According to the Finnish Accounting Act, foreign entities must keep accounting records in certain situations in Finland. The purpose of the amendment is to enable the authorities to obtain more financial information on the foreign companies operating in Finland. The information will be used as a basis for their taxation in Finland. The amended law is intended to come into force as soon as possible, it would affect the current, and all future financial years starting on the day of the legislation coming into effect.
In short, the proposed amendment would most likely require actions from legal entities residing outside the EEA (European Economic Area), whose actual place of management is in Finland or who have a permanent establishment in Finland, and who have not created financial statements or whose financial statements cannot be considered sufficient to give a true and fair view of its income and financial position.
Below we have briefly reviewed the current state of the legislation related to corporate taxation and accounting obligations, as well as the expected future changes.
The current obligations
The regulations are different for foreign entities
Currently all foreign companies that have established a registered branch into Finland have been obliged to file their financial statement with the Finnish Patent and Registration Office to be registered under the Trade Register Act, thus the financial statements of branches have become public.
Branches abide by the same financial statement publicity rules as Finnish companies, but branches are not liable to have their own accounting records as per the Finnish Accounting Act. This means, among other things, that the Finnish Accounting Act’s requirements regarding the handling, processing and retention of accounts as well as the retention periods for accounting material do not apply to foreign companies and their branches.
Income in Finland
In terms of company income taxation (“CIT”), foreign companies usually only have limited tax liability in Finland meaning that they are only liable to pay CIT on income from their business conducted in Finland. For the purposes of law and international taxation, the concept of income from business is usually defined through the term permanent establishment. In Finland, a permanent establishment means a place where a special place of business is situated or where special arrangements are made for the permanent pursuit of a business, such as a place of management; an office, industrial plant, production plant, workshop or shop or other permanent point of purchase or sale
Deficiencies in accounting obligations
Foreign companies with a permanent establishment have to calculate the profit of a permanent establishment for each financial year and break down assets and liabilities relating to the permanent establishment in Finland. However, as these companies do not have obligations to keep accounting records, the Finnish Tax Administration’s access to financial information from a permanent establishment remains somewhat limited. The situation is disproportionate between domestic and foreign companies.
The situation where a company’s actual place of management is in Finland has also been regarded as problematic. As of 1 January 2021, such companies have been under unlimited tax liability in Finland but are considered foreign companies under the Accounting Act.
What will change?
Accounting Obligation for Non-EEA entities
The main objective of this proposal is that a legal entity outside the European Economic Area, which is effectively managed from Finland, is required to prepare financial statements in accordance with the Finnish Accounting Act if the legal entity does not otherwise have comprehensive financial statements that give a true and fair view of its operations.
Additionally, any foreign entity with a permanent establishment in Finland that does not have a financial statement that gives a true and fair view of the business would have to make a financial statement according to the Finnish Accounting Act.
Definition of a legal entity
In this context, a legal entity is determined according to the national legislation where the entity is registered. However, according to the amendment, a foreign estate, an investment fund and a special investment fund, a trust and other special-purpose assets are also considered legal entities in Finland in this context. The definition therefore covers economic operators other than public limited companies or traditional forms of company.
Acceptable financial statements
The change itself does not mean that a foreign company should have a separate financial statement made in Finland just because they have a PE in Finland. If financial statements are created in accordance with the legal entity’s country of residence and kept there as per the local legislation, no significant changes are necessarily expected.
In addition to the financial statements in accordance with the Finnish Accounting Act there are several financial statement standards which are accepted. These include:
- Financial statements prepared in accordance with any country in the European Economic Area
- Financial statements prepared in accordance with IFRS as required by the European Union’s IAS Regulation
- US GAAP
- Japan GAAP
- The UK financial statements would also be approved, if there won’t be such changes to the regulations that the UK statements, that would break the conformity of the UK standard between the others mentioned.
The acceptable financial statements will not need to be registered separately in Finland, it is not necessary to translate these documents into Finnish or Swedish, and the currency does not have to be converted into euro.
When is the Finnish financial statement needed?
The financial statement is missing or insufficient
If a non-EEA legal entity (which has a place of actual management or a PE in Finland) has not made a financial statement or its financial statement is not sufficient for obtaining a true and fair view of its results and financial position, they will be required to prepare financial statements in accordance with Finnish law. The financial statement would have to be prepared within four months after the financial period has ended, or if the legal entity does not use a financial period, the calendar year. These financial statements will be registered in Finland, they shall be made in Finnish or Swedish, and the currency must be euro.
Operations are managed from Finland
A foreign entity whose actual place of management is in Finland, is required to prepare the financial statement for all their business activities even if no parts of their business are conducted in Finland. This requirement is directed namely to non-EEA foreign entities which are not subject to the EU legislation on financial statements. However, this applies only if the company has not prepared a financial statement in its country of residence or its financial statement does not include the business activities as a whole.
Things to consider
The Finnish Tax Administration often takes a strict stance regarding whether a PE is formed in Finland or not. The Tax Administration often prefers to interpret even a single employee working from home as a PE in company income taxation. A PE has different definitions in CIT and VAT regulations which means that whether a company has a PE or not must be inspected separately in each case.
In Finland, the obligation to keep accounting records and prepare financial statements is sanctioned by the criminal law of Finland. The punishment can be fines or imprisonment. If a party with accounting liability would fail to comply with its obligations to prepare a financial statement in certain situations in Finland, the board of directors or other similar body may face charges from an accounting offense.
Azets can help you to ensure compliance
We offer guidance in legal and taxation matters so that companies can ensure compliance in Finland. We provide advisory for determining tax liability, a possible permanent establishment, calculating profits for a PE and answering difficult tax and legal questions.