 1995; - Act on Administration of Taxation of December 18, The tax administration may also issue instructions for the local tax offices in order to ensure uniformity in the tax assessment of the taxpayers. While legislation is the primary source of law, the precedents of the Supreme Administrative Court and the rulings of the Central Tax Board are also of great significance. Since Finland joined the European Union, European tax law also forms part of the Finnish Tax System. 3. Tax Administration Structure The Finnish tax administration comprises the National Board of Taxes and nine regional tax offices. Each regional tax office consists of a regional office and a number of local tax offices, serving geographical territories called tax districts. Each tax district covers one or more municipalities and has a tax office, which assesses the individuals and companies resident in 27 0

3 3 the tax district. The Tax Office for Major Corporations, a unit with nation-wide powers, deals with the assessment of groups of companies and internationally active companies. INCOME TAXES AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS I. CORPORATIONS Business in Finland is usually conducted through a limited liability company, the capital of which is divided into shares and where the shareholders liability is limited to their investment in the company. A limited liability company can be a public or a private limited liability company, the main difference being that only shares in a public limited liability company may be offered to the public. In addition, the minimum share capital requirement for a private limited liability company is EUR 8,000 and for a public limited liability company EUR 80,000. A limited liability company may be incorporated by one or several individuals or legal entities. At least half of the founders shall be permanently resident or, if the incorporator is a legal entity, have its permanent residence in the European Economic Area unless the Ministry of Trade and Industry grants an exemption from this rule. A limited liability company shall have a Board of Directors consisting of a minimum of three members. If the share capital of the company is less than 80,000 euros, the number of board members may, however, be lower. The company may have a Managing Director if so stipulated in the Articles of Association or decided by the Board of Directors. However, a company with a share capital of at least 80,000 euros shall always have a Managing Director. In addition, the Articles of Association of a company with a share capital of at least 80,000 euros may also stipulate that the company shall have a Supervisory Board. The shareholders shall exercise their right to make decisions at the General Meeting of the Shareholders. 1. Tax Returns to Be Filed by a Corporation The Filing Dates Corporations must file an annual income tax return within 4 months from the end of the company s accounting period. Corporations may have a fiscal year of any 12-month period. Where and with Whom Filed The tax returns must be filed with the local tax office in the city or the municipality in which the company was domiciled at the end of the previous tax year. However, certain internationally active companies and groups of companies shall file the tax returns with the Tax Office for Major Corporations. When Must Taxes Be Paid Companies make monthly advance payments during their financial period, based on their estimated taxable income. These advance taxes shall be paid by the 23rd each month. If the company discovers that the advance payments made for the relevant financial period will not

4 4 cover the final taxes to be imposed, the company must in order to avoid interest on late payment, pay the deficit before the deadline for their tax returns expires. 2. Calculation of Income Taxes Determination of Taxable Profit Taxable profit is determined in accordance with generally accepted accounting principles with only minor adjustments for tax purposes, i.e. the amount of net taxable income is calculated by deducting expenses and depreciations from gross income and by further deducting any losses carried forward from the previous ten tax years. Corporations may have three different income sources for tax purposes: the business income source includes income from business activities, the agricultural income source includes income from agriculture and forestry and the source other income includes income from non-business assets of a Finnish resident corporation. For corporations taxable income is determined separately for each income source, and the out profit is separately for each source taxed at a flat rate of 29 per cent (in 2003). Losses in one income source can be carried forward and set off against income from the same source in the subsequent ten tax years. (1) What Revenues Are Included? Income is usually taxable on an accrual basis. Any income having a monetary value and derived from economic activity is deemed to be taxable income. The concept of income includes e.g. capital gains from the sale of any asset, inter-company dividends and rental income from lease of business assets. Usually, dividends from a tax treaty country are tax exempt if the receiving company holds at least 10 per cent of the voting power in the distributing company or at least 25 per cent of its share capital. (2) What Deductions Are Allowed? All expenses and losses incurred by the company for the purpose of generating or maintaining taxable income are generally deductible. The fact that the expense was incurred for this purpose is normally the decisive test for deductibility. In principle, expenses are allocated on an accrual basis. However, there are several exceptions from this. Expenses that generate or maintain income over a period of at least three years (such as incorporation costs) are allocated equally to the years in question up to a maximum period of ten years. The acquisition costs of inventories are deducted when the assets are sold, consumed or lost. However, a deduction is allowed to the extent that the acquisition cost exceeds the market value of the inventory at the end of the tax year. Expenses incurred in acquiring fixed assets are deducted by depreciation. Depreciation of machinery and equipment is calculated on the total value off all machinery and equipment using the declining balance method with a maximum annual rate of 25 per cent. Buildings and other constructions are depreciated by using the declining balance method. Depreciation for each building is calculated separately with

