The starting-point when assessing the taxation of international business activities in Finland is always the national tax law, which determines the type and amount of tax to be collected. Since wealth tax was abolished in 2005, foreign parties are no longer liable to Finnish wealth tax on their property situated in Finland. This is true even if a double taxation agreement with the state of residence of the property owner grants Finland the right to levy wealth tax on property situated there.

With regard to international trade, the main question is how revenues are to be taxed. In most cases – with the exception of certain sectors, such as construction, transport and logistics – the preconditions under which an economic entity liable to pay tax (permanent establishment) is considered to be formed are the same under national Finnish tax law as under the relevant double taxation agreement. The main focus when assessing the tax liability and making suitable arrangements in these situations is the distinction between income generated by the permanent establishment in Finland and income generated abroad.

Particularly where the taxation of investments is concerned, the question of which type of tax may become relevant usually has to be determined. Finnish tax may be levied on certain types of income not covered by the relevant tax treaty and which are tax-exempt in the taxpayer’s state of residence. This may, for example, be the case for profits derived from the sale of shares in a Finnish company or real estate situated in Finland.

Where cross-border transactions are concerned, determining the tax liability under the national tax law in the state of residence and the state in which the investment occurs is always only the first step. What eventually counts is the overall tax burden: arrangements that appear favourable in comparison with the available alternatives under the national tax law may be disadvantageous in an international context. The chosen arrangement may, for example, ensure that rental income from Finnish real estate is tax-exempt in the owner’s country of residence, but whether this results in a lower overall tax burden can only be determined if other taxes that might be applicable under Finnish law and the relevant tax treaty are also taken into account. Possible tax savings as regards the rental income may well be outweighed later if the real estate is sold and the Finnish tax authorities levy tax on the profit derived from the sale.

The taxpayer has no discretion to allocate income between a foreign company on the one hand and its Finnish subsidiary or permanent establishment on the other hand. Under both national Finnish tax law and the applicable tax treaties the parties must observe the ‘arm’s length principle’. This means that prices and other conditions applied in cross-border transactions between entities of the same company or between affiliated companies may realistically be agreed also for dealings between completely independent companies. If the tax authorities in one country conclude that the allocation of profits and losses was not made in accordance with the arm’s length principle and the profits in this country would have been higher (or the losses lower) had this principle been observed, the tax liability will be adjusted accordingly.

A central feature of arm’s length evaluation is that after concluding an agency or dealership agreement, for example, the principal will not make any payments unless obliged to do so, and the dealer or agent will not perform any duties unless there is an expectation of receiving a share of the revenue generated. Merely reimbursing the costs accrued during the year and balancing any deficit at the end of the year will certainly not be considered an appropriate differentiation between domestic and foreign income. The cross-border transactions to be conducted between the affiliated companies or the company and its permanent establishment and the prices and terms applicable should be agreed in writing immediately on commencing the relevant activities. If the parent company, for example, pays an agreed contribution for opening up a new market to the company, the payment made in this regard will be treated both as income earned by the Finnish subsidiary and at the same time as deductible costs of the foreign parent company. If the same payment, however, is made without a related agreement, it will be most likely regarded as a loan or an investment in kind, which is not deductible for the parent company.

Concepts designed to coordinate the accrual of income are therefore always based on documented contractual arrangements. These may include, for example, loan, cooperation or licensing agreements. Remunerated management and consulting services may also be provided within the group of companies. However, it is not sufficient for the services and remuneration to be agreed on paper; they also have to be actually performed. Therefore, companies should draw up appropriate documentation, such as, for example, working hour accounts.

If reliable market prices are not available for certain transactions, considerable effort may be required to formulate appropriate transfer prices. Carrying out the necessary analysis of the company’s operations, as well as the related legal and tax issues, often requires expert assistance. Such effort should nevertheless not be spared since omissions in this respect can have severe consequences as far as the company’s tax liability is concerned.

The fact that tax law originally designed for use in the domestic arena must nowadays often be applied to cross-border transactions gives rise to many interesting questions. For example, national tax law usually refers to the classification of companies and corporate entities under national company law. Where foreign companies are involved, the question arises as to whether these companies can be validly compared with types of company existing under Finnish law. Answering this question calls for the making of a detailed comparison between the relevant national rules on corporate organisation, share capital and the status of company organs. It may well be possible, for instance, that a German investment fund is considered to be an investment fund under the relevant Finnish tax law while the same is not true for an investment fund from Luxemburg. Similar problems often arise with regard to partnerships.

Many of these questions can be clarified by applying for an advance ruling from the tax authorities. Since this costs money and may take some time, it is however advisable to consider possible alternative arrangements first.

There are of course no ready-made solutions suitable for all types of cross-border transactions. Particularly in situations in which the activities in Finland involve considerable investment or, in the case of large corporations, foundations or investment funds acting on the Finnish market, the facts of the individual case should always be closely examined in order to determine which legal form should be chosen for the activities in Finland and which entity (for example, a holding in a third country) these activities should be tied to.