Foreign tax credit
The principal method of avoiding double taxation is the credit method, although the exemption method is still applied in a few older treaties. Foreign tax can be credited against taxes payable in Finland on the same income over the same period on a pro-rata basis. The credit is given for taxes paid to a foreign state and covered by the relevant double tax treaty (DTT). The maximum credit is the lesser of either the amount of the foreign tax or an amount equal to the Finnish tax payable on the income from a foreign state. This maximum is calculated on a source-by-source basis. Unused credit of foreign tax paid may be carried forward for five years on an income basket basis.
Research and development (R&D) activities
R&D related costs may be deducted annually, or they can be capitalised.
Additional deductibility on certain R&D subcontracting costs
A new law, according to which entities can make an additional 50% deduction on R&D subcontracting costs during tax years 2021-2025, entered into force on 1 January 2021. The law was amended to triple the deduction on R&D costs incurred in 2022-2027. The 150% deduction can first be used in taxation of 2022. The previous additional deduction of 50% applies in taxation of 2021.
The minimum amount for this additional deduction during a fiscal year is EUR 5,000 and the maximum amount is EUR 500,000.
In order for these costs to be deductible, the costs must be based on cooperation in R&D activities between the taxpayer and a research organisation. The additional deduction must also be based on subcontracting invoices that make reference to a contract between the taxpayer and the research organisation that has been signed on 1 January 2021 or thereafter. Additional deduction is not granted to the extent the entity has received direct financial support form the State of Finland or other public subsidies for its R&D activity.
There are also certain requirements that the research organisation has to meet in order for the taxpayer to receive the additional deduction. The deduction can be granted only on payments to research organisations that:
- operate in the European Economic Area
- are a unit of a university or a research institute whose main goal is to conduct fundamental research, industrial research, or experimental development, or disseminate research results through education, publishing, or transfers of technology, and
- further invest any profits to other research activities, dissemination of the results, or education.
This definition is intended to be consistent with the definition of a 'research and knowledge-dissemination' organisation in Article 2 (83) of European Commission Regulation (EU) 651/2014 of 17 June 2014.
A permanent additional deduction on R&D costs
As of 1 January 2023, a new law entered into force which provides a tax incentive for R&D activities. The new, permanent deduction is a combined deduction, which consists of a general additional deduction based on the amount of research expenses and an added additional deduction based on the increase of the amount of expenses. The general additional deduction can first be used in taxation of 2023 and the added additional deduction can be used in taxation from 2024 onwards.
The amount of the general additional deduction is 50 % of the salary and service purchase expenses related to the taxpayer’s own research and development activities. The maximum amount of the general additional deduction in a tax year is EUR 500,000 and the minimum amount is EUR 5,000.
The taxpayer can also receive an added additional deduction of 45 % based on the increase in the amount of R&D activities, if the amount of activities carried out by the taxpayer during the tax year has increased compared to the previous tax year. The maximum amount for the added additional deduction in the tax year is also EUR 500,000, but there is no minimum amount for the added additional deduction.
This law is applied simultaneously with the provisions of the law on the additional deduction for R&D activities in the tax years 2021-2027, so that the general additional deduction according to the new law would not be obtained for the same expenses on the basis of which the additional deduction according to the other law has been claimed. The general additional or added additional deduction of the new law is also not available for the same expenses for which other public subsidies have been received. Additional deductions are taken into account when confirming the tax year’s loss.