The foundation of a branch or a subsidiary is worth considering even if a company intends to conduct business in Finland only on a minor scale. For tax purposes, the company will often in any case be considered to have a permanent establishment in Finland and as a result have the same registration obligations as a branch or a subsidiary.

If a company has a permanent establishment, it will also be liable for taxes in Finland. As a result, many foreign enterprises try to avoid the ‘foundation’ of a permanent establishment by all means available. This approach, however, often causes more problems than it solves.

A permanent establishment, in the meaning given to that term in the tax legislation, cannot be ‘founded’ as such. The term refers to the actual circumstances – a permanent establishment either exists or it does not exist. The formation of a permanent establishment can be prevented neither by non-registration nor by other omissions. Only the way in which the business activity is actually organised determines whether such establishment emerges or not.

A permanent establishment, as the term is used in the language of corporate taxation legislation, is a fixed place of business from which the company carries out all or part of its business. This may include, for example, a head office, a branch, an office, factories or workshops, and also building sites or construction projects if exceeding a certain duration. A permanent establishment may even emerge if the company assigns a dependent agent in Finland who has, and who habitually exercises, authority to conclude contracts on behalf of the principal, and whose activities are not limited to the purchase or delivery of goods.

On the other hand, the term ‘permanent establishment’ does not usually include the use of facilities solely for preparatory or auxiliary activities such as storage, delivery or purchase of goods and merchandise, collection of information or advertising.

In practice, it may be difficult to prevent the creation of a permanent establishment in the long run. If a company, for example, employs a customer service person for the Finnish market, this can be considered a permanent establishment if the employee is authorised to conclude sales contracts. Even if the employment contract explicitly prohibits the conclusion of contracts on behalf of the company, the employee may be deemed to have the necessary authorisation if the company accepts contracts he or she has concluded.

In borderline cases, the prevention of a permanent establishment can only be achieved by means of permanent control, which can be very difficult and time-consuming. From an economic point of view, it will often be more reasonable to register a permanent establishment in Finland.

This results in a greater administrative effort when it comes to accounting and tax declarations, but will prevent unpleasant surprises. If it later transpires that a permanent establishment existed from the beginning but no taxes were declared, this can have considerable financial consequences. Finnish tax law provides for extensive penalties in such cases.

If a company intends to conduct business on a larger scale in the Finnish market, the creation of the necessary organisational conditions at an early stage is recommended. This can mean either establishing a branch office or an independent subsidiary. In both cases, the company will be entered into the Finnish trade register as an enterprise conducting business in Finland. This makes it considerably easier for Finnish business partners to establish whom they are dealing with.

A branch office is not an independent company, but legally and in terms of organisation part of the main company, and as such in general subject to the law applicable to the main company. Any obligations and liabilities of the branch are obligations and liabilities of the whole company.

A subsidiary is a legally independent company, and in Finland it is usually a private company limited by shares (osakeyhtiö - Oy). As a rule, the parent company is liable for debts of the Finnish company only in respect of its shares in the subsidiary. For the purpose of limiting the liability of the main company, it may be therefore preferable to found a subsidiary for the sale, distribution and production of goods in Finland.

In contrast to the common perception, founding a subsidiary is often less costly than establishing a branch. The minimum capital required for the foundation of a Finnish private limited company is only €2,500. Maintaining a branch office, on the other hand, can be costly in the long run since a foreign company directly conducts business on the Finnish market. When establishing a branch, the foreign company must, for example, submit an authorised Finnish translation of its entire articles of association. In addition, the annual balance sheets of the company must be translated and submitted to the Finnish trade register on a yearly basis.

In addition, the requirement for a representative – who must be a natural person resident in Finland – is a considerable obstacle in founding a branch office in Finland. According to Finnish tax rules, the person entered in the trade register as the Finnish representative of a branch is jointly liable for the taxes levied on the branch. It is obvious that very few private persons would want to take on such a risk. Therefore, it is usually very difficult to find someone who will act as the required representative.

Otherwise, the foundation and administration requirements are practically identical for both options. Permission by the National Board of Patent and Registration is required in both cases if the main or parent company has its registered seat outside the EU/EEA area.

Regardless of whether the business in Finland is carried out through a branch, a subsidiary or an unregistered permanent establishment, it is necessary for tax purposes to have written documentation on the exchange of goods and services with the main or parent company.

Since the profit made in Finland is subject to Finnish taxation, the earnings of the Finnish branch or subsidiary have to be separated in accounting. The tax authorities will accept the allocation of profits only if it makes sense economically. The Finnish tax authority, for example, will not accept it if mainly costs are allocated with the Finnish branch and at the same time the earnings remain with the foreign main company and would therefore not be subject to taxation in Finland.

The same is of course true for the tax authority in the country of the main company. It is obvious that the authorities in different countries will not necessarily share the same opinion as to how profits and losses should be allocated. A situation can easily arise where taxes on the same income are levied in both countries. Resolving such a situation is usually a complex legal issue.

The risk of getting involved in this kind of situation can be minimised if transfer prices and similar conditions in internal dealings are laid down explicitly in written documentation. If it is possible for the conditions of the internal agreement also to be agreed between independent enterprises, these will as a rule be approved by the tax authorities. Such written transfer pricing documentation is recommendable for all enterprises that have foreign branches or subsidiaries, but has even been made compulsory by a recent Finnish Act with regard to enterprises not classifiable as small and medium-sized companies.