5 5 the maximum percentage rate being 4, 7 or 20 per cent, depending on the use and type of the building. Patents and other intangible assets are depreciated according to the straight line method over the economic life of the asset in question, however, over a maximum of ten years. (3) What Are Major Expenses That Are Not Deductible? Certain expenses such as expenses incurred in obtaining tax-exempt income, income taxes and penalty interests relating thereto, as well as 50 per cent of entertainment expenses are not deductible for tax purposes. (4) What Is Included Concerning Finnish Investment Abroad? In general, the costs resulting from establishing a subsidiary abroad are not deductible for the Finnish parent company. However, the interest paid on loans taken for the acquisition of a foreign subsidiary is deductible in Finland. Applicable Tax Rates The corporation tax rate is 29 per cent in There are no other taxes imposed on the income or net wealth for domestic corporations. In addition, corporations are liable to pay real estate tax. However, because of the imputation system (avoir fiscal) applied to dividends, corporations distributing dividends are obliged to pay a certain minimum amount of income tax. The applicable minimum tax in 2003 is 29/71 of the dividends to be distributed to the shareholders for the relevant year (provided the distributing company does not have sufficient amount of tax surpluses or unused tax credit.) The imputation system is not discussed in detail herein. Tax Losses (1) Operating Losses Operating losses resulting from business activity can be carried forward for 10 years. Losses are deducted in the order in which they are incurred. Carry-back of losses is not allowed. The right to use losses carried forward is, as a rule, forfeited if more than 50 per cent of the ownership of shares in the corporation has changed either directly or indirectly subsequent to or during the financial year during which the tax losses were incurred. However, the relevant tax office may, upon application, grant a clearance to use the losses if there are special grounds for it and if the granting of a clearance is necessary for the continuance of the company s business. Moreover, the shares that are quoted on the Main List of the Helsinki Stock Exchange, are not taken into account when calculating the percentual change in the ownership. Losses carried forward by the dissolving company in a merger may be used by surviving company if it, its shareholders or the surviving company and its shareholders together have owned more than 50 per cent of the dissolving company s share capital from the beginning of the fiscal year during which the losses were

6 6 incurred. Nevertheless, the right to use the losses in the surviving company will be forfeited if more than 50 per cent of the ownership of shares in the surviving corporation has been changed e.g. due to a share issuance in a merger. In a demerger, the losses of the demerging company are generally assumed and used by to the new corporations in the same proportions as the net assets are transferred. Foreign currency losses are deductible in the year during which the exchange rate changed. The loss may also be capitalised and written off over subsequent years until the loss is actually realised. (2) Capital Losses In general, capital losses resulting from business activity are deducted the same way as operating losses. However, certain capital losses, like losses from the sale of machinery, are deducted indirectly through depreciations. Moreover, capital losses resulting from the company s non-business assets can be carried forward but can only be offset against future capital gains of the non-business assets during the following three years. Transfer Pricing Rules Finland has very few formal transfer pricing provisions or documentation requirements. In general, the arms-length principle should be applied to transactions between affiliated parties. In practice, the burden of the proof will rest heavily on the company, should the transfer prices be challenged by the tax authorities and, therefore, proper documentation is highly recommended. Consolidated Returns for Affiliated Companies There is no fiscal unity of consolidated tax return regime in Finland. In a group of companies, each company is taxed individually. However, in certain very strictly regulated situations, a Finnish group can under Finnish Group Contribution Act reduce its total tax cost by using a group contribution regime. In general, the contribution is deductible to the contributing company and taxable income to the receiving company. 3. Territorial Rules Residence A company established under Finnish laws is for Finnish tax purposes resident in Finland. Taxation of Worldwide Income A corporation resident in Finland is taxed on its worldwide income, including income from foreign branches, subject to tax treaty relief. Worldwide business profits, interest income, rental income, royalties and dividends are taxed in Finland as a resident corporation s normal income unless such tax liability is alleviated by an applicable tax treaty. Branch A foreign corporation may establish a branch in Finland by filing a notice of registration with the National Board of Patents and Registrations. The notice of registration must state inter

