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Tax guide for Americans in Finland

Tax guide for Americans in Finland

Navigating the complexities of tax obligations as an American expatriate living in Finland can be a daunting task.

With the United States' unique approach to taxing its citizens on their worldwide income, coupled with Finland's comprehensive tax system, American expats find themselves at the intersection of two different tax jurisdictions.

This article aims to demystify the tax filing requirements for US expatriates in Finland, highlighting the key US and Finnish tax forms that play a pivotal role in ensuring compliance and optimizing tax liabilities.

From using exclusions and credits to avoid double taxation to understanding local Finnish tax obligations, we'll provide a roadmap for US expats to effectively navigate their tax responsibilities.

Whether you're a seasoned expatriate or just adjusting to life in Finland, this guide will equip you with the knowledge you need to manage your tax affairs with confidence.

Table of contents

  1. Resident vs. non-resident of Finland
  2. Who can be considered a resident of Finland
  3. Types of taxes in Finland
  4. Filing an income tax return in Finland
  5. Types of income in Finland
  6. Social Security in Finland
  7. Tax deductions for expats in Finland
  8. US-Finland tax treaty
  9. Most popular tax forms for US expats
  10. Finland tax forms for US expats

Resident vs. non-resident of Finland

The Finnish tax system classifies individuals as either residents or non-residents, each of which is subject to different tax rules and rates. The primary distinction lies in the scope of taxable income:

  • Finnish residents are taxed on their worldwide income. This means that if you are considered a resident, you must report and pay tax in Finland on your income, regardless of where it is earned.
  • Non-residents, on the other hand, are taxed only on their Finnish source income. This includes income earned in Finland, such as wages for work performed in the country, rental income from Finnish property, and income from business activities conducted in Finland.

Who can be considered a resident of Finland

The determination of tax residence in Finland is based on several criteria. You are considered a Finnish tax resident if you meet one of the following conditions:

  • You are considered a resident if you have a permanent home or habitual residence in Finland, which is usually defined as spending more than six consecutive months in the country. Brief absences from Finland do not interrupt the continuity of residence.
  • Even if you do not spend more than six months in Finland, you may still be considered a resident if you have significant ties to the country. These ties may include family relationships, employment, housing, and social connections.

Finnish citizens may continue to be considered residents for three full calendar years after leaving Finland unless they can prove that they have no significant ties to the country during the tax year in question.

Types of taxes in Finland

The Finnish tax system is comprehensive and includes various types of taxes applicable to individuals and corporations.

For individuals, especially residents, it is important to understand the structure of personal income taxation. This system is designed to fund public services and welfare while ensuring that the tax burden is fairly distributed according to the ability to pay.

Income tax rates for residents

Finnish tax residents are taxed on their worldwide income. This includes income from employment, business profits, capital gains, and other sources.

The Finnish tax system applies progressive taxation to personal income, i.e. the tax rate increases as taxable income increases.

This system is divided into national tax rates and local income taxes.

National tax rates

The national tax rates in Finland are progressive, with several brackets that apply to different ranges of income. As of the latest tax year (2023), the structure is as follows (these rates are illustrative and may change annually):

Taxable income (EUR) Tax rate
0-19,900 12,64%
19,900-29,700 2,515 + 19% of the excess over 19,900
29,700-49,000 4,377 + 30.25% of the excess over 29,700
49,000 -85,800 10,215 + 34% of the excess over 49,000
85,800 and above 22,727 + 44% of the excess over 85,800

Local income taxes

In addition to the national tax rates, residents of Finland also pay local income taxes levied by the municipalities. The local tax rate varies from municipality to municipality but generally ranges from 16.5% to 23.5%.

This tax is applied to taxable income after the national tax has been calculated, effectively adding to the total tax rate faced by an individual.

Church tax

In Finland, members of the Evangelical Lutheran and the Orthodox church are subject to church tax.

This tax is levied in addition to the municipal income tax and is calculated based on the taxable income of the church member.

The rate of church tax varies by parish but generally ranges from 1% to 2.2%.

Individuals who are not members of these churches or who have officially left the church are not required to pay this tax.

Tax on public broadcasting

The purpose of the public service broadcasting tax is to finance Yleisradio Oy (Yle), Finland's national public service broadcaster.

The tax ensures that Yle can provide a wide range of television and radio programs, including news, education, and entertainment, without commercial advertising.

The tax applies to all residents of Finland who are 18 years of age or older and have taxable income. The rate is 2.5% of the individual's annual income, with a minimum of €50 and a maximum of €163 per year.

The public broadcasting tax is assessed and collected as part of the individual's overall tax assessment.

