Individuals are considered to be resident in Finland if their permanent abode is in Finland or they are physically present in Finland for more than six continuous months in a tax year. Foreigners staying in Finland a maximum of six months are considered non-residents and required to pay tax only on income arising in Finland.


  • Taxable Income

An individual is taxed separately on earned income and on investment income. Earned income is subject to national income tax, municipal income tax and church tax. Taxable earned income is generally computed in the same manner for these taxes, although the deductions and credits allowed for the different taxes differ slightly. Investment income is subject only to a flat tax of 28%.

Taxable business income is divided into an investment income portion and an earned income portion. The amount of investment income is determined using a 15% rate of return on the net assets of the business. The remaining business income is taxed as earned income.

Earned income includes salaries, wages and benefits-in-kind. Fringe benefits, such as a company car, housing and lunch vouchers, are taxed on values set forth in an official table and are lower than the actual cost incurred. Scholarships from private institutions are exempt, up to a varying annual amount, which is currently about FIM 68,000.

For residents, royalty income is included in investment income if the taxpayer inherited or purchased the patent or other intangible right. Royalties on intangible rights not inherited or purchased, such as on the rights to an invention created by the taxpayer, are taxed as earned income.

Investment income, or income from capital, is aggregated and taxed separately from earned income. Investment income includes dividend income together with the imputation credit, capital gains, certain interest income and income from rental activities. A portion of an individual partner's share of partnership income is taxed as capital income (see Section F.4, page 49), as is a portion of an individual's business income. A portion of dividend income from a limited company may be taxed as earned income.

In general, interest income is taxed as investment income, but certain exceptions apply. Interest income on bank deposits and bonds is subject to a 28% withholding tax which is a final tax. Interest on ordinary bank savings accounts are exempt, provided that maximum interest rates are within prescribed limits.

Gifts or inheritances are not usually treated as income, but are taxed separately as discussed in Section F.7, page 56.


Capital gains are computed by deducting from sales proceeds selling expenses and the greater of the acquisition cost or 30% of the proceeds, or 50% of the proceeds for an asset acquired on or before 31 December 1988. The difference is included in taxable investment income in full. Losses are deductible only from gains arising in the same year and the three subsequent years.

A capital gain from the sale of a flat or a house used by a seller as a primary residence for at least two years prior to the sale is tax-exempt.

  • Deductions And Reliefs

In general, a taxpayer may deduct all expenses directly incurred in generating or maintaining taxable income. However, separate deductions apply for earned income and investment income.

Deductions From Earned Income

The following deductions from earned income are permitted:

  • Up to FIM 50,000 of additional pension insurance contributions annually if total pension coverage does not exceed the statutory basic pension. Otherwise, only 60% of payments up to FIM 30,000 is deductible. Statutory payments are fully deductible.
  • 3% of salary, up to a maximum deduction of FIM 1,500. Expenses incurred in connection with earning income are deductible to the extent they exceed FIM 1,500.
  • Annual expenses of commuting from home to work that exceed FIM 2,500, up to a maximum deduction of FIM 16,000 annually.
  • Annual membership fees for trade unions.
  • The unemployment insurance premium of 1,5% on earned income and the employee pension premium of 4,3% on earned income.
  • An amount equal to taxable income if, after the above deductions, taxable income does not exceed FIM 8,800. If taxable income exceeds FIM 8,800, the FIM 8,800 deduction is reduced by 20% of the income in excess of FIM 8,800.

Additional tax relief is available to the handicapped and the elderly.

Deductions from Investment Income. Interest expense is generally deducted from investment income, in addition to all expenses directly incurred in generating or maintaining taxable investment income. Deductible interest includes interest on housing, student loans and loans that relate to earning taxable income. Interest on other loans that are not used for income-producing activities, such as a loan to acquire a family car, is not deductible.

In general, if interest expense exceeds investment income, 25% of the excess is allowed as a credit against income taxes on earned income. However, this credit is limited to FIM 8,000 for a single person and FIM 16,000 for a couple. The maximum is increased by FIM 2,000 for one child and by FIM 4,000 for two or more children. Over a transitional period until 2002, a taxpayer may be entitled to an additional deduction on loans that he or she had at 31 December 1992.

Interest relating to business or farming is treated differently. It is deducted in full from the business or farming income in determining the taxable income from the activity.

  • Losses

Tax losses may be carried forward for 10 years. Losses may not be carried back.

  • Personal Tax Rates

The national income tax rates on earned income for 1996 range from 7% on taxable earned income of FIM 40,000 to FIM 56,000 to 39% on taxable earned income exceeding FIM 290,000. For a complete 1996 tax table, see Appendix 9, page 86.

