FRANCHISING AND TAXATION
(Updated Feb. 8, 2012)
Franchising and taxation in Finland
By Jori Taipale , attorney-at-law,
From Bird & Bird Attorneys Ltd.
The author is an experienced franchise lawyer.
Franchising as a form of business is naturally subject to different tax obligations in Finland. The following article deals with the most common taxation issues relating to franchising, especially taking into account the franchised businesses of international nature (subsidiaries and joint ventures of foreign franchisors, royalties paid to for-eign individuals or companies, master franchising etc). All the relevant changes in the Finnish tax laws till 1 January 2012 have been taken into account in this article.
Corporate Income Tax
In most cases both the franchisor and the franchisee are Finnish companies. In the Finnish operations on an international franchising chain sometimes only one of the parties is a Finnish company. All Finnish companies are subject to national corporate income tax on their world-wide income. The rate of above mentioned tax is 24.5 per cent.
If the franchisor is a foreign company and not for example a Finnish subsidiary, it is, as a general rule, naturally not subjected to Finnish company taxation. However, the exemption requires that the franchisor does not operate through a permanent estab-lishment in Finland which would bring the company under Finnish taxation for all the income that it derives from Finland through the before mentioned establishment.
If the transfer of shares of a Finnish company (franchisor or franchisee) is not made on The Helsinki Stock Exchange, a transfer tax at the rate of 1.6 per cent of the rele-vant sales price is payable by the buyer. However, if the buyer is a non-resident, the seller must collect the tax from the buyer. If the seller and buyer are both non-residents the transfer of the shares will be exempt from Finnish transfer tax.
Transfer tax transferring a real estate located in Finland. The rate of transfer tax con-cerning real estates is a flat 4.0 per cent. Even in the case the seller and buyer both being non-residents the exemption from transfer tax does not apply when transfer-ring a real estate. The tax is payable by the buyer.
Tax on Capital Income
General tax rate on capital income in Finland is a flat 30 per cent to the amount of EUR 50,000.00 per year. The amount exceeding EUR 50,000.00 per year is taxed on a rate of 32 per cent.
As a general rule a dividend received by a Finnish individual is taxable at a flat tax rate of 30 per cent and dividend received by a Finnish company is exempt from tax in the taxation of that company. Especially in situations where the receiver of dividend is a company, the taxation can vary substantially depending on things like whether the shares of distributer of the dividend is listed in Stock Exchange or how much of the distributors shares are owned by the receiver. In these kinds of situations the taxation of the dividend has to be evaluated on case-by-case basis.
Taxable capital gains are the difference between the sales price and the total acquisi-tion costs of the shares. Resident individuals and Finnish estates may choose to apply a capital allowance instead of the acquisition costs. The capital allowance is at least 20 per cent of the sales price but 40 per cent if the shares have been owned for at least 10 years. Capital losses arising from the sale of shares other than connected with business operations are deductible only from gains arising in the same year and the following five years if the losses have arisen in 2010 or later. If the losses have arisen before the year 2010 they are deductible only from gains arising in the same year and the following three years. The capital gains are exempt from tax if the com-bined sales prices of a taxpayer do not exceed EUR 1,000 in a tax year. Correspond-ingly, the capital losses can not be deducted from the gains if the question is about above mentioned tax-exempt gains and the combined acquisition costs in a tax year do not exceed EUR 1,000.
The capital gains of the companies arising from the sale of fixed asset shares are ex-empted from taxes, provided that the company selling the stocks has owned continu-ously for at least one year no less than 10 per cent of the share capital of the company whose shares are subject to the assignment and that these shares subject to assign-ment belong to those owned for the required time period. Furthermore, a precondi-tion for the exemption is that the Council directive (90/435/EEC) on the common system of taxation applicable in the case of parent companies and subsidiaries of dif-ferent Member States applies to the company subject to the assignment or that there is an appropriate tax treaty between Finland and the country of the company’s domi-cile. Consequently, the capital losses arising from these tax-exempt sales are not de-ductible from the capital gains. However, for example companies that practice capital investment activity are not entitled to exemption.
Capital losses arising from the sale of shares connected with business operations are deductible from the business income. Capital gains received by non-residents are not taxable income in Finland, provided that the gain is not connected with a fixed place of business of the seller in Finland.
Value Added Tax
The value-added tax is with minor deviations compatible with the VAT directives of the EU. In addition to sale and rental of goods, VAT is widely applicable to services as well. However, the tax does not cover, inter alia, health and medical services, services related to social welfare, education and training, or banking and insurance services. Agriculture and forestry are also, in the main, tax-exempt.
The general VAT is 23 per cent. This rate is among the highest in Western Europe. A reduced rate of 9 per cent is applied to personal transport, accommodation, movies, medicaments, books and subscriptions to newspapers and periodicals. Food is sub-ject to a tax rate of 13 per cent, although the service is taxable on the general rate of 23 per cent.
The Taxation on Non-Residents
Non-residents are taxed on their income derived from Finland. The Income Tax Act includes a list of items of income which are considered to be derived from Finland. An important exception to the general rule is that interest derived by non-residents is not taxable in Finland except for a few uncommon cases.
It should be noted that whereas the basic rules on whether income is derived from Finland are found in the Finnish Income Tax Act, the provisions of different tax trea-ties between Finland and other countries often affect the taxation of non-residents in a significant way.
Items of income derived from Finland by non-residents are either subject to a final withholding tax or taxed on a basis of assessment. The most common types of income are subject to the final withholding tax. These items include salaries, wages and pen-sions as well as dividends, royalties and interest in the few situations where interest is taxable.
From international franchising point of view the withholding tax (tax-at-source) is the most important tax as it is applicable to both dividends (from Finnish subsidiary or joint venture) payable to a foreign shareholders and royalties (from franchisees, master or area franchisees etc.) payable to a foreign owner of the intellectual prop-erty rights or the franchised business etc. However, dividend paid by a Finnish com-pany to a company in other member state of EU is not subject to tax in Finland, if the Council directive on parent companies and subsidiaries applies to the receiving com-pany and if the receiving company owns no less than 10 per cent of the share capital of the company distributing dividend.
The tax rate for tax at source on salaries, wages and pensions is 35 per cent, and only a limited number of deductions are allowed. Dividends, royalties and other items of capital income are taxed at 30/32 per cent rate depending on the amount of the in-come. The actually applicable tax rates on dividends, interests and royalties, however are usually lower due to tax treaty provisions. Business income as well as rents and capital gains on real property and on shares of property companies are taxed on the basis of assessment. Rents and capital gains are taxed as capital income at the 30/32 per cent rate. Business income of an individual are divided into capital income and earned income, which are taxed at the rates of 30/32 per cent and 35 per cent, re-spectively, and business income of a company is taxed at the rate of 24,5 per cent.