The tax regime for foreign professionals

The foreign expert tax regime is a special tax regime designed to attract highly qualified professionals to work in Finland. Under this regime, qualified foreign experts working in Finland may be taxed at a flat rate of 32% instead of the progressive tax rates applicable to residents.

To qualify for the scheme, several criteria must be met, including a minimum monthly salary requirement and the possession of specific expertise deemed beneficial to the Finnish labor market. The regime applies for a maximum period of 48 months (4 years) from the start of employment in Finland.

This special tax status aims to make Finland more attractive to international talent by simplifying the tax structure and potentially reducing the tax burden on foreign experts.

It also includes provisions for tax-free reimbursement of certain moving and living expenses.

Income tax rates for non-residents

Non-residents in Finland are taxed differently from residents, with their tax liability limited to Finnish source income.

The tax rates for non-residents are as follows:

  • Non-resident individuals who earn employment income in Finland are subject to a flat tax rate of 35%. This simplified approach facilitates the tax process for those who are in Finland temporarily or for a specific period of employment.
  • Capital income such as dividends, interest, and royalties from Finnish sources is taxed at a rate of 30% for non-residents. This rate applies regardless of the amount of capital income received.

Value-added tax

VAT is a broad-based consumption tax that applies to most goods and services sold or consumed in Finland. The standard VAT rate in Finland is 24%, which applies to most goods and services. However, there are reduced VAT rates for certain categories:

14% This lower rate applies to food, restaurant and catering services, and agricultural supplies.
10% A reduced rate for books, pharmaceutical products, passenger transportation services, hotel accommodations, and tickets to cultural and sporting events.

These reduced rates are intended to make essential goods and services more affordable for consumers.

Net wealth tax

Under the current tax framework, Finland does not levy a net wealth tax.

Inheritance tax

In Finland, inheritance tax is levied on the property transferred to beneficiaries upon the death of an individual. The tax is calculated based on the value of the inherited property and the relationship between the deceased and the beneficiary.

The closer the relationship, the lower the tax rate, reflecting a tiered system designed to favor immediate family members.

Inheritance tax rates vary, with different brackets applied depending on the value of the inheritance and the relationship of the beneficiary to the deceased. For example, children and spouses typically pay lower rates than distant relatives or unrelated beneficiaries. The tax is progressive, meaning that higher-value estates are subject to higher tax rates:

Value of the taxable property (EUR) Tax rate
20,000-40,000 100 + 7% of the excess over 20,000
40,000-60,000 1,500 + 10% of the excess over 40,000
60,000-200,000 3,500 + 13% of the excess over 60,000
200,000-1,000,000 21,700 + 16% of the excess over 200,000
1,000,000 and above 149,700 + 19% of the excess over 1,000,000

Estate tax

Finland does not impose an estate tax as a separate entity from the inheritance tax.

Gift tax

Finland levies a gift tax on the transfer of property as a gift. The tax applies to both movable and immovable property transferred without adequate compensation.

Similar to inheritance tax, gift tax has its rates and brackets:

Value of the taxable property (EUR) Tax rate
5,000-25,000 100 + 8% of the excess over 5,000
25,000-55,000 1,700 + 10% of the excess over 25,000
55,000-200,000 4,700 + 12% of the excess over 55,000
200,000-1,000,000 22,100 + 15% of the excess over 200,000
1,000,000 and above 142,100 + 17% of the excess over 1,000,000

Property tax

In Finland, property tax is levied annually on the ownership of real estate, including land and buildings. This local tax is administered by municipalities, which have the power to set their rates within the limits set by national legislation.

Property tax rates vary depending on the type of property, its location, and its intended use, with different rates applied to residential properties, vacant land, and commercial or industrial properties.

The tax rate for residential property typically ranges from 0.41% to 1.00% of the property's assessed value, while the rate for vacant land can be significantly higher to encourage the development of unused land.

The exact rate is set annually by each municipality, allowing flexibility to meet local needs and priorities.

Transfer tax

Transfer tax is levied on the sale or other transfer of ownership of certain types of property in Finland, including real estate and shares in housing companies (which effectively represent ownership of an apartment). The tax also applies to transfers of shares in companies where the majority of the assets consist of real estate located in Finland.

The transfer tax rates are as follows:

  • 4% for real estate transactions
  • 2% for shares in housing companies and other similar entities,
  • 1.6% for shares in companies whose main business is not real estate.

First-time homebuyers may be exempt from the transfer tax under certain conditions, which encourages home ownership among younger individuals and families. The transfer tax is payable by the purchaser and is usually due within two months of the transaction or the signing of the deed of sale.