7 7 alia the name of the foreign organisation and the place of its registered office, the name of the branch, its objects, the municipality in which the branch will be domiciled and details of its Finnish representative. The branch office needs no board of directors, but needs an individual representative who is resident in Finland. The branch and the Finnish representative of the branch are jointly and severally liable for income taxes imposed on the branch. A company from a non-eea country must apply for a special permission to establish a branch in Finland. In general, a non-resident corporation is liable to pay Finnish income tax only on income attributable to Finland. Therefore, if a foreign company is considered to have a permanent establishment, i.e. corporate tax presence, in Finland, it is liable to prepare local financial statements (as required by the Finnish Bookkeeping Act), file a Finnish corporate tax return and pay corporate tax of 29 per cent on income that is attributable to such permanent establishment. The taxation of a permanent establishment is in principle the same as that of a Finnish limited liability company. The OECD model treaty, on which most Finnish tax treaties are based, define a permanent establishment as a fixed place of business through which a business or an enterprise is wholly or partly carried on. Activities of a preparatory and auxiliary character, even if carried on through a fixed place of business, do not constitute a permanent establishment. The concept of a place of business covers any premises or facilities used for carrying on the business of the enterprise, whether or not used exclusively for that purpose. In Finnish tax practice, enterprises have been deemed to have a permanent establishment in some cases where the enterprises have not had business premises at their disposal in Finland, but have had personnel working for them in Finland. A branch of a foreign corporation is liable to net wealth taxation at a rate of one per cent of the net wealth. However, a non-discrimination article in a tax treaty usually abolishes this tax liability. Controlled Foreign Company The Finnish Controlled Foreign Corporation Act came into force on 1 January According to the Act, tax can be levied on an individual residing in Finland or a domestic corporation for their share of the profit of a controlled foreign corporation (CFC), regardless of whether such profit share is distributed by the CFC to its shareholders. A CFC is a foreign corporation that in its domicile is subject to a lower level of effective income taxation than 3/5 of the level of income corporate tax in Finland. Generally, this means that the tax rate applicable to a CFC is 17.4 per cent (3/5 of 29 per cent) or less. In order for it to be possible to levy tax on a shareholder in Finland for the income of the CFC, the company has to be under Finnish control. By law, the company is considered to be controlled from Finland if one or more resident individuals or corporations directly or indirectly own shares representing at least 50 per cent of the votes or at least 50 per cent of the capital of the company. Furthermore, a company or other entity is held to be controlled by a Finnish resident, if one or more Finnish residents are entitled to a portion of at least 50 per cent of the yield of the capital of the entity.

8 8 By virtue of the CFC-rules, Finnish tax is not levied on persons or corporations that do not, together with closely related parties or entities belonging to the same sphere of interest, own at least 10 per cent of the company s share capital or is as a beneficiary entitled to a portion of at least 10 per cent of the profit of the company. As an exception, CFC-rules are not applicable to income that originates mainly from i.e. industrial production or shipping carried out by the CFC in the relevant jurisdiction. Further, the CFC-rules are not applicable to a company resident in a country with which Finland has a Double Taxation Treaty provided that the average corporate tax in that country is not substantially lower than Finnish corporate tax and this company is not subject to any specific tax relief in its country of domicile. For example, the CFC-rules have been applied to a Belgian co-ordination centre owned by a Finnish parent company, although Finland has entered into a double tax treaty with Belgium (Supreme Administrative Court 2002:26). According to the legislative history of the Act, substantial is interpreted to mean 75 per cent of the Finnish tax rate. The reference to specific tax relief means any non-general tax relief such as a regional or business-specific relief but not a general relief on capital gains applicable to all taxable entities. Dividends distributed to the shareholder of the CFC are, to the corresponding extent, tax exempt in Finland. However, dividends distributed by the CFC are treated as taxable income to the shareholder if their total amount exceeds the amount which has according to CFCrules been taxed as income of the shareholder within the year in question or during the five previous tax years. Tax Credits Double taxation is eliminated in accordance with the Finnish Act on the Elimination of International Double Taxation, subject to relevant tax treaty provisions. According to the act, the credit method is the primary method. This method provides that the state tax (i.e. federal taxes in the US) paid in another country for income can be credited against Finnish tax on the same income. The credit is limited to foreign state taxes (i.e. federal taxes in US) unless otherwise provided by an applicable tax treaty. The Act also provides that the credit may not exceed the tax payable in Finland on the income received with respect to the same country and item. At the taxpayer s request, part of the taxes paid in another country that cannot be credited because of the limitations set forth in the Act, can to a limited extent be carried forward to the following tax year. 4. Withholding Taxes Rates on Dividends Dividends paid by Finnish corporations to non-residents are generally subject to a withholding tax at a flat rate of 29 per cent, unless a lower rate is provided by an applicable tax treaty. Dividends paid to a company residing in an EU-country and holding at least 25

