Individuals living in Finland may receive pension income from abroad, and likewise, individuals living abroad may receive pensions from Finland. Taxation of these pensions is determined by Finnish domestic law and any applicable tax treaties between Finland and another country. Generally, Finland has the right to tax pensions paid from abroad to Finland and pensions paid from Finland to abroad, but tax treaties can limit this right.
This blog post aims to clarify the general rules and regulations governing the taxation of such pensions under Finnish law, taking into account the impact of international tax treaties.
Tax liability in Finland
In Finland, individuals are categorized into two tax liability groups: resident taxpayers and nonresident taxpayers. Generally, Finnish resident taxpayers have unlimited tax liability and are subject to tax on their worldwide income in Finland. In other words, it does not matter where the income has been paid, accrued or originated. Conversely, individuals considered as Finnish nonresident taxpayers have a limited tax liability, and they are liable to tax only on Finnish-sourced income (as defined by the domestic tax law).
For individuals who have dual residency, tax treaties play a critical role in determining the taxing rights of each country. These treaties generally divide the taxation rights between the countries and include provisions in order to avoid double taxation.
Definition and classification of pensions and the role of tax treaties in pension taxation
The Finnish pension system comprises for instance earnings-related pensions, social security-based pensions, and various non-mandatory pension arrangements. In accordance with the Finnish domestic tax law, pensions received from abroad are generally subject to Finnish income tax, regardless of how the income is categorized in the source country. Similarly, pensions paid from Finland to foreign countries are taxable under Finnish domestic tax law, provided that Finnish tax treaties do not preclude such taxation.
Tax treaties play a crucial role in determining the tax treatment of pensions paid across borders. Articles in the tax treaties govern the situations, outlining which country has the right to tax the pension income. The provisions within the articles can vary significantly and thus the specific wording of each treaty determines the exact tax implications.
In tax treaties, pension income is defined based on the domestic legislation of each contracting state. There is no ultimate clearness of what income should be treated as pension income for tax treaty purposes. This can lead to situations where one country classifies the income as pension income whereas another country classifies it differently. This discrepancy can impact the tax treatment and potential deductions available in Finland. In addition, different countries have various ways of financing and paying out pensions, which can complicate the classification of pension income for Finnish tax purposes.
Taxation of pensions paid from Finland to abroad
Finland retains the right to tax pensions paid to individuals residing abroad. However, the extent of this right can be constrained by applicable tax treaty provisions. A tax treaty may either entirely prevent Finland from taxing the pension income in question or limit the taxation right in certain ways. Furthermore, domestic legislation also influences the scope of Finland’s taxing rights.
When Finnish resident taxpayers who live abroad receive pension income sourced from Finland, their taxation follows the same procedures as if they were residing in Finland. This includes preassessment processes similar to those for residents within Finland.
People living abroad and considered as nonresident taxpayers in Finland are liable to pay tax only on their Finnish-sourced income. Pensions sourced from Finland are governed by specific rules outlined in the Act on Income Tax. Pensions from government service or public sector entities are considered Finnish-sourced income if paid by the State of Finland or a Finnish public entity.
Pensions from private-sector employment are deemed Finnish-sourced income if the work was performed predominantly in Finland or the employer was Finnish. Conversely, pensions from Finnish employers based on work mainly outside Finland are not considered Finnish-sourced income. Additionally, pensions from voluntary insurance contracts with Finnish or foreign insurance companies are regarded as Finnish-sourced income if related contributions were previously deducted in Finnish tax assessments.
Taxation of pensions paid from abroad to Finland
Finnish resident taxpayers are taxed on their worldwide income. This means that pension income received from abroad is taxable to Finnish resident taxpayers in Finland, regardless of whether those pensions have already been taxed abroad. Hence, foreign pensions must be reported in Finland and they are generally subject to Finnish income tax.
However, as described above, tax treaties between Finland and other countries affect how these foreign pensions are taxed. Since these treaties vary, it's important to review the specific treaty applicable to each situation. As a result, income tax rules may differ from case to case in terms of the pension income received from abroad.
Conclusion
The taxation of pension income, whether received from abroad or paid to foreign countries, is governed by a complex interplay of Finnish domestic laws and international tax treaties. While Finland generally maintains the right to tax such income, the specifics can be influenced by the provisions of applicable tax treaties. Understanding these regulations is essential for proper tax compliance and for optimizing potential tax benefits.
For detailed guidance and advice tailored to specific circumstances, consulting with a Finnish tax professional is highly recommended to ensure accurate taxation of pension income in cross-border circumstances.