Excise tax

Excise taxes in Finland are levied on certain goods and services, including alcohol, tobacco, fuel, electricity, and certain beverages. These taxes are designed to take into account the external costs associated with the consumption or use of these products, such as the health care costs associated with alcohol and tobacco use or the environmental impact of fuel consumption.

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Filing an income tax return in Finland

When to file tax returns

In Finland, the tax year is based on the calendar year and runs from January 1 to December 31. Taxpayers must file their income tax returns in the spring of the following year.

Normally, the Finnish Tax Agency sends pre-completed tax returns to individuals in April.

Taxpayers have until the beginning of May to review their returns, make any necessary adjustments, and file them. The exact due date varies each year and is specified in the tax return documents provided by the tax authorities.

How to file a tax return

Filing a tax return in Finland can be done in several ways, depending on the taxpayer's preference and the complexity of their tax situation:

  • Online via MyTax. The Finnish Tax Agency's MyTax portal is the most convenient way to file a tax return. After logging in with your bank details or a mobile certificate, you can review your pre-completed tax return, make any necessary changes, and submit it electronically.
  • By mail. If you prefer not to use the online service, you can make changes to the paper form that was sent to you and mail it to the Finnish Tax Agency. Be sure to send it well before the deadline to allow for postal delivery times.
  • Through a tax agent. Individuals with more complex tax situations or those living abroad may choose to use a tax agent or accountant to prepare and file their tax returns. This option can provide peace of mind and ensure that the return is completed accurately.

Penalties for late or incorrect filing

Failure to file your tax return on time, or filing an incorrect or incomplete return, may result in penalties:

  • If you miss the filing deadline, you may be subject to a late filing penalty. The amount of the penalty depends on the circumstances and the length of the delay.
  • In addition to late filing penalties, interest may be charged on unpaid taxes from the original due date until the tax is paid in full.
  • If the Finnish Tax Administration finds inaccuracies or omissions in your tax return, you may be required to pay additional tax and interest. In cases of significant understatement or fraud, more severe penalties may apply.

Types of income in Finland

The Finnish tax system classifies income into different types, each of which is subject to different tax rules and rates. Understanding these categories is crucial for taxpayers to accurately report their income and meet their tax obligations.

Employment income

Compensation of employees is the income received by an individual from work as an employee. It includes not only wages and salaries but also bonuses, overtime pay, and other forms of compensation for services rendered.

In Finland, earned income is subject to progressive income tax rates, i.e. the rate increases as the income level rises. This system ensures that those with higher incomes contribute more to public finances.

In addition to the basic salary, income from employment may include various fringe benefits provided by the employer, such as company cars, housing allowances, and meal vouchers.

These benefits have specific taxable values set by the Finnish tax administration and are added to the total taxable employment income.

Interest income

In Finland, interest income is considered capital income and is taxed at a flat rate, separate from the progressive rates applied to earned income.

Interest income is subject to a final withholding tax, which means that the financial institution paying the interest withholds the tax and remits it directly to the tax authorities.

Taxpayers must report their interest income on their annual tax return, even if the tax has been withheld at source.

Capital gains

These gains are considered a form of capital income and are subject to taxation under certain conditions.

The tax rate on capital gains is generally flat, unlike the progressive tax rates that apply to earned income.

For capital gains, the tax rate is set at 30% for gains up to €30,000 and 34% for gains exceeding this amount within a tax year.

A notable aspect of Finland's approach to capital gains taxation is the exemption for the sale of a primary residence under certain conditions. If the property has been the seller's primary residence for a continuous period of at least two years, the gain on the sale may be exempt from capital gains tax.

Dividend income

The taxation of dividend income is structured to encourage investment while ensuring that investment income contributes to public finances.

The tax treatment of dividend income differs depending on whether the dividends are from listed or private companies.

  • For dividends from listed companies, 85% of the dividend amount is taxable and 15% is tax-free. The taxable portion is subject to the capital gains tax rate of 30% for amounts up to €30,000 and 34% for amounts above this threshold.
  • Dividends from private companies have a more complex tax structure designed to strike a balance between rewarding investment and discouraging tax avoidance.

A portion of the dividend is considered tax-free up to a certain limit based on the company's net worth, while the remainder is taxed as capital income or, in some cases, as earned income.

Rental income

Rental income is taxable and taxpayers must declare this income in their annual tax returns.

The tax treatment of rental income focuses on net income after deducting allowable expenses related to the rental activity. These expenses may include mortgage interest payments, maintenance and repair costs, and property management fees.

For Finnish tax residents, rental income from both domestic and foreign properties is subject to Finnish tax.

Social Security in Finland

The Finnish social security system is known for its universality and generosity, covering a wide range of benefits including health care, unemployment, family benefits, and pensions.

