Tax Guide for US Expats Living and Working in Finland
Who Is Liable For Income Taxes in Finland
Individuals resident in Finland are taxed on their worldwide income. However, salary earned abroad is exempt from tax in Finland if a Finnish resident works abroad continuously for at least six months and satisfies certain other requirements. Non-resident individuals are subject to income tax on income from Finnish sources only.
Domestic law treats an individual as resident if his or her permanent home is in Finland or if he or she stays in Finland a continuous period of more than six months. The stay in Finland may be regarded as continuous even in the event of a temporary absence (up to two months) from the country.
In the case of emigration, foreign citizens become nonresidents for Finnish tax purposes at the time they leave the country and surrender their permanent home in Finland. With respect to a Finnish citizen, he or she is still considered to be resident in Finland until three years have passed from the end of the year when the individual left the country, unless he or she can establish that no essential connections with Finland have been maintained.
Income subject to tax. The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. Taxable income is calculated separately for earned income and capital income (see Capital income). Business income is divided between earned and capital income (see Self-employment and business income).
Earned income is subject to national income tax, municipal income tax and church tax. Taxable earned income is generally computed in the same manner for each of these taxes, although the deductions and credits allowed for each tax differ slightly.
Earned income consists of salaries, wages, directors’ fees and benefits in kind. Fringe benefits, including a company car, housing and lunch vouchers, are taxed on values set forth in an official table that are lower than the actual costs incurred. Scholarships from private institutions are exempt, up to approximately €18,800 (2011 tax year).
Under a special expatriate tax regime, qualifying expatriates may elect to be taxed on their salary income at a rate of 35% for a period of up to 48 months, instead of at the normal progressive income tax rates.
Self-employment and business income. Self-employment income of residents is considered to be business income. Taxable business income is apportioned between capital income and earned income.
The amount of capital income is determined using a 10% or 20% rate of return on investment and is taxed at the 28% rate applicable to capital income (see Capital income). The remainder of taxable business income is taxed as earned income according to the progressive income tax scale.
Taxable business income consists of profits shown in the statutory accounts required for self-employed individuals. Accounting profit and taxable profit are, in principle, the same, although the tax law prescribes a number of adjustments.
Investment income. For Finnish individuals, the taxation of dividend income depends on several factors. If the distributing company is a listed company that is resident in a country with which Finland has entered into a tax treaty, 70% of the dividend is taxable capital income. The remaining 30% is exempt from tax. Dividends from unlisted companies may be exempt from tax, taxed as capital income or taxed as earned income (similar to salary), depending on the net assets of the distributing company and the country of residence.
For residents, interest income on bank deposits and bonds is subject to a 28% final withholding tax in 2011. Certain government bonds are exempt from this tax. Interest on housing loans, student loans and loans related to the deriving of taxable income is fully deductible from capital income. In general, 28% of the excess of interest expense over capital income is deductible from income taxes on earned income. However, this credit is limited to €1,400 for a single person and €2,800 for a couple. The maximum amount deductible is increased by €400 for one child and by €800 for two or more children.
For nonresidents, dividends and royalties paid from Finland are subject to a 28% final withholding tax, unless a tax treaty provides otherwise. In most cases, interest paid to nonresidents is tax exempt.
Taxation of employer-provided stock options. Stock options provided by an employer are not taxed at the time of grant. At the date of exercise, the difference between the fair market value of the underlying stock and the exercise price of the option is treated as taxable employment income. Employee social security contributions are not payable on the benefits except for the health insurance contribution of 1.19% (plus a surcharge of 0.17%). Stock options are not subject to employer’s social security contributions. The base for the employee contribution is generally the taxable amount.
Any gain derived from the subsequent sale of the stock is taxed as a capital gain under the rules described in Capital gains and losses.
