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Finland Corporate - Income determination

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Companies and other legal entities may have income from three different sources: income from business activities, agricultural income, and personal-source income. The net taxable income is calculated separately for each source. The expenses of one source of income cannot be deducted from the taxable income of another source, and a loss from one source of income cannot offset taxable income from another source. All taxable income received by a company is taxed at the CIT rate of 20%, irrespective of the source to which it is attributable.

Income from business and professional activities falls into 'business source' income (taxed in accordance with the Business Income Tax Act or BITA), while income from non-business activity is 'personal income'. Typically, personal income is passive income derived, for example, from investments. As an example, rental income from real estate let to non-related companies is usually regarded as 'personal source' income. The same can apply to a dividend received from stock exchange quoted companies, where the recipient of the dividend is a passive holding company. Farming and forestry income are, as a main rule, treated as agricultural-source income.

In general, Finland has a very broad income concept, and taxable income includes all income derived from a company’s activities, though there are some significant exceptions, including (among others):

  • Capital contributions by shareholders.
  • In most cases, dividends from unlisted companies (see Dividend income below).
  • Liquidation gains and capital gains qualifying for the participation exemption (see Capital gains below).
  • Proceeds from disposal of company’s own shares.
  • Merger gain.

There is no general distinction between capital gains and other income; capital gains of a company are taxed as part of its general income either in the ‘business income’ basket or the ‘other income’ basket. No rates other than the general CIT rate of 20% are applied to any part of taxable income of a company.

Taxable income of a company generally is computed on an accrual basis (i.e. income is taxable in the year it is earned). However, exemptions to this main rule do exist, including unrealised exchange gains and losses, which are taxable/deductible in the year of the rate change.

Inventory valuation

Inventories may be written down to the lower of direct first in first out (FIFO) cost, replacement cost, or net realisable value. Conformity between book and tax reporting is required.

Capital gains

Capital gains and losses are generally included in the taxable business income (i.e. sales proceeds are included in the taxable income, and the undepreciated balance of the asset sold is deducted in the sales year) and treated as ordinary income. However, the entire stock of machinery and equipment is treated as a single item, and the capital gain on machinery and equipment is entered as income indirectly by deducting the selling price from the remaining value of the stock of machinery and equipment.

Capital gains arising from the sale of shares are tax exempt via a participation exemption, under certain circumstances. Specifically, capital gains arising from the sale of shares are tax exempt if:

  • the seller is not a company carrying out private equity activities (as defined by the BITA)
  • the seller has owned continuously, for a period of at least one year, at least 10% of the share capital of the target company, and
  • the shares are part of the seller’s fixed assets and the shareholding is included in the seller’s business income source for tax purposes.

For the participation exemption to apply, the target company cannot be a real estate company, a housing company, or a company the activities of which mainly include owning of real estates. The target company must also be a Finnish company, a company referred to in the European Commission (EC) Parent-Subsidiary Directive, or a company resident in a country with which Finland has concluded a tax treaty that applies to the target company’s dividend distribution.

Note that a capital gain is taxable to the extent that the gain corresponds with a previous tax-deductible write-down or provision made in connection with the acquisition cost of shares, subsidies received for acquiring shares, or previous capital losses deducted for Finnish tax purposes from intra-group transfer of the shares.

Capital losses are non-deductible in situations where capital gains are exempt from tax.

Dividend income

Dividends received by a Finnish company are tax exempt in most cases.

However, dividends received by a Finnish company are fully taxable (100%) if:

  • the dividend is received from a publicly quoted company, the receiving company is not a publicly quoted company, and the shareholding is less than 10% of the equity of the distributing company
  • the dividend is distributed by a non-resident company that is not such as mentioned in the EC Parent-Subsidiary Directive or other company resident in an EU or EEA country that is not liable to pay at least 10% tax for its income, or
  • the dividend is distributed by a company resident outside the European Union or European Economic Area.

Note that most of the Finnish tax treaties include provisions enabling tax-exempt dividends from the tax treaty country in case of at least a 10% shareholding.

Furthermore, dividends received are partly (75%) taxable if the dividend is received on shares belonging to 'investment assets' and the receiving company does not own at least 10% of the equity of the distributing company that is resident in another EU member state and covered by the EC Parent-Subsidiary Directive or the dividend is received on shares belonging to 'investment assets' and the distributing company is resident in Finland or an EEA country but not a company covered by the EC Parent-Subsidiary Directive (note that only financial, pension, and insurance institutions may have assets that are considered as 'investment assets').

Finland has implemented into domestic tax legislation the changes in the Parent-Subsidiary Directive (concerning mismatches in tax treatment of profit distribution to avoid situations of double non-taxation and general anti-abuse rules, directives 2014/86/EU and 2015/121/EU) by limiting Finnish companies' right to receive tax-exempt dividends. Due to these changes, dividends received by a Finnish company are always considered fully taxable in case:

  • the dividend is tax deductible for the distributing company, or
  • the dividend distribution relates to an arrangement or series of arrangements mainly aimed at achieving a tax benefit that is not meant to be the purpose of the dividend article and is not genuine, taking into account all the facts and circumstances related to the case (i.e. the arrangement or series of arrangements is not based on solid business reasons).

Stock dividends

Stock dividends (bonus shares) may be distributed to stockholders, which are corporations and other legal entities with some exceptions, free of tax on the shareholder (see Dividend income above).

Distributions from reserves for invested unrestricted equity

Distributions from reserves for invested unrestricted equity are, in general, deemed as dividends. However, distributions from non-listed companies can be deemed as capital gain if they are:

  • a return of capital investment made by the same taxpayer
  • distributed within ten years of the investment, and
  • clarified by the taxpayer that the above-mentioned conditions are met.

Distributions cannot be deemed as a capital gain if the reserves for invested unrestricted equity have been formed in conjunction with company restructurings (merger and acquisition [M&A] processes).

Interest income

Interest income of a company is taxed as part of its general income, thus the regular CIT rate of 20% is applied.

Royalty income

Royalty income of a company is taxed as part of its general income, thus the regular CIT rate of 20% is applied.

Foreign income

A Finnish corporation is taxed on foreign dividends when the decision to distribute dividends is made and on foreign branch income and other foreign income (e.g. interest and royalties) as earned. The principal method of avoiding double taxation is the credit method, although the exemption method is still applied in a few older treaties (see the Tax credits and incentives section for more information).

Last Reviewed - 04 December 2018

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