FRANCHISING AND TAXATION

(Updated Feb. 14, 2024)

Franchising and taxation in Finland

By Jori Taipale , attorney-at-law,
From Bird & Bird Attorneys Ltd.
The author is an experienced franchise lawyer.

Franchising as a form of business is naturally subject to different tax obligations in Finland. The following article deals on a high level with the most common taxation issues relating to franchising, especially taking into account the franchised businesses of international nature (subsidiaries and joint ventures of foreign franchisors, royalties paid to foreign individuals or companies, master franchising etc). All the relevant changes in the Finnish tax laws till 1 January 2024 have been taken into account in this article.

Corporate Income Tax

In most cases both the franchisor and the franchisee are Finnish companies. In the Finnish operations on an international franchising chain sometimes only one of the parties is a Finnish company. All Finnish companies are subject to national corporate income tax on their world-wide income. The rate of above-mentioned tax is 20 per cent.

If the franchisor is a foreign company and not for example a Finnish subsidiary, it is, as a general rule, subjected to Finnish company taxation only from the income received from Finland (see below). However, the exemption requires that the franchisor does not operate through a permanent establishment in Finland which would bring the company under Finnish taxation for all the income that it derives from Finland through the before mentioned permanent establishment. Furthermore, if a foreign company has its place of effective management in Finland, it can be considered as a resident taxpayer in Finland.

Transfer Tax

A transfer tax at the rate of 1.5 per cent of the relevant sales price (possibly including e.g. certain debts assumed by the buyer) is payable by the buyer of shares in Finnish company. However, if the buyer is a non-resident, the seller must generally collect the tax from the buyer and file the corresponding transfer tax return. If the seller and buyer are both non-residents the transfer of the shares will be exempt from Finnish transfer tax. In respect of Finnish public shares, certain exemptions from transfer tax may apply.

Transfer tax is levied also when transferring a real estate located in Finland. The rate of transfer tax concerning real estates is a flat 3 per cent. Even in the case the seller and buyer both being non-residents the exemption from transfer tax does not apply when transferring a real estate or shares in a Finnish real estate company. Finnish transfer tax is also levied in respect of transfer of shares in a non-Finnish company holding directly or indirectly Finnish real estate assets of over 50% of its total assets, if the buyer or the seller are Finnish tax residents.

Tax on Capital Income

General tax rate on capital income in Finland is a flat 30 per cent to the amount of EUR 30,000.00 per year. The amount exceeding EUR 30,000.00 per year is taxed on a rate of 34 per cent.

As a general rule, dividend received by a Finnish company from an unlisted entity resident in EEA is exempt from tax in the taxation of the recipient. However, the taxation can vary substantially depending on things like whether the shares of distributer of the dividend is listed in Stock Exchange or how much of the distributor’s shares are owned by the receiver.  The taxation system of dividends received by a Finnish individual is relatively complex, and the effective tax rate on dividend can range from 7.5 % to full earned income taxation.

Taxable capital gains are the difference between the sales price and the total acquisition costs of the shares. Resident individuals and Finnish estates may choose to apply the deemed acquisition cost instead of the actual acquisition costs. The deemed acquisition cost is at least 20 per cent of the sales price but 40 per cent if the sold shares have been owned for at least 10 years. Capital losses arising from the sale of shares other than connected with business operations are deductible primarily from gains arising and secondarily from the other capital income of an individual in the same year and the following five years. The capital gains are exempt from tax if the combined sales prices of a taxpayer do not exceed EUR 1,000 during calendar year. Correspondingly, the capital losses cannot be deducted from the gains if the total purchase price of shares sold in a tax year do not exceed EUR 1,000.

The capital gains of the companies arising from the sale of fixed asset shares can be exempted from corporate income tax, provided that the company selling the shares has owned continuously for at least one year no less than 10 per cent of the share capital of the company whose shares are subject to the assignment and that these shares subject to assignment belong to those owned for the required time period. Furthermore, a precondition relating to foreign fixed assets shares for the exemption is that the Council directive (90/435/EEC) on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States applies to the company subject to the assignment or that there is an appropriate tax treaty between Finland and the country of the company’s domicile. Consequently, the capital losses arising from these tax-exempt sales are not deductible. However, for example companies that practice capital investment activity are not entitled to exemption. Also, selling shares in a real estate or a housing company or in a company that de facto mainly engages in real estate holding or managing cannot be treated as tax-exempt sale.

In general, capital losses arising from the sale of shares connected with business operations are deductible from the business income. Capital gains received by non-residents are not taxable income in Finland, provided that the gain is not connected with a fixed place of business of the seller in Finland or that the shares sold are not shares in a housing or a real estate company or other Finnish or non-Finnish limited liability company, cooperative or other entity or trust with more than 50 % of its total assets in Finnish real estate.

Value Added Tax

The value-added tax is with minor deviations compatible with the VAT directives of the EU. In addition to sale and rental of goods, VAT is widely applicable to services as well. However, the tax does not cover, inter alia, health and medical services, services related to social welfare, education and training, or banking and insurance services. Agriculture and forestry are also, in the main, tax-exempt.

The general VAT rate is 24 per cent. This rate is among the highest in Western Europe. A reduced VAT rate of 10 per cent is applied to personal transport, accommodation, movies, medicaments, books and subscriptions to newspapers and periodicals. Food is subject to a VAT rate of 14 per cent, although the service is taxable on the general  VAT rate of 24 per cent.

The Taxation on Non-Residents

Non-residents are taxed on their income derived from Finland. The Income Tax Act includes a list of items of income which are considered to be derived from Finland. An important exception to the general rule is that interest derived by non-residents is not taxable in Finland except for a few cases.

It should be noted that whereas the basic rules on whether income is derived from Finland are found in the Finnish Income Tax Act, the provisions of different tax treaties between Finland and other countries often affect the taxation of non-residents in a significant way.

Items of income derived from Finland by non-residents are either subject to a final withholding tax or taxed on a basis of assessment. The most common types of income are subject to the final withholding tax at source of the income. These items include salaries and pensions as well as dividends, royalties and interest in the few situations where interest is taxable.

From international franchising point of view the withholding tax (tax-at-source) is the most important tax as it is applicable to both dividends (from Finnish subsidiary or joint venture) payable to a foreign shareholders and royalties (from franchisees, master or area franchisees etc.) payable to a foreign owner of the intellectual property rights or the franchised business etc. However, dividend paid by a Finnish company to a company in other member state of EU is normally not subject to tax in Finland, if the Council directive on parent companies and subsidiaries applies to the receiving company and if the receiving company owns no less than 10 per cent of the share capital of the company distributing dividend. Normally, Finland does not levy any withholding tax on outbound interest payments.

The tax rate for tax at source on salaries and pensions is 35 per cent, and only a limited number of deductions are allowed. Dividends, royalties and other items of capital income are generally taxed at 20/30 per cent rate. A 35 percent rate is applied if the payment goes to a shareholder of nominee-registered shares, the payer does not have the details necessary for identification of the beneficiary.  The actually applicable tax rates on dividends, interests and royalties, however are usually lower due to tax treaty provisions. Business income as well as rents and capital gains on real property and on shares of property companies are taxed on the basis of assessment. Rents and capital gains are taxed as capital income at the 30/34 per cent rate. Business income of an individual are divided into capital income and earned income, which are taxed at the rates of 30/34 per cent (capital income) and progressively up to 44 per cent (earned income, as per 2024), respectively, and business income of a company is taxed at the rate of 20 per cent. Foreign persons working in Finland may apply for a specific withholding tax treatment available on key employees.