The main components of the Finnish social security system include:

  • Health insurance. Provides coverage for medical expenses, including doctor visits, hospital care, and prescription drugs. It also provides maternity, paternity, and sickness benefits.
  • Unemployment benefits. Provides financial assistance to individuals who are temporarily out of work. The system includes a basic unemployment benefit provided by the government and an earnings-related benefit administered by unemployment funds.
  • Family benefits. Includes maternity allowances, child allowances, parental allowances, and childcare allowances to help families with the costs of raising children.
  • Social assistance.A financial assistance of last resort for individuals and families whose income and assets do not cover their essential daily expenses.

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Tax deductions for expats in Finland

Employment expenses

Expatriates working in Finland can deduct certain work-related expenses from their taxable income, effectively reducing their tax liability. Here are some of the most important work-related expenses that expats can consider when filing their tax returns:

  • Expats can deduct the cost of traveling between home and work. This includes public transportation as well as the cost of using a personal vehicle for commuting.
  • Expenses for the purchase of work-related equipment or supplies that are not reimbursed by the employer may be deductible. This can include computers, professional literature, and special tools needed for the job.
  • For expats working from home, some home office expenses may be deductible. This includes expenses related to the use of a home office, such as Internet charges and utilities, provided that the home office is used primarily for work purposes.
  • Expenses for professional education or training that maintain or improve skills required in the expatriate's current employment may be deductible. This includes course fees, study materials, and possibly travel expenses related to attending the training.

To claim these deductions, expatriates must provide documentation to support the expenses, such as receipts or invoices, when filing their tax returns.

Personal deductions

Finnish tax law allows several personal deductions that reduce taxable income, including pension contributions, unemployment insurance premiums, and interest expenses.

These deductions are intended to encourage saving for retirement, provide financial security in the event of job loss, and encourage investment in housing.

Pension premiums

Contributions to Finland's mandatory pension system, made by both employees and the self-employed, are fully deductible. This system ensures that individuals save for their retirement while reducing their current taxable income.

In addition to mandatory contributions, individuals may make voluntary contributions to pension plans. These voluntary contributions are also deductible up to a certain limit, thus encouraging additional savings for retirement beyond the mandatory system.

Unemployment insurance premium

This insurance provides financial support in the event of job loss, and the premiums paid for this insurance are fully deductible from taxable income.

Interest expenses

  • Interest paid on a mortgage for a principal residence is partially deductible.
  • While the deductibility of consumer loan interest is more limited, certain interest expenses related to investment activities may be deducted from capital income. This includes interest on loans taken out to generate taxable investment income.

Household expenses

In Finland, taxpayers can deduct certain household expenses related to the care, maintenance, and renovation of their primary residence or holiday home. This includes expenses for cleaning, in-home childcare services, and renovation projects.

To qualify for the deduction, the services must be performed by a registered business, and taxpayers must keep detailed receipts for the work performed.

The maximum deduction for household expenses is adjusted annually, so it's important to check the current limits when filing your taxes.

Energy costs

Energy costs for heating, electricity, and water can make up a significant portion of household expenses, especially in a country with a climate like Finland's.

While general energy costs are not directly deductible, specific investments in energy efficiency improvements or renewable energy sources for your home may qualify for deductions or tax credits.

For example, installing solar panels or upgrading to more energy-efficient windows can not only reduce your energy bills but may also qualify you for tax incentives aimed at promoting environmental sustainability.

Accommodation costs

For individuals who maintain more than one residence due to work commitments, lodging expenses for the secondary residence may be deductible.

This is particularly relevant for expatriates who may have to travel frequently for work or maintain a residence in another country. The deduction covers rent, utilities, and other necessary costs associated with the secondary residence.

To be eligible, the accommodation must be required for employment purposes and the taxpayer must demonstrate that maintaining a second residence is necessary for their work.

Donation deduction

Finland encourages charitable giving by allowing taxpayers to deduct donations from approved charitable organizations, educational institutions, and cultural projects.

To qualify for the deduction, donations must be made to organizations that are recognized by the Finnish tax administration and contribute to the public good.

Business deductions

In Finland, businesses, including self-employed individuals and companies, can use a variety of deductions to reduce their taxable income.

These deductions are designed to reflect the actual costs of generating business income, thereby ensuring that businesses are taxed on their net profit rather than their gross income.

