Israel – Finland Tax Treaty

Business Activity in Finland

Finland is a thriving country of strong innovation, and it creates many business opportunities, both in the country and internationally. The competitive economy is largely supported by businesses in the gaming, electronics, software, clean tech, and health areas, and overall, the country thrives from large cooperate businesses. As a member of the European Union, Finland distinguishes itself as the sole Nordic nation that has embraced the Euro as its currency.

Finland’s business ecosystem is distinguished by its transparency, efficiency, and strong support for innovation. The country offers a streamlined process for establishing a business, with clear regulations and minimal bureaucracy, making it accessible for both domestic and international entrepreneurs. The Finnish government provides various incentives, including start-up grants and funding opportunities, to encourage entrepreneurial activity.

The country also has a low corporate tax rate of 20%, which is uniform for all types of corporate income, including sales profits, interest income, dividends, royalties, and rental income. This helps to lure in foreign countries for business. As foreign companies are entitled to the same set of benefits and grants as the Finnish companies with the market, this fosters and encourages equitable opportunities for all.

Additionally, Finland’s commitment to research and development fosters a culture of innovation, particularly in sectors like technology and sustainable development. The business environment is further enhanced by a high regard for work-life balance and a collaborative approach, contributing to the overall success and sustainability of enterprises operating within the country.

Bilateral Agreements Between Israel and Finland

Convention on the Prevention of Double Taxation

The agreement between the Governments of Israel and Finland regarding the avoidance of double taxation was signed on January 7, 1997, and entered into force on the first of December 31, 1998.

To read the agreement in English click here.

Applicability of the MLI

Both Finland and the State of Israel have signed the Multilateral Convention, commonly known as the MLI. The MLI is a convention that is meant to fix double taxation treaties according to the BEPS framework.  

Israel signed the MLI on the 7th of June 2017, with its provisions entering into force on the 1st of January 2019. Finland on the other hand, affixed its signature to the MLI on the 7th of June 2017, and its provisions became effective as of the 1^st of June, 2019.

Residency for Tax Purposes in Finland

Residence of an Individual

A person is considered a resident of Finland if they have a permanent home or regular place of stay in the country, or if they stay in Finland continuously for more than six months. Temporary absences do not interrupt this continuous stay. Finnish nationals who leave the country are still considered residents for three full calendar years unless they can prove they no longer have significant ties to Finland during the tax year. Residency can begin or end at any point during the year.

To read about how an individual is considered a resident of Israel, click here.

Residency of a Company

A company is considered a resident of Finland if it is incorporated in Finland.

A foreign company (one incorporated in another country) can also be treated as a Finnish tax resident. This happens if its place of effective management is in Finland.

To learn about how a company is considered a resident of Israel, click here.

The Tax System in Finland

The Finland Tax Authority is called the Finnish Tax Administration

Income Taxation:  12.64 – 44%

Taxation of Companies and Branches: 20%

VAT: 24%

Capital Gains Tax: 30% or 34% (on income exceeding EUR 30,000 annually)

Withholding Tax

Inheritance Tax Finland

Taxes apply to property acquired through inheritance, wills, or gifts, with specific rules for each. Inheritance tax is paid when a person inherits property, provided the deceased, inheritor, or beneficiary resided in Finland at the time of death. Property located in Finland and shares in companies primarily owning Finnish property are always taxed.

Value of Taxable Property (EUR)       Tax on Column 1 (EUR)          Tax on Excess (%)

20,000 – 40,000                                           100                                                7%

40,000 – 60,000                                           1,500                                           10%

60,000 – 200,000                                        3,500                                           13%

200,000 – 1,000,000                                   21,700                                          16%

Over 1,000,000                                            149,700                                      19%

Relocation to Finland

Finland offers several job opportunities, enticing many people every year to relocate there. Along with job opportunities, Finland is also known for being a very safe and clean country, and it ranks high among the happiest places for people to live. Once an individual has lived in Finland for over 6 months, they will then be subject to residence taxes. These taxes include income taxes, which range between 12.64% and 44% depending on the individual’s earnings, as well as a value-added tax (VAT) that is typically set at 24%. Usually, individuals do not have to pay taxes for the goods they bring with them to Finland, and they will only be taxed in the country of their residency.

The Finnish Jewish community estimates that over 2,000 Jews live in Finland, which has a total population of 5,518,371 as of 2023. There are two Jewish communities in the country: one in Helsinki with around 950 members and another in Turku with fewer than 100 members.

