Different jurisdictions have their own laws and regulations to comply with. In many cases, foreign law and its practices may differ from those in your national jurisdiction. When it comes to companies or groups of companies, the discussion quite often drifts to taxation. When operating in a foreign country, it is vital to comply with the local tax legislation. ”Don’t you have group taxation or consolidated taxation in Finland?” is a question I hear repeatedly. The short answer to that question is no, but we do have a group contribution regime which can be used to allocate taxable income between group companies.
From a Finnish tax point of view, companies resident in Finland are taxed on their worldwide income. Non-resident companies are taxed only on their Finnish-source income. Resident companies are generally those incorporated in Finland.
In Finland, corporations are taxed individually as separate entities, and thus consolidated tax returns are not applicable, and there is no joint taxation either. The Finnish group contribution regime allows companies within a group to balance their taxable profits and losses through group contributions, which can effectively mimic the outcome of consolidated tax returns. This regime is designed to provide flexibility and efficiency in managing the tax liabilities of companies within a group, ensuring that overall tax burdens are optimized while maintaining compliance with Finnish tax laws.
Group contributions are tax-deductible for the payer and included in the taxable income of the recipient. By transfers of these contributions, income can be effectively allocated among group companies. To qualify, both companies must be limited liability companies resident in Finland, and there must be at least 90% ownership, direct or indirect, from the beginning of the tax year. Both companies must also have the same accounting period. The companies must carry out business activities and cannot be financial, insurance, or pension institutions. The taxpayer is not allowed to create a tax loss by crediting group contributions.
In Finnish tax practice, it has been accepted that if the group relationship between two Finnish companies is borne through a foreign entity, the Finnish companies can still, under certain conditions, give group contributions to one another. This is generally possible at least if the foreign entity is a corporate entity (similar to a Finnish limited liability company or cooperative) and that it resides in a country with which Finland has signed a double tax treaty.
According to Finnish legal praxis, group contributions are accepted between a Finnish corporation and a subsidiary of a foreign corporation located in Finland, if they are part of the same group. The main requirement in this case is that the permanent establishment is carrying out business operations in Finland.
In general, the recipient of a group contribution can set off carried forward losses derived from business activities against the group contribution income. However, this is possible only to a more limited extent if there have been ownership changes in the loss company, i.e., losses which require a special permit for utilization due to an ownership change cannot be set against group contributions.
Group Deduction
Group deduction is somewhat related to group contribution, but it is not included in the group contribution act; rather, it is regulated in the Act on Group Deduction. Group deduction basically means that the final losses of a foreign subsidiary can be deducted in the taxation of the Finnish parent company.
The deduction is available in cases where the subsidiary is located in a country within the European Economic Area (EEA). The group deduction is a deduction from the parent company’s trading income, the amount of which is based on the amount of the ultimate losses of the EEA resident subsidiary.
The group deduction is made in the year of liquidation of the subsidiary and does not result in a loss for the parent company.
The requirements for group deduction are similar to those concerning group contribution, i.e., there must be at least 90% ownership (direct ownership). This deduction can be made in the parent entity’s taxation during the fiscal year in which the subsidiary is liquidated. The maximum amount of the deduction is the taxable profit of the parent entity.
