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Tax Residency of foreign companies in Finland on the basis of place of effective management - measures need to be taken

  • Finland


    The Finnish Parliament has passed a law based on Government Proposal (HE 136/2020 vp), under which a foreign corporation may become tax resident in Finland on the basis of place of effective management. The law becomes applicable from the beginning of 2021. UCITS and AIF investment funds within the EEA will be subject to a transitional period so that the amendment to the law will be applied to them starting from fiscal year 2023.

    In a nutshell, the amendment means that from fiscal year 2021, a foreign corporation can be taxed in Finland for its global income if it is effectively managed from Finland. Since a corporation is generally required to submit a tax return also in its home country in accordance with local regulations, this may result in double taxation of its income. Elimination of double taxation does not necessarily happen easily or rapidly.

    According to amended law, the place of effective management of a foreign corporation is the place where the board of directors or other decision-making body of the corporation makes the most important highest-level decisions concerning daily management. A participation in board meetings remotely from Finland counts. In assessing the location of the place of effective management, other circumstances related to the organisation and business of the corporation are also taken into account. A foreign corporation will be considered tax resident from the date of its establishment or registration or from the date when Finland became the country of its place of effective management.

    The assessment of the place of effective management is based on the evaluation of facts and circumstances by the Finnish Tax Administration. Documentation necessary for the consideration consists of, for example, the minutes of the meetings of the board of directors or other decision-making bodies of the corporation and other relevant documentation.

    Board work in a foreign subsidiary in the interest of customary parent company steering function should not be considered to constitute decision-making establishing a place of effective management based on the arguments in the government proposal. The challenge consists in drawing the line between the ‘governance-type’ parent company steering on the one hand and business management decisions related to a foreign subsidiary on the other hand. Drawing the line is particularly difficult in relatively small groups.


    The change concerns all foreign corporations with ownership in Finland and foreign groups with connections to Finland, such as board members, executives or actual decision-makers living in Finland. At risk are especially foreign corporations of small size or administration irrespective of their country of location, especially if their turnover is significant. These may include, for example, foreign group companies at the start-up phase, holding companies and investment companies. Also Estonian companies with any connections to Finland can be presumed to be under even closer supervision by the Finnish Tax Administration in future.

    Foreign corporations considered tax residents in Finland are under the obligation to submit a self-assessed tax return in Finland, which will be realised in spring 2022 for calendar-year corporations. Groups will have to take a stand on the matter at the latest by that time. Meeting the obligation to submit a tax return requires information on decision-making concerning operational activities and active control to prevent errors. Fulfilling the obligations to submit tax returns to two states for the same income is expensive, not to mention tax audits and an increase in the effective tax rate.


    The management structures and decision-making models of foreign corporations should be scrutinised without delay. At the same time, it should be ensured that no fixed establishments, or the risk of such, have come into being unintentionally. Finnish law on Controlled Foreign Company (CFC) obligations should not be forgotten, either.

    In the short term, board members in Finland can refrain from attending the board meetings of foreign corporations from Finland. The compositions of groups’ boards of directors and executive teams should be reviewed and group guidelines updated.

    Careful documentation of decisions concerning foreign corporations and stating where the decisions concerning their business are made during the COVID-19 pandemic will require constant work and particular care in future.

    This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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