9 9 per cent of the share capital in the distributing Finnish company are, subject to certain additional requirements, exempted from withholding tax. Rates on Royalties Royalties paid by Finnish corporations to non-residents are subject to a withholding tax of 29 per cent, unless a lower rate is provided by an applicable tax treaty. Rates on Interests Under domestic tax law, interest paid to non-residents is widely tax-exempt. Rates on Withholding Tax on Profits Realized by a Foreign Corporation There is no withholding tax on profits realized by a foreign corporation. If such profits are taxable in Finland (i.e. if they are attributable to a Finnish permanent establishment), a foreign corporation is obliged to file a Finnish corporate tax return and pay corporate tax of 29 per cent on its taxable income in Finland unless otherwise provided by an applicable tax treaty. However, a Finnish entity is obliged to withhold tax at a rate of 13 per cent from any compensation for work, assignment or service paid to a branch, which has not been registered in the Finnish preliminary tax withholding register. II. PARTNERSHIPS There are two types of partnerships in Finland, general and limited partnerships. All partners in a general partnership and a general partner in a limited partnership are jointly and severally liable for the obligations of the partnership. A limited partnership shall have at least one partner with unlimited liability. A partnership is established by a partnership agreement between the partners. All partnerships have to be registered with the Trade Register and the tax authorities. 1. Tax Returns to Be Filed by a Partnership The Filing Dates Partnerships must file an annual tax return. The tax return will have to be filed by 31 January of the year following the year during which the accounting period has ended. However, if the accounting period ended between 1 October and 31 December, the tax return will have to be filed by 1 April. Where and with Whom Filed The tax return is filed with the local tax office of the municipality or the city in which the partnership has its domicile. Are Taxes Levied against the Entity? A partnership is considered transparent for tax purposes, i.e. no income tax is levied on partnerships. A partnership is treated as an accounting unit and its profit is taxed as the income of the partners.

10 10 2. Calculation of Income for Income Tax Purposes Determination of Taxable Base The net income of a partnership is determined in the same manner as the taxable income of a limited liability company, i.e. according to the rules of the Business Income Tax Act. Allocation of the Income to the Partners After the determination of the taxable income, the income is allocated among the partners according to each partner s share in the partnership s total income. The income allocated to the partners is split into capital income and earned income in case the partners are individuals. An amount equalling 18 per cent of the relevant partner s share in the aggregate of (i) the net value of the business assets of the partnership and (ii) 30 percent of the salaries paid during the last twelve months is taxed as capital income at flat rate of 29 per cent. The remaining part is taxed as the partner s earned income at progressive tax rates. In case partners are legal entities, the income allocated to the partners is included in their taxable income. According to Finnish tax practise, the aforementioned also applies to foreign partners, i.e. a non-resident partner (either a general or silent) in a Finnish partnership is liable to file a Finnish tax return and pay tax on income, which is attributable to the partnership, in the same manner as Finnish resident partners (Supreme Administrative Court ruling 2002:34). III. OTHER ENTITIES SUCH AS ASSOCIATIONS AND FOUNDATIONS Associations and Foundations The business activities of associations and foundations are taxed the same way as the activities of limited liability companies. However, in case an association or a foundation meets the requirements applicable to non-profit-making organisations under the Income Tax Act, it is liable to pay corporate income tax (at the flat rate of 29 per cent) only on its business profits. In addition, a non-profit-making organisation is liable to corporate income tax on its income from real property used for other than public or non-profit purposes at a reduced rate of per cent (in 2003). Non-profit-making organisations, which are engaged in socially significant activity, can be granted exemptions from income tax on business profits and income from real property upon application. Sole Proprietorships Sole proprietorships are used by individuals for entrepreneurial businesses. Sole proprietorships are not subject to a statutory audit requirement and no income tax is levied to them as the profits are taxed as income of the individual. The business income of a sole proprietor is calculated according to the rules of the Business Income Tax Act after which it is divided into elements of earned income and capital income of the individual according to the Income Tax Act.

