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, cleantech, 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. 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 are, this fosters and encourages equitable opportunities for all. Enterprises value Finland for its unwavering stability and commitment to transparency, and as a country of minimal corruption, this cultivates an ideal environment for prosperous business and endeavors.

Bilateral agreements between Finland and Israel

Several agreements were signed between Israel and Finland:

1. Cultural agreement between the government of the State of Israel and the government of the Republic of Finland (23/04/1985) – On April 4, 1985, Finland and Israel reached a cultural agreement out of desire to strengthen the friendly relations in the fields of culture, education, and scientific research. The agreement encourages the exchange of representatives of universities and other institutions/organizations of education in regards to these fields.

2. Treaty for the prevention of double taxation – The double taxation treaty is a bilateral agreement of which two states that are party to the agreement stipulate the tax rules that will apply to income and assets of those states. In addition, the treaty includes principles for the exchange of information on tax issues between those countries. The original tax treaty between Israel and Finland was signed in 1997. The agreement was modified by the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting signed by the Republic of Finland and the State of Israel on June 7, 2017.

To read the agreement in English, click here, and to read the text of the agreement combined with the MLI (unofficial), click here.

Applicability of the MLI

Finland and Israel have signed the MLI, which means that there is an automatic exchange of information between the two countries. Finland and Israel signed the MLI in 2017, and both countries  ratified it in 2019.

Residency for tax purposes in Finland

Residence of an individual

You are considered a resident in Finland who’s eligble for tax if your permanent home is located there, or if your presence in Finland is continuous for a period of more than six months. When registered in Finland’s Population Register System, this means an individual has their main abode and home in Finland. A temporary break (around two months away) from Finland would break the continuity of your stay in regards to these guidelines.

An individual is also liable for taxation if their employment involves frequent presence in Finland, even if living in a different country. If you’re in Finland for a majority of the days throughout a week, this technically is more than six continuous months in the country, and you will pay residence tax. The only exception is if you’re traveling between borders every day to commute to work, such as between Sweeden and Finland.

Residency of a company

A company is considered as resident in Finland if it is incorporated (registered) in Finland. As of new legislation changed in 2021, companies corporate entities whose place of effective management is located in Finland, even if the company itself is not registered in Finland, are also considered to be resident taxpayers.

When assessing the location of effective management for a corporate entity, it’s deemed to be in Finland if its board of directors is suited in Finland. Additional information is also considered when assessing whether the company is resident, such as the company’s organization and business operations.

The tax system in Finland

The Finnish Tax Authority is called: “the Finnish Tax Administration” (Vero Skatt)

Income taxation: between 12.64 – 44%

Taxation of companies and branches: 20%

VAT: standard is 24%

Reduced rate of 14% applies to food and animal feed, as well as restaurant and catering services.

Reduced rate of 10% for certain goods and services

Capital gains tax: 30% for capital income that is less than 30,000, 34% for capital income that exceeds 30,000.

Withholding Tax

Inheritance tax and estate tax in Finland

In Finland, if the taxable amount of the inheritance is at least €20,000, you pay inheritance tax. There are also some important deductions for children and spouses that would reduce this taxable amount. The exact calculation of inheritance tax in Finland is also influenced by the relationship between the deceased and the inheritor.

There are two inheritance tax categories in Finland; one for immediate family, like spouses and children, and the other for all other individuals, including siblings. The taxable amount for spouses and children would typically be less than that of other individuals.

If an inheritor received a gift from the deceased individual up to three years before they passed away, the gifts and gift tax will be a part of their inheritance tax sum.

Relocation

Finland offers several job opportunities, enticing many people every year to relocate there. Accessing the job market may pose some challenges, but individuals who meet the right qualifications and have proper experience in their chosen fields should be able to easily obtain employment. 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.

Real Estate Taxation in Finland

Within the boundaries set by Finland’s law, it’s the duty of the municipal councils to establish the applicable rates for real estate taxes. The Tax legislation defines two distinct categories of real estate tax rates: the general real estate tax rate for land and buildings, excluding resident structures, and the real estate tax rate for residential buildings. Municipalities have the authority to determine real estate tax rates for non-residential structures, including recreational homes.

Some real estate taxes that are set in accordance with the law include:

• The general real estate tax rate must be set between 0.93% and 2.00%.
• The real estate tax rate for permanent residential buildings must be set between 0.41% and 1.00%.
• The tax rate for other residential buildings must be set between 0.93% and 2.00%.

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 25% of withholding tax. The tax authority can allow, under certain circumstances, to reduces or dismiss the withholding tax. Our firm handles withholding tax matters with the Israeli Tax Authority.

Due to the fact that both countries have a tax treaty with each other, one can submit a declaration form (2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax), and under certain circumstances, there is a possibility to transfer the payment without the withholding tax and the approval of the Tax Authority.

In providing advice regarding the transfer of money abroad, in addition to the issue of withholding tax, our office handles the requirements of the foreign banks, such as an accountant’s approval regarding the payment of taxes and examines additional actions required in light of the uniform standard of CRS between the countries – automatic exchange of information between countries which is carried out first through the banks and then between the tax authorities of each two countries.

The banks raise many difficulties and charge high fees for converting shekels into other currencies, so it is important to consult before transferring the funds – 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:

1. 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.
2. 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 incorporation. 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.
3. 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 there’s an absence of a minimum capital requirement. Additionally, all partners hold an equal status in all aspects of the company’s operations.
4. Limited Partnership – This legal structure entails the involvement of one limited partner, who typically assumes the role of an investor. In order 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.

Incentive laws in Finland

Finland offers tax incentives to encourage companies to invest in R&D (research and development) activities. These incentives include tax deductions and credits for R&D related expenses, which helps companies reduce their tax burden and incentivizes innovation.

As of January 1, 2023, companies can now have up to 1,500,000 euros deduction. The amount of general additional deduction is 50% of the salary and service purchase expenses related to the taxpayer’s own R&D activities. The minimum amount of deduction is 5,000 euros.

Finland Double Tax Treaties