New guidance on remote workers in Finland – impact on foreign corporations’ taxation

Finnish Tax Administration (FTA) has updated the guidance on income taxation of non-resident foreign corporate entities in Finland. The update on January 27, 2023, concerns foreign corporations’ employees who work remotely from home in Finland and respectively the creation of permanent establishment (PE) in Finland. This can change a corporation’s liability to pay income taxes and file a tax return in Finland. The FTA guidance was updated to correspond with respective OECD guidance.

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Permanent establishment creates a tax liability

Permanent establishment is a tax concept. A foreign corporation must pay taxes in another country when its activities are considered to create a permanent establishment (PE) in the country. A permanent establishment is created when a corporation has a fixed place of business, such as an office, and the foreign corporation’s activities are other than auxiliary or preparatory activities, e.g., advertising, the collection of information or similar.

Remote working from a home office

Prior to the new guidance, a PE was generally created in Finland, when a foreign corporation had employees working from their home offices in Finland on a permanent basis. The only exceptions to the treatment were the aforementioned auxiliary or preparatory activities. Similarly, foreign companies’ directors and other employees who worked from Finland only due to personal or family reasons created a PE and, hence, tax payment and reporting liability to their foreign employer.

The new FTA guidance may facilitate foreign corporations’ employees working remotely from home in Finland. Remote working from a home office does not automatically contribute to the creation of a PE when the corporation’s activities do not demonstrate business-related interests to carry out work from the country. Examples of business-related interests include serving Finnish customers or carrying out sales related activities in Finland or in the neighbouring Nordic and Baltic countries.

However, the non-business-related interests must be identifiable in an objective manner. The corporation must be able to provide solid facts on the corporation’s business activities in Finland and abroad. It is not sufficient that the employee or corporation would only notify FTA that remote working in Finland takes place on the request of the employee, for instance. It is expected that the future Finnish tax practice and case law together with the OECD commentary clarifies in more detail what business related interest means.

Requirement to work from home

A PE can still be created in Finland due to the work carried out through a home office when a foreign corporation requires that the employee works from Finland but has not provided the employee an office. In these situations, the (home) office is a requirement for the work and working from the home office is expected by the employer.

Based on the guidance, it is assumed that the employer has requested the employee to work from home if the employer does not provide an office space even when the work tasks require this. Further, work from home is considered to be requested if the employer demands that the employee works from home on certain days, because there is not enough office space for all the employees, or if the employer compensates office expenses to the employee such as paying a rent. However, providing a computer and some other general office equipment is not compensating office expenses.

What should foreign corporations do now?

If you consider that the new guidance could apply to your corporation, we recommend examining your set-up in Finland in more detail. Based on the investigation, actions can be taken considering future tax liability and the possibilities to address past liabilities.