11 11 Sole proprietors will have to file their annual tax returns according to the rules applicable to partnerships described above. IV. INDIVIDUALS 1. What Tax Returns Must be Filed The Filing Dates Individuals must file an annual tax return reporting their worldwide income and net wealth. Spouses file separate tax returns, i.e. joint filing or income splitting is not possible. The annual tax return must be filed by the end of January on the year following the year the income was received (i.e. tax year), the tax year for individuals being the calendar year. An extension can be granted by a local tax office. However, instead of a traditional tax return many taxpayers receive a tax proposal. The tax proposal is a pre-completed form which contains the taxation information received directly e.g. from the payers of income. If the individual has nothing to add to or correct in the tax proposal, he/she does not have to file anything with the tax authorities. In both cases the assessment is completed by the end of October of the year following the year in which the income was generated. Non-residents generally do not file a tax return (final tax is withheld at source). However, according to law a tax return must be filed if income received by a non-resident is other than salary, pension, dividend, interest or royalty. For example, if non-resident has taxable wealth (typically real property) situated in Finland or rental income accrued in Finland, a tax return has to be filed. Where and with Whom Filed The tax returns are filed with the local tax office of the municipality or the city in which the individual was domiciled at the end of the previous tax year. If the spouses have separate domiciles the younger spouse has to file his/her tax return with the same local tax office as the older spouse. In case the spouses are of the same age, the competent tax office is determined by reference to the personal identification numbers of the spouses. When Must Taxes Be Paid In general, a Finnish employer is obliged to withhold advance payroll tax on salaries paid to persons liable to tax in Finland. To the extent that the final tax liability exceeds or is less than the amount of advance taxes withheld, the difference shall be settled by an additional payment or refund. If the individual wishes to avoid interest on the deficit, he/she has to pay the deficit by the end of March of the following year. In 2003, the interest is 1.5 per cent if the insufficient amount is more than EUR 1,960 and 5.5 per cent on the amount exceeding EUR 10,000. If not paid by 31 March, the tax authorities will provide bank giros in which deadlines or the payments are in December of the year following the tax year and in the following February.

12 12 2. Calculation of Income Tax Determination of the Taxable Base (1) What Revenue Is Included? The income of individuals is divided into two categories: earned income and capital income. Earned income is taxed at progressive rates while capital income is currently taxed at a flat rate of 29 per cent. Earned income includes wages and salaries, pensions and certain social security allowances. Fringe benefits, such as company car, accommodation and meal benefits are included in the taxable earned income at their taxable value determined by the National Board of Taxes. Capital income is comprised of dividends, interest and capital gains, rent and other return on investments. Dividends from a company other than one listed on the Main List of the Helsinki Exchanges are divided into earned and capital income. The amount of capital income corresponds to 13.5 per cent of the net assets of the company while the rest is taxed as earned income. In addition, as Finland applies the imputation system (avoir fiscal) the shareholder is credited in full for the tax paid by the company. However, it is likely that Finland will abolish the imputation credit system in the near future. (2) What Deductions Are Allowed? A taxpayer is allowed to deduct, inter alia, the following expenses from his/her earned income: - A standard deduction of EUR 590 (but no more than the annual earned income) as work-related expenses. - Membership dues to trade unions and contributions to unemployment funds. - Limited travelling expenses regarding commuting from home to work using the most economical means of transport to the extent they exceed EUR 500 per year, up to EUR 4, All other expenses not mentioned above and which are incurred in for the purpose of generating or maintaining earned income, to the extent that such expenses exceed the standard deduction of EUR Statutory Finnish unemployment insurance premiums and employee pension premiums. - Subject to certain restrictions, premiums paid by a taxpayer for voluntary additional pension insurance up to EUR 8,500 per year.

13 13 A taxpayer is allowed to deduct from his capital income expenses incurred in earning or maintaining such an income. Capital gains or losses are calculated by deducting the original purchase price of the asset as well as sales related expenses from the sales price. However, taxpayers may also elect to apply an acquisition cost presumption instead of the actual acquisition cost. The acquisition cost presumption is normally 20 per cent, but 50 per cent of the sales price in case the sold assets have been held by the taxpayer for at least ten years. (3) What Exemptions Are Allowed? The following items of income are, inter alia, regarded as tax exempt: - 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. - Inheritances and gifts, which are taxed according to the Inheritance And Gift Tax Act. - Scholarships or other support received for studies, scientific research, artistic or sporting activities, subject to certain limitations. - Certain major national and international artistic awards. - Certain pension schemes and welfare benefits. - Gain from the sale of the taxpayer s home if the taxpayer has owned and lived in it continuously for at least two years. (4) What Major Expenses Are Not Deductible? Generally all the expenses, which cannot be regarded as expenses for acquiring and maintaining taxable income, are non-deductible. Such non-deductible expenses would be, inter alia, the costs of accommodation, food and clothing expenses and expenses for entertainment and leisure time. (5) Are Stock Options and Pension Premiums Included in the Taxable Income? Benefits granted in the form of employment related stock options are taxed as earned income when the option is exercised or transferred to a non-related party. When subscribing or purchasing the shares upon employee stock options the taxable benefit of the employee stock option is equal to the fair market value of the shares at the time of exercise less the aggregate of the price paid for the shares and the option price, if any. When selling the employee stock options the taxable benefit is the difference between the sales price of the employee stock options and the option price, if any. However, in a case of employee stock option donation or transfer to a person or a company belonging to the sphere of interest of the employee stock option holder, taxation is deferred until the donee or the transferee exercises the options.