  • Operating expenses. Business expenses are the most common type of business deduction. These include costs directly related to the day-to-day operation of the business, such as rent for office space, utilities, supplies, and employee salaries.
    To be deductible, an expense must be ordinary (common and accepted in the business) and necessary (helpful and appropriate to the business).
  • Depreciation. Depreciation allows companies to spread the cost of property, plant, and equipment over their useful lives, reflecting the loss in value due to wear and tear, decay, or obsolescence.
    This includes buildings, machinery, vehicles, and equipment used in the business.
  • Research and Development. Expenses related to research and development activities aimed at creating new products, services, or processes are deductible.
    Finland encourages innovation through various tax incentives for R&D, recognizing its importance for economic growth and competitiveness.
  • Interest expenses. Interest paid on business loans and other forms of debt financing is generally deductible. This deduction helps businesses manage the costs associated with borrowing for expansion, capital improvements, or other investments.
  • Marketing and advertising. Marketing and advertising expenses are deductible business expenses. This can include advertising campaigns, promotional materials, and trade show participation.
  • Professional fees. Fees paid for professional services, such as legal, accounting, and consulting services, are deductible. These services are often necessary for business operations, regulatory compliance, and strategic planning.
  • Business trips. Expenses related to business travel, including transportation, lodging, and meals, may be deductible under certain circumstances.

US-Finland tax treaty

The tax treaty between the United States and Finland is designed to prevent double taxation and tax evasion of income and capital. The treaty covers various forms of income, including employment income, dividends, interest, royalties, and capital gains, and provides clear rules on how each country taxes such income.

  • The treaty defines how an individual or entity is determined to be a resident of one country or the other for tax purposes. This determination is essential to the application of the treaty's provisions.
  • The treaty outlines what constitutes a permanent establishment, which affects how companies operating in both countries are taxed on their income.
  • The treaty provides for reduced rates of withholding taxes on dividends, interest, and royalties paid by a resident of one country to a resident of the other, facilitating cross-border investment.
  • The treaty provides mechanisms to eliminate double taxation, including credits and exemptions, to ensure that income is taxed only once.
  • The treaty ensures that nationals and companies of one country are not subject to discriminatory taxation in the other country.
  • The treaty establishes a process for resolving disputes or questions regarding interpreting or applying the treaty's provisions.

Most popular tax forms for US expats

For American expatriates living abroad, navigating tax obligations back home requires familiarity with specific IRS forms tailored to their unique situations. These forms ensure compliance with US tax laws while potentially taking advantage of benefits that reduce taxable income or avoid double taxation. Here are some of the most common tax forms used by US expats:

  1. Form 1040: The standard US individual income tax return that all expats must file annually to report their worldwide income to the IRS.
  2. Form 2555 (Foreign Earned Income Exclusion - FEIE): This form allows qualified expats to exclude a certain amount of their foreign-earned income from US taxation, significantly reducing their tax liability.
  3. Form 1116 (Foreign Tax Credit - FTC): For expats who pay taxes to a foreign government, this form allows them to claim a credit for foreign taxes paid, potentially reducing their US tax bill on the same income.
  4. FinCEN Form 114 (FBAR): The Report of Foreign Bank and Financial Accounts (FBAR) must be filed by expatriates who have more than $10,000 in foreign financial accounts at any time during the tax year.
  5. Form 8938 (Statement of Specified Foreign Financial Assets): Required for expats with significant foreign financial assets, this form provides detailed information to the IRS and helps enforce tax compliance.

Finland tax forms for US expats

In addition to complying with US tax requirements, US expats living in Finland must also navigate the Finnish tax system. Finland provides specific forms for residents (including expats) to file taxes, report income, and claim deductions or credits. Key Finnish tax forms that US expats may encounter include

  1. Pre-completed tax return: Most taxpayers in Finland receive a pre-completed tax return from the Finnish Tax Agency, which includes reported income and deductions. Expats must review, amend, and certify this form, adding any unreported income or deductions.
  2. Form 50A (Income and Deductions): For expats with additional income or deductions not included in the prefilled tax return, this form allows them to provide detailed information about their income and allowable expenses.
  3. Form 16A (Statement of Foreign Income): US expats who earn income outside of Finland must report this income on Form 16A, which is crucial for determining the correct Finnish tax liability and avoiding double taxation.
  4. Form 5057 (Application for Non-Resident Tax Card): For US expatriates who are not considered Finnish tax residents but earn Finnish source income, this form is used to apply for a non-resident tax card to ensure that the correct withholding rate is applied to their Finnish income.

Navigating the dual tax obligations in the US and Finland can be complex for American expatriates. It's often wise to seek the advice of tax professionals familiar with both US and Finnish tax laws to ensure compliance and optimize tax results.

Proper understanding and use of the relevant tax forms in both countries is essential to managing tax liabilities and taking advantage of available tax treaties and agreements.