Individual taxpayers have to pay income tax on earned income and capital income.

Capital income, such as rental income and capital gains, is taxed at a flat rate of 28%. If a private individual receives dividends from unlisted companies, a share of 30% of the dividends is tax-free, with the remaining share being subject to general income tax calculated by reference to progressive tax rates. However, preferred treatment is given to a part of the dividend that corresponds to 9% of the mathematical value (=net value of the shares.) For this part, the capital income tax rate of 28% applies, and within certain limits this part is even tax-free.

Finnish tax on earned income consists of the progressive state income tax, the flat-rate municipal tax and – if applicable – church tax.

The municipal tax rate varies depending on the domicile of employee. In the capital region for example, the rate is currently 17.5% for Espoo and Helsinki and 18.5% for Vantaa. State income tax is levied on income exceeding €12,600, the rate depending on the amount of salary received, beginning at a rate of 8.5% and climbing up to 31.5% for income exceeding 62,000 Euros (in 2008). There is a tax calculator on the website of the Finnish tax authority (www.vero.fi), which gives a good estimation of the overall tax rate based on estimated annual income.

A foreign national employed in Finland may be subject to unlimited or limited tax liability in Finland. As a rule, the decisive factor is place of residence.

Foreign nationals considered as Finnish residents are subject to unlimited tax on all their global income. Under Finnish national tax law, any person habitually resident in Finland or coming to Finland with the intention of staying for a continuous period of at least six months will be considered a Finnish resident.

With regard to temporary work assignments in Finland, a situation may easily arise where, under the relevant national legislation, the employee is considered a resident of Finland as well as of his or her country of origin. Such so-called ‘dual residence conflicts’ are decided principally on the basis of existing double taxation agreements between Finland and the employee’s country of origin.

Most tax treaties concluded by Finland contain so-called ‘tie-break rules’ for determining which of the states concerned will be considered the state of residence for treaty purposes. Usually, the decisive criterion is where a person has a permanent home. If the employee has a permanent home in both states, the place of residence is the state to which the individual has the stronger personal or economic ties and which can therefore be considered the centre of his or her vital interests. If the residence cannot be determined by reference to permanent home or centre of interests, habitual abode and nationality are usually looked at as subsidiary criteria.

There are also, however, tax treaties that give both states the right of taxation in dual residence situations and only allow the employee to deduct tax paid in one state from tax to be paid in the other state in respect of the same income.

As the above considerations show, the question of where a person will be considered resident and subject to unlimited tax liability always depends on the circumstances of the individual case and on the employee’s country of origin. Therefore, it is advisable to seek advice from an expert familiar with international taxation on the tax liability applicable in the particular case at hand.

Foreign nationals employed in Finland but not resident in Finland are subject to limited tax liability. As a rule, they have to pay Finnish income tax on income received from a Finnish source but not on income received from a foreign source.

The applicable tax treaties usually give Finland the right to levy tax on salary, wages and other remuneration derived from employment carried out in Finland. As an exception to this rule, many tax treaties provide that an employee resident in another country is liable for taxation only in his or her country of residence if he or she is present in Finland for a maximum of 183 calendar days per year, provided that he or she is employed by a foreign employer and the salary is not paid from the employer’s permanent establishment or fixed base in Finland. The applicable provisions may vary when it comes to the detail: while, for example, some agreements refer to the calendar year, others refer to any 12-month period.

The exception mentioned above is usually not an option if the foreign employer has at least a fixed establishment in Finland, since this establishment will usually bear the salary costs. Leased employees are also excluded from the 183 days rule in some cases. In particular, leased employees from Denmark, Norway, Sweden, Iceland, Estonia, Latvia and Lithuania (as well as from countries which do not have a tax treaty with Finland), are liable to pay Finnish income tax from the first day onwards regardless of the intended duration of their stay.

In addition to the 183 days rule, many tax treaties include special provisions for particular groups of individuals; for example, artists, sportsmen and women, teachers and researchers, or members of the board of directors (or similar organ) of a Finnish company.

As a rule, non-resident employees are taxed on their Finnish earned income at a tax-at-source flat rate of 35%. A fixed amount of €510 per month (or €17 per day if the work does not last a full month) may be deducted from the Finnish source income before the tax is calculated if the right to make deductions is marked on the tax card. In the context of the annual tax assessment, EU/EEA citizens who receive at least 75% of their salary from Finland may also request that tax be levied in accordance with the normal progressive income tax rates if this results in a lower tax burden.

If a non-resident is taxed on his or her Finnish source income in Finland, the same income will usually also be subject to income tax in the country of residence. In order to avoid double taxation of the same income, the tax treaties usually contain provisions dealing with the manner in which Finnish tax is taken into account in the country of residence. There are two basic methods for avoiding double taxation: the tax paid in one country may be deductible from the tax payable on the same income in the other country (so-called credit method) or the income taxed in one country may be tax-exempt in the other country (so-called exemption method). The details have to be determined based on the applicable tax treaty.

