Pillar Two considerations of the announced reduction in Finnish corporate income tax rate
As we described previously, on 23 April 2025, the Finnish government announced a reduction of the corporate income tax rate from the current 20% rate to 18%.
As we described previously, on 23 April 2025, the Finnish government announced a reduction of the corporate income tax rate from the current 20% rate to 18%.
Based on currently available information, the 18% tax rate will apply to all accounting periods ending in the calendar year 2027 and thereafter. The tax rate reduction is subject to legislative process, which is expected to be completed at the end of 2025 or 2026.
The tax accounting implications are further described in this news article. The rate reduction would affect deferred tax balances and expenses in the financial statements, which may consequently affect Pillar Two taxation.
Pillar Two GloBE calculation impact
The rate reduction of 2% would generally reduce the effective tax rate (“ETR”) of the Finnish group entities going forward. This may lead to more Finnish group entities being subject to Pillar Two top-up taxes. Even though the Finnish statutory tax rate would still remain above 15%, other factors such as additional R&D deductions or the green investment tax credit could reduce the ETR calculated under the GloBE rules (”GloBE ETR”) below 15%, thus resulting in top-up taxes. Further, with all the complexity of Pillar Two rules, there is always room for surprising impacts arising from certain transactions or unexpected interpretations.
The deferred tax expense or benefit arising from the remeasurement of deferred tax assets and liabilities due to the tax rate change will be excluded under the GloBE rules.
Pillar Two Safe Harbour impact
Pillar Two Country-by-Country Reporting (“CbCR”) Safe Harbour rules are applicable during 2024–2026 for calendar year groups and include three tests:
- De minimis test;
- Simplified effective tax rate (“ETR”) test; and
- Routine profits test.
The tax expense recorded in the income statement (whether current or deferred tax) is only relevant for the Simplified ETR test. If the group is relying on either the de minimis test or the routine profits test for Finland, the potential tax rate reduction should not have any impact on the applicability of the safe harbour rules.
The impact under the Simplified ETR test will depend on whether the Finnish group entities are in a “net deferred tax asset” (“net DTA”) or “net deferred tax liability” (“net DTL”) position. Remeasurement of net DTA at the lower rate would result in a deferred tax expense, thus, increasing the Simplified ETR and the likelihood of passing the Simplified ETR test. To pass the test requires that the Simplified ETR is at least 16% in 2025 and 17% in 2026. On the other hand, remeasurement of net DTL at the lower rate could result in failing the simplified ETR test because it would reduce the Simplified ETR. If none of the three tests is passed for Finland, then full GloBE calculations would need to be prepared for the Finnish group entities.
The year in which the safe harbour calculations will be affected depends on the timing of the legislative process (as described in our previous news article), and whether the legislative process is completed in 2025 or 2026.
How can groups prepare and how can we help?
The potential rate reduction is just another piece in the vast Pillar Two puzzle. Reviewing the entity level and consolidation level accounting and tax entries is an important element of the puzzle. As with any other moving pieces, we are happy to help with preparing or reviewing your Pillar Two calculations – including assessing the impact and treatment of the rate reduction.
Contact us:
Markus Joensuu
Veroneuvonta
+358 (0)20 787 7417
markus.joensuu@pwc.com