Income taxation of posted employees

Generally, foreign employees working in Finland are subject to Finnish income tax as resident or non-resident taxpayers. The extent depends on the duration of the assignment and the employer’s presence in Finland. Additionally, international tax treaties may limit Finland’s taxation rights.

As a starting point, foreign employees working in Finland are subject to Finnish income tax as:

Resident taxpayers (being liable for Finnish income tax on their world-wide income), or

Non-resident taxpayers (being liable for Finnish income tax on their Finnish income).

Tax residents

A posted employee is considered a resident taxpayer in the following situations, both of which are assessed on a case-by-case basis:

Permanent home and residence in Finland: This covers cases where a person has their main abode and home in Finland. A temporary residence does not usually qualify, unless there are strong personal ties to Finland, such as family or intention to settle.

Continuous stay of over 6 months: The duration is calculated based on days between arrival to and departure from Finland and is not tied to a calendar year. Temporary absences do not necessarily interrupt continuous residency. Postings for a project or several consecutive projects lasting more than six months are prone to trigger tax-residency in Finland.

Tax residents are typically subject to progressive taxation on earned income. As an exception, employees fulfilling the prerequisites for expert employees may apply for a 32 per cent flat-rate tax-at-source if their monthly gross income exceeds EUR 5,800.

Non-residents

Posted employees who do not qualify as tax residents, are generally treated as a non-resident taxpayer and must pay Finnish income tax on income received from Finland.

Income is considered received from Finland if the following two criteria are met:

Work is performed in Finland, meaning that more than half of the working hours during a pay period must take place in Finland. In this case, the wages for the entire pay period are regarded as earned in Finland, regardless of any work outside Finland.

Work is performed for employer or principal present in Finland. This generally covers entities registered with the Finnish trade register, foreign entities whose effective place of management is in Finland and permanent establishments of foreign entities in Finland.

Non-resident taxpayers’ income is, as a rule, subject to a 35 percent tax at source, regardless of the amount.

Elimination of double taxation via tax treaties

Tax treaties may limit Finland’s taxation rights. Finland has concluded income tax treaties with over 70 countries, which are primarily based on the OECD Model Tax Convention.

To determine how tax rights are divided between Finland and another country, one must first identify the employee’s country of residence according to the tax treaty. Where a person is considered a tax resident under the national law of both countries, the country of residence is primarily determined by where they have a permanent home or a centre of vital interests, referring to family, economic, and societal ties.

Salaries and other work-related remuneration are typically taxed in the country where the work is performed. A prominent exception included in most tax treaties is the 183-day rule: the income is taxed (solely) in the country of residence if: 1) the employer is not a resident of the country of working, 2) the income is not borne by a permanent establishment in the country of working and 3) the employee resides at the working country up to 183 days during a 12-month period, calendar year, or other period specified in the applicable tax treaty. The details regarding application of the 183-day rule can vary significantly between different tax treaties.

A permanent establishment in this sense typically includes a place of management, branch, office, factory, workshop. A building site or construction or installation project usually constitutes a permanent establishment only if it lasts more than twelve months, but the threshold varies between different tax treaties. The income is typically regarded to be borne by the permanent establishment when the income is deductible in the country of the permanent establishment.

To the extent both treaty states have right to tax the same income, double taxation is typically eliminated by the credit method (whereby tax paid in one country is credited in the other country) or by the exemption method (whereby income taxed in one country is exempt from tax in the other country). The method applied and its details are specified in each tax treaty.

Non-treaty situations

In the absence of a tax treaty, the elimination of a possible double taxation needs to be determined based on the national rules of the countries involved. As these rules and related procedures are typically not aligned with each other, double taxation can often not be eliminated entirely in non-treaty situations.

In Finland, resident taxpayers may generally apply the credit method whereby foreign-paid tax on income derived from abroad can be deducted from Finnish tax on the same income. Non-resident taxpayers, on the other hand, must typically seek relief in their country of residence for income subject to taxation in Finland.

Related employer obligations

Employer obligations and procedures depend on whether the employer has a permanent establishment in Finland and is registered in the Employer Register.

A foreign entity is required to register in the Employer Register if it has a permanent establishment (PE) in Finland and pays salaries regularly to at least two permanent employees or simultaneously at least six employees on a temporary basis. In this case, the employer must:

Report wages and employer contributions for work carried out in Finland to the Incomes Register. Additional income (for example from work performed outside of Finland) may need to be reported if the employee in question is a tax resident or subject to Finnish social security.

Withold and pay income tax to the Tax Administration. Tax must be withheld from wages paid to resident taxpayers, and for non-resident taxpayers, tax-at-source must be collected from wages earned in Finland. The applicable tax rates are generally specified on each employee’s tax card or tax-at-source card.

Pay the employer’s health insurance contributions, unless the employees have documentation proving that they remain in the social security system of their home country for the duration of the posting.

Even if an employer has no Finnish PE, it can voluntarily register in the Employer Register. A voluntarily registered employer has similar reporting and withholding obligations as a PE, but in most cases does not need to collect tax-at-source from non-resident employees.

If a foreign employer has no PE in Finland and it has not voluntarily registered in the Employer Register, it is not obligated to withhold tax from an employee’s wages. Such employer must nevertheless file earnings payment reports to the Finnish Incomes Register, for example, when employing Finnish tax residents or employees subject to Finnish social security.