In order to encourage foreign experts to come to work in Finland, Finnish tax rules provide for privileged taxation of certain foreign ‘key employees’. If the employee concerned is considered a Finnish resident based on the national legislation and the applicable tax treaty, his or her Finnish source earned income may nevertheless be taxed at a flat rate of 35% instead of the regular progressive tax rates.

The prerequisites for this flat-rate taxation are as follows:

The flat rate taxation is possible for a maximum period of four years. The necessary tax-at-source card must be applied for within 90 days of commencing work in Finland.

The privileged treatment of key employees is based on a temporary Act, which will remain valid for employment relationships concluded up to the end of 2011. The Act has existed since 1996 and has been extended on several occasions in the past.

Any employee coming to Finland should apply for a Finnish Personal Identification Number (henkilötunnus) as soon as possible, since acquisition of this number this is a precondition for obtaining a Finnish tax card.

In order to receive the Finnish Personal Identification number, the employee must register in person at the magistrate (maistraatti) of his or her place of domicile in Finland. The employee must present a passport, residence permit, and official certificates of marriage and birth of children. He or she must also complete a foreigner registration form.

Once the employee has obtained Finnish personal ID, he or she can apply for a tax card from the local tax office. The tax percentage stated in the tax card is calculated based on the estimated income for the relevant year. Non-residents should apply for a special tax-at-source card.

It is important to obtain the tax card as soon as possible since, as long as the employee does not have a tax card, the employer is obliged to withhold tax from the monthly salary paid at the rate of 60%. As a rule, the employee gives the tax card to the employer who then withholds the tax percentage stipulated in the tax card from the employee’s monthly salary and transfers this amount to the tax office.

If the foreign employer does not have a permanent establishment in Finland and the salary is directly transferred to the employee’s account from outside Finland, the employee will be liable to pay the relevant tax himself/herself. In this case, the employee should request the local tax office to calculate a self-initiated advance tax and make the prepayments accordingly.

The withholding rate, which is calculated on the basis of estimated salary and stipulated in the tax card, is used for tax collection purposes. Final taxation occurs after the end of the tax year and is based on the notified taxable income.

Employees receive a pre-completed tax return form in April of the year following the tax year in question. The tax return includes the income and deductions that have been notified to the tax authorities. The employee has to check the tax return form and notify necessary amendments using the form attached to the pre-completed tax return. The due date for returning amendments is in early May and the exact date is stated in the pre-completed tax form. If all the information is correct and no income or deduction is missing, the employee does not have to do anything. If the employee does not return the tax return form, the taxation is done in accordance with the tax notice attached to the tax return form. If the employee notifies changes to the tax return form, he or she will receive a tax assessment between August and October.

If the tax withheld during the year is less than the taxation based on the notified income, the employee has to pay residual tax in two instalments, with the due dates in early December and February. If the actual tax burden is lower than the amounts withheld during the tax year, the employee receives a refund in early December.

First of all, the employer has to withhold the percentage of tax stipulated in the tax card from any salary paid to the employee. The withheld tax has to be transferred to the local tax office by the tenth day of the following month at the latest. In addition, the employer must provide monthly notifications about the salary paid.

Foreign employers who do not have a permanent establishment in Finland are not obliged to withhold and pay tax from the salary, provided that the salary is directly transferred to the employee’s account from outside Finland. In this case, the employee will be liable to pay the relevant tax by way of advance tax payments.

Employers must also make annual notifications to the tax authorities concerning the employees employed in Finland during the tax year, and the remuneration paid to them. These annual payroll reports are used as a basis for the assessment of individual taxpayers’ income and accrued tax in the pre-completed tax return.

The annual payroll report is due by 31 January of the relevant tax year. The obligation to submit the report is strictly enforced by the authorities and omissions in this respect may be punished with a penalty of up to €15,000.

Since July 2007, foreign employers have been obliged to notify the Finnish tax authorities when sending leased employees to Finland in situations where the double taxation agreement with the country in question does not prevent the leased employees from being taxed in Finland.

This is true in particular for employees from the Nordic countries (Denmark, Sweden, Norway, Iceland) as well as from the Baltic States (Estonia, Lithuania, Latvia), since Finland’s tax treaties with these countries exclude leased employees from the 183 days exemption so that they are liable to pay Finnish income tax regardless of the duration of their assignment in Finland. In addition, notifications have to be made for all employees from a country which has not concluded a double taxation agreement with Finland.

The notification must include the employees’ personal data, as well as information on work location, duration, service recipient, and estimated remuneration. The deadline for submitting the notification is the end of the month following the calendar month in which the first employee started working in Finland.