Municipal income tax and church tax are also levied on the taxable earned income of individuals. These taxes are discussed in Section F.9, page 58.

Investment income is taxed at a flat rate of 28%. It is not subject to municipal income tax or church tax.

The imputation system applies to the taxation of dividends. Although dividend income is included in taxable investment income, the recipient benefits from an imputed tax credit, a credit for the tax paid by the company. The imputed tax credit of 7/18 (for 1996) of the amount of the distributed dividend is deducted from the recipient's income tax liability on investment and earned income. Any excess credit is refunded. See Section F.2, page 40, for a discussion of the dividend imputation system and Appendix 11, page 89, for an illustrative calculation of the imputed credit.

See Appendix 10, page 87, for an illustrative tax calculation for an individual.

  • Net Worth Tax

Net worth tax is imposed on individuals' taxable net worth at the end of each tax year. Taxable property consists of property with monetary value, with certain specified exceptions. Exempt property includes certain rights to recurrent payments, such as pensions, bank accounts and specified bonds, the interest on which is exempt or subject to a final 28% (in 1996) withholding tax, and household property intended for the taxpayer's personal use. However, certain high-value personal property, such as cars, boats and jewels, is taxable. Business property is generally taxable, but some farm property, such as livestock and farm products, is generally exempt. Taxable assets are reduced by liabilities to calculate taxable net worth. Assets are normally valued considerably below their market values.

The net worth tax for 1996 is FIM 500 for taxable net worth of FIM 1.1 million. The tax on the excess is 0.9%.

  • Maximum Combined Tax Rate

If total national and municipal income taxes, church tax, social security contributions and net worth tax exceed 70% of an individual's taxable earned and investment income in any one year, the aggregate amount is reduced to that ceiling. The amount of national income tax levied is reduced first to zero, if necessary. If total taxes still exceed the 70% limit, the net worth tax may be reduced. Church tax, municipal tax and social security contributions, however, are always payable in full, even if the amount exceeds the ceiling after adjustments.


Income from wages or salary earned abroad is tax-exempt in Finland if a Finnish resident works abroad continuously for at least six months and satisfies certain other requirements, including the following:

  • The expatriate may visit in Finland no more than six days for
  • each month worked abroad without breaking the continuity
  • requirement.
  • The individual has to work in the same country or in different countries but on behalf of the same employer.

Exemption does not apply if the working state has no right to tax the income of the individual. If the six months rule is applied 60 % of the tax free income is calculated as income in Finland when determining the progressive tax rate for individuals taxable income.

A Finnish citizen continues to be considered a resident in Finland for three years after leaving Finland unless the individual demonstrates that he or she has no essential connections with Finland, such as a family living in Finland or ownership of real estate or a house in Finland. The rule does not apply to foreign citizens.


A non-resident who works in Finland for up to six months on behalf of a Finnish employer is liable for withholding tax at source at a flat rate of 35%. If the individual remains in Finland for more than six months, the individual is taxed at the national progressive tax rates.

Non-residents are liable for withholding tax at source on Finnish-source income at a flat rate of 35% on salaries and pensions and 28% on dividends and royalties. If Finland has concluded a tax treaty with the individual's country, lower withholding tax rates may apply. Interest is usually not taxed (see Taxable Income, page 50 and Section F.6, below).

From the beginning of 1996 foreign expatriates coming to work in Finland may choose to be taxed on their salary income at a rate of 35 % for periods up to 24 months, instead of being taxed at the ordinary income tax rates. Employee has to apply for this special non-resident status from the local county tax office, either before the assignment begins or during the first 30 days of assignment. The application must be made in writing.

The special expatriate regime applies only to expatriates with special skills. The cash salary must amount to minimum of FIM 35.000 per each month of the assignment. No cash minimum applies to teachers in the Finnish Universities or scientists working on research for public interest (not a private company or private use). It is also required that the expatriate has not been resident in Finland during the last five years before the assignment.

If the expatriate using this special regime stays in Finland after 24 months, he shall be taxed according to ordinary tax rates after this period. This special regime will apply to assignments that start during the period Jan 1, 1996 - Dec 31, 1997. After this it will be decided whether a permanent law will be enacted.

The content of this article is intended to provide a general information on the subject matter. It is therefore not a substitute for specialist advice.

For further information contact Mr. Jukka Nisonen on +358 0 1727 7282, Tilintarkastajien Oy - Ernst & Young Kaivokatu 8, 00100 Helsinki, Finland or enter a text search 'Ernst & Young' and 'Business Monitor'.