14 14 Pension premiums for voluntary pension insurance, paid by the employer, are generally included in the employee s taxable earned income, but only to the extent the premiums would not be deductible (or if only 60 per cent of the amount were deductible) if they were paid by the employee. As mentioned above, the premiums are deductible up to EUR 8,500 per year subject to certain restrictions. However, if the supplementary pension benefits are arranged collectively for a group of employees, the pension premiums paid by the employer are usually not included in the employees taxable income. (6) Is Social Security Included in the Taxable Income? Social security and other similar benefits are generally taxable if they are deemed to be compensation for the loss of taxable income. However, certain pension schemes and welfare benefits are exempt from taxes. Applicable Rates 1. State Income Tax of Finnish residents State income tax on earned income is payable at progressive rates as follows in 2003: Taxable income (EUR) Tax on lower amount (EUR) Tax on excess (%) 11,600 14, ,400 20, ,000 31,200 1, ,200 55,200 3, ,200-10, A mandatory health insurance premium of 1.5 per cent of the gross salary and pension is payable in Municipal Tax, Church Tax In addition to the state income tax on earned income, municipal tax and church tax are imposed at flat rates on earned income. Municipal tax is levied at flat rates varying from per cent to per cent depending on the municipality or city the person is domiciled in. Church tax is paid by the members of the Finnish Evangelic Lutheran and Orthodox churches and the rates vary between 1 per cent and 2.25 per cent. 3. Capital Income Capital gains and other capital income are taxed at a flat rate of 29 per cent. Handling of Losses Losses in Earned Income Income is divided into three sources of income: business income, agricultural income and other source of income (salaries, wages, pensions etc.). If any of these sources shows a loss, this loss is carried forward for ten years and set off against income from the same source.

15 15 Losses are deducted in the order in which they are incurred. However, losses from business profits or agricultural income sources can be deducted from capital income of the same tax year if the taxpayer or, in the case of spouses, both spouses so demand. Losses in Capital Income In case of losses in capital income, 29 per cent of the loss can be deducted from tax levied on earned income. However, the rate of the deduction is 30 per cent on the part of the deficit that is due to interest on a loan, which the individual has taken for the acquisition of his/her first dwelling. The maximum deduction is EUR 1,400 for an individual with no children, EUR 1,750 for an individual with one child and EUR 2,100 for an individual with two or more children. The deficit can also be deducted from the earned income tax of the spouse in case the deduction cannot be made in his/her own taxation. If there are no earned income taxes from which the deduction could be made, the losses in capital income can be carried forward for the following ten years. Capital Losses Capital losses are excluded when determining the amount of the above mentioned capital income deficit. They are deductible only from capital gains arising in the same year and during the following three years. However, in case the capital losses belong to the individual s business income, they can be deducted from the business income and taxable loss of business income may be carried forward for ten years. 3. Territorial Rules Where Is the Individual Subject to Tax Finnish residents and non-residents are treated differently for tax purposes in Finland. Persons resident in Finland are subject to taxation on their worldwide income and net wealth. Non-resident persons who are not generally liable for tax in Finland are subject to taxation solely in respect of their Finnish source income. An individual is deemed to be resident if he resides in Finland for a continuous period of 6 months or more or if he has a permanent home or dwelling in Finland. The stay in Finland may be regarded as continuous in spite of a temporary absence from the country. A Finnish citizen is, however, considered to be resident in Finland until 3 years have elapsed from the end of the year in which he left Finland, unless he can produce evidence that he has no longer any essential ties to Finland (the three-years rule). A resident status can begin or end in the course of a year. Worldwide Income Finnish residents are subject to tax on their worldwide income and net wealth. Expatriates Inbound Expatriates A non-resident individual (e.g. one who is occasionally working in Finland), is taxed on Finnish source income only. Non-residents are taxed at flat rates in accordance with the

