Obligations of foreign employers in Finland
As globalization continues to bridge the gap between countries, an increasing number of foreign companies are employing workers in Finland. While this creates significant opportunities, it is essential for these companies to understand and comply with Finland's tax and social security obligations. Failure to meet these requirements can result in undesired outcomes and substantial penalties. Foreign employers must therefore ensure full compliance with Finnish tax laws and social security requirements to maintain smooth operations.
Permanent establishment: A key determinant
The obligations of a foreign employer largely depend on whether the company has a permanent establishment in Finland for income tax purposes. A permanent establishment typically refers to a fixed place of business through which the company's operations are wholly or partly carried out. This could include for example a branch, an office, a factory, or a construction site that exists for a certain period. In addition, a foreign company may be deemed to have a permanent establishment in Finland for income tax purposes if it has a representative or agent operating within the country, even in the absence of a permanent place of business.
Companies without a permanent establishment
If the foreign employer does not have a permanent establishment in Finland for income tax purposes, the foreign employer isn’t generally required to submit a start-up notification, file an income tax return, register to the Finnish Tax Administration's register of employers, or withhold tax on salaries paid in Finland.
However, certain circumstances necessitate that foreign employers must submit earnings payment reports to the Finnish Incomes Register:
The employee is considered a Finnish resident taxpayer.
The employee, a Finnish non-resident taxpayer, is a leased worker, and Finland has taxation rights over the employee’s salary based on a tax treaty with the employee’s country of residence.
The foreign employer pays wages to an employee working in Finland covered by the Finnish social security scheme.
The foreign employer pays wages to an employee working abroad covered by the Finnish social security scheme.
Although tax withholding is not mandatory in these cases, the foreign employer may choose to register voluntarily to the register of employers in Finland, thus aligning their employer obligations with those of companies that have a permanent establishment in Finland.
Companies with a permanent establishment
If a foreign employer is considered to have a permanent establishment in Finland for income tax purposes, several obligations come into play:
Start-up notification: A foreign employer must generally submit a start-up notification.
Registration: A foreign employer must generally register to the Finnish Tax Administration's register of employers. Additionally, registration in the prepayment register may also be advantageous.
Reporting: A foreign employer must generally submit earnings payment reports to the Finnish Incomes Register.
Withholding taxes: A foreign employer is required to withhold taxes from employees' wages based on the percentage rates provided on their tax cards or tax-at-source cards. This applies to both taxable cash wages and taxable fringe benefits. The withheld amounts must be paid to the Tax Administration monthly.
Income tax return: A foreign employer must file a Finnish income tax return.
Corporate income tax: A foreign employer must pay income tax on all income attributable to the Finnish permanent establishment.
Social security obligations
A foreign employer's responsibilities concerning Finnish social security depend on whether their employees possess A1 or E 101 certificates. These certificates indicate that the employee is covered by their home country's social insurance scheme. If such a certificate is valid, the foreign employer is exempt from insuring the employee in Finland as well as exempt from paying Finnish social security contributions.
In the absence of such a certificate, the foreign employer must arrange pension insurance for the employee through a Finnish pension insurance company. The foreign employer may also be required to arrange for accident insurance, unemployment insurance, and group life insurance for the employee.
Other obligations
In case the employee is considered a posted worker, the posting company must submit a notification of the posting of workers to the Finnish Occupational Safety and Health Administration. The notification can be submitted as soon as the contract for posting workers has been concluded, but latest before the work agreed upon in the contract begins. However, reporting is generally not required when workers are transferred within the same group of companies for a maximum period of five days.
A foreign employer may also need to comply with the Finnish collective agreements and their terms and conditions. Additionally, employers may be required to provide occupational healthcare for employees working in Finland.
Consequences of non-compliance
In terms of the Finnish employer obligations, timely and accurate reporting is essential. Delayed submissions can result in late-filing penalties and punitive tax increases. Furthermore, failure to withhold required taxes may result in the Tax Administration recovering unpaid taxes from the employer, in addition to imposing additional charges. Moreover, the Finnish Tax Administration may cancel the foreign employer’s prepayment registration, affecting the foreign employer’s ability to operate smoothly in Finland.
Final thoughts
Navigating the Finnish tax and social security landscape can be complex, especially for foreign employers unfamiliar with local regulations. Given that the obligations vary based on the company's specific status, failure to adhere to Finnish regulations may result in substantial penalties. It is advisable to consult a professional advisor to ensure all requirements are fully met.