Real Estate Taxation in Finland

In Finland, local authorities levy property tax on owners of real properties. This tax is imposed on real property in Finland and has been exempted from forested and agricultural lands. Tax is calculated according to the assessed value of the property, and is payable by the owner at the start of the year. Tax rates are roughly from 0.41% to 2.0%, and municipalities charge within these bounds.

A tax rate of 2 6% may be levied on the vacant land in the city whose use is not for residential or construction purposes. In 2024, the land property tax rate will be raised, and the new lower limit is 1.30%, whereas the old upper limit is reserved at 2.00%. Construction tax rates will remain in the range of 0.93% to 2.00%.

Transfer tax is imposed in the transfer of real estate as well as Finnish securities. Tax is 3% on real estate transfers, 1.5% on company shares whose primary activity is owning real estate, and 1.5% on all other securities. The tax is based on the transfer price. Listed company securities are usually exempt from this tax. No transfer tax is payable if both the seller and buyer are non-residents, except concerning shares in Finnish-developer real estate companies. Transfers for inheritance, gifts, or property division on account of marriage are also tax-free.

Transfer of Funds from Israel to Finland

According to section 170(a) of the Israeli income tax ordinance, any transfer of payment to a non-Israeli resident is subject to a 25% withholding tax. The tax authority can allow, under certain circumstances, to reduce or dismiss the withholding tax. Our firm handles withholding tax matters with the Israeli Tax Authority. As mentioned above, the countries have signed a tax treaty, that allows taxpayers to submit a 2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax, to potentially transfer the payments without paying the withholding tax. 

In addition to assisting with withholding tax matters, our firm also helps with other issues related to transferring funds abroad. This includes providing an accountant’s approval regarding the payment of taxes, reviewing additional actions required under the CRS standard, and more. Moreover, banks often raise many difficulties and charge high fees for converting shekels into other currencies. Therefore, consulting with a specialist before transferring the funds is highly recommended, click here to contact us. 

For more information on money transfers abroad, click here. 

Types of Business Entities in Finland

Finland has several different types of business entities which are related to different kinds of companies. The operating rules of each entity differ; they have different consequences and are chosen based on how large the company is. Some of the prominent entities of Finland are:

Private Entrepreneur – This entity is the easiest, quickest, and most widely adopted method for initiating a new business. With this model, a sole individual can commence operations using a chosen company name, without the requirement of a minimum capital investment. If the venture is executed effectively and proves to be profitable, there is potential for transitioning it into a different legal structure over time.

Limited Liability Company – To establish an LLC, it’s required to have at least one natural or legal person, which can be an individual or corporation. It’s also possible to have multiple individuals or entities involved, and for the initial investment, there is no minimum capital requirement. Once the initial capital has been deposited into a designated bank account and the registration process for the company is complete, the company may use the funds for operational needs.

General Partnership – This entity involves the collaboration of at least two individuals who come together to establish a company through the writing of a partnership agreement. An advantage of this entity for entrepreneurs is that a minimum capital requirement is absent. Additionally, all partners hold an equal status in all aspects of the company’s operations.

Limited Partnership – This legal structure entails the involvement of one limited partner, who typically assumes the role of an investor. To establish this entity, it’s necessary to have at least one general and one limited partner who contributed financially. There is no specific minimum capital requirement for initiating the business, however, at least one of the partners assumes liability for the company’s debts and obligations.

Sole Proprietorship – A business owned and operated by one person. The owner is personally liable for all debts and obligations.

Incentive Laws in Finland

Foreign tax credits are a key mechanism for avoiding double taxation, primarily through the credit method, although some older treaties still apply the exemption method. Finland allows foreign taxes to be credited against Finnish taxes on the same income over the same period on a pro-rata basis, as long as the taxes are covered by a relevant double tax treaty (DTT). The credit is limited to the lesser of the foreign tax amount or the Finnish tax payable on the income from the foreign state, calculated on a source-by-source basis. Unused foreign tax credits can be carried forward for five years on an income basket basis.

Finland provides significant tax incentives for research and development (R&D) activities. Entities can annually deduct or capitalize R&D-related costs, and a temporary law (2021–2027) allows an additional 50% or 150% deduction on R&D subcontracting costs under specific conditions. From 2023, a new permanent tax incentive offers a 50% general additional deduction on R&D expenses, capped at EUR 500,000 annually, and a 45% added deduction for increased R&D activities, also capped at EUR 500,000 but without a minimum threshold. Both laws prohibit claiming deductions on expenses funded by public subsidies or for the same costs under multiple provisions. These incentives aim to bolster R&D collaborations between taxpayers and research organizations meeting specific criteria under EU regulations. Additional deductions are factored into the tax year’s loss calculations.

Finland Double Tax Treaties