16 16 Non-residents Tax Act according to which e.g. salaries paid to non-residents are subject to a withholding tax of 35 per cent, unless a lower rate is provided by an applicable tax treaty. Finnish domestic tax law includes a special regime for foreign experts, which is applied to foreign experts who work in Finland and become residents because of this work when they arrive in Finland. According to the law, a foreign expert working in Finland may qualify for a special regime for a period of 24 months if his/her duties require special expertise and his/her cash salary is EUR 5,800 or more per month. In addition, it is provided that the foreign expert has not been resident in Finland during any of the previous five years. Otherwise, the foreign expert would be subject to tax at normal progressive rates. Outbound Expatriates Finnish residents are subject to tax on their worldwide income. However, if a Finnish resident receives salary from an employment abroad, the salary may be tax-exempted in Finland provided that he/she works for a continuous period of at least six months abroad. In addition, it is required that the tax treaty state in which the employment is exercised does have a primary right to tax the salary under the tax treaty. Moreover, the employee may visit Finland on an average for a maximum of six days per each full month of employment abroad. This six-month exemption rule means a total exemption without any progression effect. However, the salary is generally subject to Finnish social security contributions if the taxpayer belongs to the Finnish social security system. 4. Withholding Taxes Finnish source income of a non-resident is usually taxed at source. Unless lower rates are provided for in an applicable tax treaty, the final withholding tax rate is 35 per cent on earned income (salaries and pensions) and 29 per cent on capital income (dividends and royalties). No deductions are allowed against income subject to final withholding tax. ALL OTHER TAXES, CONTRIBUTIONS OR TRANSFER REGIMES OTHER THAN INHERITANCE AND GIFT TAXES AND LEVIES I. LIST OF OTHER TAXES AND CONTRIBUTIONS THAN INHERITANCE AND GIFT TAXES 1. Value Added Tax Value added tax (VAT) is a general tax imposed on the sale of goods and services, on imports, on intra-community acquisitions of goods and on removals of goods from warehousing arrangements. Company carrying on such business in Finland is liable to Finnish VAT. Liability to VAT does not arise if the yearly turnover of the company does not exceed EUR 8,500. However, also in such cases an entrepreneur can voluntarily register for VAT purposes. Company which is VAT registered and carries on taxable business activity is generally entitled to input VAT deductions.

17 17 The standard rate of VAT is 22 per cent, but there are also three reduced rates: 17 per cent, which is applied to foodstuffs and animal feed (excluding restaurant services, alcoholic beverages and tobacco products), 8 per cent, which is applied e.g. to passenger transportation services, books and medicines and 0 per cent, which is applied to subscribed magazines and newspapers. However, some supplies of goods and services, such as financial and insurance services, hospital and medical care, social welfare services, leasing of real property, are VAT-exempted (without credit for input VAT). The tax base is the total selling price, i.e. the consideration paid by the purchaser excluding VAT. The normal tax period for VAT is one calendar month. The tax payable is the difference between output taxes on supplies and input tax deductions attributed to each tax period. The VAT-liable person submits a monthly tax return to the Regional Tax Office. The VAT-liable person pays the tax without prompting no later than on the 15th of the second month following the month the taxable transaction took place. The monthly tax return must be submitted even if there is no tax payable concerning the tax period. 2. Net Wealth Tax Net wealth tax is payable by individuals to the extent their net wealth (assets less liabilities) is equal to or exceeds EUR 185,000. The amount of the tax due is EUR 80 plus 0.9 per cent on the amount exceeding EUR 185,000 (in 2003). This rate applies to individuals and the estates of deceased persons. The rate of net wealth tax for corporate bodies is 1 per cent. However, corporate entities are generally exempt from the net wealth taxation in Finland. Spouses are taxed separately, but the taxation of minors is based on the principle of joint taxation. The assets of minors are aggregated to the assets of the parent with higher taxable assets and their total liabilities are deducted from these assets. The calculation of the Finnish net wealth tax is based upon asset values on December 31 of the relevant calendar year. Property is generally valued at its market value, but certain assets are valued at lower value. For example, shares in a company that is quoted in the Helsinki Exchanges or equivalent are valued at 70 per cent of their market value at the end of the relevant tax year. There are also some assets, such as furniture, household effects, certain bank accounts and bonds, which are totally exempt from wealth tax. 3. Transfer Tax Transfer tax is imposed on transfers of Finnish real property and securities. Tax on transfers of real property is 4 per cent of the transfer price and, in case of transfers of securities, 1.6 per cent of the transfer price. The transferee of real property or securities is liable to pay the tax. However, if the transferee of a security is a non-resident, or if the transferee is a foreign credit institution or a foreign investment service company having no permanent establishment in Finland, the transferor is obliged to collect the tax from the transferee. Transfer of securities is tax exempt if the transfer takes place through the Helsinki Exchanges, on equivalent exchanges or if both parties to the transaction are non-residents.