Capital gains and losses. Capital gains on shares and real estate are taxed as capital income at a rate of 28%. A taxable capital gain is computed by deducting from the disposal proceeds the greater of the acquisition cost plus the sales cost, or 20% of the proceeds (40% for property owned for at least 10 years before disposal). The value used for property received by gift or inheritance is generally the value used for purposes of the gift and inheritance tax (see Other taxes). However, certain exceptions may apply.
A capital gain resulting from the sale of an apartment or house that the seller used as a primary residence for at least two years during the time of ownership is exempt from tax. Capital losses are deductible only from capital gains derived in the year of the loss or in the five following years.
Deductions
Deductible expenses. In general, a taxpayer may deduct all expenses directly incurred in generating or maintaining taxable income. However, separate deductions apply for earned income and capital income. See Investment income for deductions applicable to capital income.
The following are the primary deductions applicable to earned income for 2011:
- Travel expenses that exceed €600 incurred between home and office, up to a maximum of €7,000
- Payments to labor unions
- A deduction from salary income, up to a maximum of €620
- Expenses incurred in connection with earning income, to the extent they exceed €620
- Employee contributions for health insurance per diem, unemployment insurance and pension
Contributions paid by individuals to voluntary pension insurance are generally deductible for tax purposes up to certain maximum limits from capital income.
Business deductions. Expenses incurred to create or maintain business income are generally deductible. Exceptions apply to salaries paid to entrepreneurs, their spouses and their children under 14 years of age who work for their business, as well as to 50% of entertainment expenses.
Interest expenses relating to business or farming activities are deductible for business or farming income purposes in determining taxable income from these activities.
Relief for losses. A business loss is deductible from capital income. Any excess loss from a business may be carried forward for 10 years and offset against business income. Any loss from earned income may be carried forward for 10 years and offset against income from the same category.
B. Other taxes
Wealth tax. Finland does not impose wealth tax.
Inheritance and gift taxes. Inheritance and gift taxes are levied on inheritances, testamentary dispositions and gifts. All property owned by a person resident in Finland or received by a person resident in Finland is taxable. If both the owner and recipient are nonresidents, the tax applies only to real property located in Finland and to shares in a corporate body in which more than 50% of the assets consists of Finnish real property. A tax credit is allowed for any estate tax paid abroad on the same inheritance or gift if the recipient is resident in Finland.
Beneficiaries are divided into the following two categories:
- Spouses, children, spouses’ children, grandchildren, parents and grandparents (first category)
- Other related and unrelated individuals (second category)
C. Social security
The social security tax is imposed on employers, employees and self-employed individuals. For employees and self-employed individuals in 2011, the social security contributions consist of a Medicare contribution and a per diem contribution. The per diem contribution is 0.82% of salary income (excluding certain items, such as employee stock options), and the Medicare contribution is 1.19% of municipal taxable income. Pensioners pay an increased Medicare contribution at a rate of 1.36%. In addition, for employees, a 4.7% compulsory pension insurance premium and a 0.46% unemployment insurance premium apply to earned income subject to withholding tax. The compulsory pension insurance premium is 6% for employees over 53 years of age.
For employers, social security taxes are levied as a percentage of gross wages and salaries subject to withholding tax. No ceiling applies to the amount of wages subject to social security taxes. The average total percentage of all contributions for private sector employers is approximately 22.61%, which consists of 2.12% for sickness premiums (employer’s social security premium), 0.071% for group life insurance premiums, pension premiums that average 17.7%, 1% for average accident insurance premiums and 0.80% for unemployment insurance premiums (3.2% for salaries exceeding €1,879,500). To provide relief from double social security taxes and to assure benefit coverage, Finland has entered into totalization agreements with EEA countries, European Union (EU) countries, Australia, Canada, Chile, Israel, Quebec and the United States.
For assignments to Finland beginning after 1 January 2009 from a country other than an EU/EEA country, Switzerland or a totalization agreement country, employees working in Finland for foreign employers are exempt from the pension insurance contributions for the initial two years of an assignment.
We have been preparing US income tax returns for US Citizens and permanent residents living in Finland for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Finland and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the Finland tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Finland Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working in Finland, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Finland.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email