Proposed Implementation of the Concept of Economic Employer in Finnish Tax Law

The Finnish Ministry of Finance has issued a draft of a government bill concerning the implementation of the concept of an economic employer in Finnish tax legislation in early July. Should the bill pass, Finland’s right to levy and collect taxes would expand in certain situations. The suggested legislative changes are planned to take effect as of 1 January 2022. As for now, the bill is being circulated for comments until mid-August and it may be amended based on the comments received.

Currently Finland applies the concept of a formal employer in its tax legislation. This means that Finland has taken a formal approach as to who is considered to be one’s employer. This, in turn, has in some cases restricted Finland’s right to levy and collect taxes if an employee working for a Finnish company is formally employed by a foreign company. Many other countries are already applying the concept of an economic employer.

The proposed legislative amendments would expand Finland’s right to levy and collect taxes when an employee has a formal employer abroad, but the work conducted is performed for a Finnish employer that is considered to be an economic employer under the suggested legislation. It should be noted that the suggested legislation would also apply to intra-group situations.

A Finnish company would be regarded as an economic employer if the work conducted by the employee is regarded as an inseparable part of the company’s business activities and performed under the company’s supervision. The draft lists several factors that could help determine whether a company should be considered to be an economic employer. Suggested criteria for the determination include e.g. the following:

Should the Finnish company be regarded as an economic employer, the so-called 183-day rule would no longer apply if the employee is a Finnish tax resident under the Finnish tax legislation, but a tax resident of another country under a tax treaty. As for non-resident taxpayers, salary received from a Finnish economic employer would now be considered Finnish sourced and thus taxable in Finland. Therefore, the proposed changes would expand Finland’s right to levy and collect taxes. In addition, it should be noted that the application of the new legislation would bring about obligations in Finland to both the foreign employer and the Finnish economic employer as well as to the employee.

The final government bill is expected to be issued in mid-September. The suggested legislative changes are planned to take effect as of 1 January 2022 and they would be applied from the tax year 2022 onwards. All Finnish companies that receive employees from abroad and foreign companies that send employees to Finland should familiarise themselves with these new changes.

We will continue to monitor for any developments as the proposal proceeds towards implementation. If you have any questions regarding the matter, please feel free to contact any of Borenius’ attorneys listed in this alert or those with whom you usually work.