18 18 There is no liability to transfer tax if the transfer is due to an inheritance, a donation, a last will or a division of property subject to matrimonial right. No tax is imposed if a person aged between 18 and 39 acquires his first permanent home. Tax on securities has to be paid normally within 2 months from the date of the deed and, in case of real property, when applying the legal confirmation of title (i.e. normally within 6 months from the deed). However, in case of real estates, when there is no requirement to apply for a legal confirmation of title, or when it is not applied in due course, the tax has to be paid within 6 months from the date of the deed. 4. Excise Taxes Excise duties are included in the prices of alcohol, gasoline and lubricants, motor vehicles, tobacco and certain other products. 5. Social Security Contributions A mandatory health insurance premium of 1.5 per cent of the gross salaries and pensions is payable by all individuals (rates set for 2003). These premiums are included in individual s advance payroll withholding tax rates. The health insurance premium is not deductible from the individuals earned income. A pension insurance premium of 4.6 per cent and an unemployment insurance premium of 0.2 per cent are withheld from the gross salary of all employees by the employer and paid to private insurance companies (rates set for 2003). Both premiums are mandatory, but they are deductible from the individuals earned income. 6. Real Estate Tax A real estate tax is levied on all real property (land and buildings) situated in Finland. However, there are exemptions granted on forests as well as on agricultural land. The real estate tax is paid to the municipality in which the property is situated. The municipal council determines the applicable tax rates annually within the statutory limits, presently the tax rate can vary between 0,22 per cent and 3.0 per cent. The tax due is determined by the taxable value of each property. The tax is payable by the individual or company owning the real property at the beginning of the calendar year. I. REGISTRATION DUTIES FOR BUSINESS ENTITIES 1. Incorporation of a Company A registration duty of EUR 285 is due upon the incorporation of a limited liability company. Upon the registration of private proprietorships the fee is EUR 60 and EUR 135 for partnerships.

19 19 2. Increase in Capital A registration duty of EUR 50 is due upon the registration of an increase in capital of a company, unless an amendment of the Articles of Association needs to be registered at the same time when the fee is EUR The Transfer of the Companies Shares There are no registration duties regarding the transfer of companies shares (see transfer tax above). However, there are certain notification and application duties concerning mergers and divisions. 4. The Transfer of Corporate Asset There are no registration duties regarding the transfer of corporate asset (see transfer tax above). 5. Other Registration Duties Due - Amendment of the Articles of Association of a limited liability company EUR Converting a partnership or a limited partnership into a limited liability company EUR Application for a public summons to the creditors of the company EUR Application for lowering of share capital, lowering of appreciation reserve, change of company form, distribution of profit, lowering of reserve fund or lowering of issue premium fund EUR Auxiliary trade name EUR 60/name. - Other notifications to the Trade Registrar EUR 50. Notification of new mailing address of a trader as well as notice of termination of trade or dissolution of organization is free of charge. 6. To Whom the Duties Must Be Paid? The registration duties specified above are paid to the National Board of Patents and Registrations, which is the governing authority of the registrations. The duties are charged by the Trade Registrar at the time the notification application is filed. INHERITANCE AND GIFT TAXES Inheritance and gift taxes are payable to the state by the beneficiaries on gifts, inheritances and testamentary dispositions. 1. What Triggers Inheritance and Gift Taxes?

20 20 Inheritance tax is payable on the whole inherited property or a legacy, in case the deceased, the successor or the legatee was a Finnish resident at the time of death. Otherwise, the inheritance tax is levied only to the extent that the estate consists of real property situated in Finland or of shares in a corporate body if more than 50 per cent of the total gross assets of that corporate body consist of real property situated in Finland. Gift tax is payable on the whole donated property if either the donator or the donee was a Finnish resident at the time of the donation. Gift tax is also payable regardless of whether the donator or the donee was a resident in Finland, to the extent that the estate consisted of a real property situated in Finland or of shares in a corporate body if more than 50 per cent of the total gross assets of that corporate body consist of real property situated in Finland. The above is subject to conventions for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on estates and inheritances. 2. Where, When and with Whom Must Tax Returns Be Filed? Inheritance tax is levied on the basis of an estate inventory deed or, if the deceased person resided abroad, on the basis of a tax return. An estate must be inventoried within three months of the death and submitted within one month of the execution to the local tax office of the deceased person s place of residence. In case the deceased person resided abroad, the aforementioned tax return must be submitted within three months of the death to the local tax office of the municipality where the assets are located, or if the assets are not located in Finland, to the local tax office of the heir s place of residence. Gift tax is levied on the basis of a tax return, which the recipient of the gift has to make within three months of the donation. The tax return of a minor is made by his/her guardian or the trustee assigned to him/her. The returns must be submitted to the local tax office in the donator s place of residence or, if the donator does not reside in Finland, to the local tax office within whose jurisdiction the majority of the donated property lies. If the donated property is not in Finland, the tax return has to be filed with the local tax office of the recipient s place of residence. However, no tax return is required when the value of the gifts from the same donator is less than EUR 3,400 within three consecutive years. 3. When Must Taxes Be Paid? Deadlines for the payment of inheritance and gift tax are defined separately for each case. 4. Tax Rate The same tax rates apply for inheritance and gift taxes. The recipients are divided into three categories based on their relationship to the deceased or the donator. The recipients in the first category are taxed according to the table set out below. Those in the second category are taxed at twice the rates and those in the third, at threefold the rates. Value of the Fixed amount payable Rate applicable to the part