The new tax regime is targeted to combat aggressive tax planning but is an exit tax the correct measure given the points raised by the critics.
Definition of exit tax
Generally speaking private individuals are taxed for capital gains in their country of residence. The obvious tax planning measure is then to relocate to a favorable country before a sale of assets. This planning, in turn, can be tackled by introducing a so-called exit tax where the original country of residence retains the right to tax the respective capital gains. This exit tax is justified by arguing that the capital gain has accumulated during the stay in the original country and thus the taxing right should be allocated accordingly. An exit tax or similar legislation has been put into force in a number of countries such as in the US and several European states including Germany and France.
Current legislation
Finnish tax legislation does not currently include an exit tax provision. The only exception relates to a situation where a Finnish shareholder has received shares in a tax-exempt share-for-share exchange. Upon a relocation to a foreign country with-in 5 years, Finland is then able to levy tax on the capital gain, which was originally deemed tax-exempt.
Otherwise, Finnish tax resident individual is able to relocate to a foreign country and put an end to Finland's right to tax. As a result, the former Finnish tax resident is liable to tax in Finland only on Finnish sourced income, which is determined based on each type of income. In practice, the key types of income, over which Finland has not right to tax, are capital gains from shares (non-real estate companies) and interest income.
Finnish nationals are, however, subject to tax in Finland for all their income during the year of relocation and 3 years thereafter. This rule can be bypassed by demonstrating that the taxpayer does not have a home in Finland and receives only passive Finnish sourced income. Also tax treaties typically allow the new country of residence to have full taxing right on the capital gains received by a Finnish expatriate. However, it should be noted the certain tax treaties grant taxing right to Finland for certain (typically 3 years) period after relocation.
Proposed exit tax
According to the current proposal exit tax will be applied to Finnish tax residents, who become liable to Finnish tax only on limited basis or become tax residents in another country as a result of relocation, as follows:
- Tax base is the market value of assets deducted with their acquisition cost. Tax rate is the Finnish capital gains tax rate of 30/34%. Taxation would thus take place even the assets are not actually disposed.
- Only on assets which summed up market value is above 500.000 euro and resulting capital gain at least 100.000 euro.
- On all types of assets excluding real estate assets, because Finland already has right to tax such capital gains
- Exit tax applied to all Finnish tax residents, who have stayed in Finland for at least 4 years in the past 10 years. This could include assets person has had upon moving to Finland
The proposal includes several technical points, which are still under discussion including e.g. the right to obtain a continuance on payment of tax and possibility to credit foreign tax. It is expected that the proposal will be updated in near future.
Analysis
An exit tax could be an effective tool to combat aggressive tax planning and such legislation is already in place in a number of countries, which are important trading partners with Finland. The proposal has received fierce public criticism as follows
- The tax revenue for the first year is estimated to be 0-70 million euro in 10 years. Is a new tax really required?
- The proposed rules are not technically sound. The new rules should be carefully planned and thus introduction in 2023 is too early.
- Administratively difficult to monitor and requires efforts from tax administration which are not in-line with the estimated tax revenue.
- Compatibility with EU law needs more attention
- Sends a negative message to professionals considering to relocate to Finland and limits their stay in Finland up to 4 years for tax reasons
It is probable that exit tax will become applicable as of 1 January 2023. However, Finland has a parliamentary election in April 2023 and it is thus interesting to see whether the new government has a different opinion on exit tax.
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