Draft bill regarding the economic employer concept has been issued

The Finnish Ministry of Finance has circulated a draft bill regarding the introduction of the economic employer concept in Finland as of 2022.

Although the draft bill may be changed based on the comments the Ministry of Finance will receive, it clarifies the initial plan on how the economic employer concept could be taken into use in Finland.

The draft bill can be found here: Hallituksen esitys tuloverolain ja eräiden muiden lakien muuttamisesta taloudellisen työnantajan käsitteen käyttöönottamiseksi - Valtiovarainministeriö (vm.fi). The document is unfortunately not available in English.

We are in the process of reviewing the draft bill in detail but would like to already share our initial understanding on the proposed legislation. Further, as mentioned, the draft bill may yet be changed based on the comments the Ministry of Finance will receive. Thus, the below summary is based on our understanding of the upcoming changes at the moment, in the beginning of July 2021.

Based on our initial review the new rules would work as follows:

• The new rules would be applicable as from 1 January 2022
  
  
• The rules would apply to a situation in which a foreign employer pays salary to an employee who works in Finland under a supervision and direction of a Finnish economic employer and the work is an integrated part of the economic employer’s activities performed in Finland                         
  • This applies also to intra group situations
  • It seems that one of the important indicators of whether an economic employer exists in Finland is the fact whether the costs are charged to a Finnish economic employer, or if the costs should have been charged to a Finnish economic employer
  • There is no day threshold on when the employee working for a Finnish economic employer would become taxable, i.e. the taxation would take place from the day 1
• It seems that there would be reporting obligations for the foreign employer, the economic employer as well as the employee
  
  • The foreign employer should make a notification to the tax authorities when an employee starts working in Finland. Further, it hast to report the salary to the Incomes register on a monthly basis
  • The Finnish economic employer also needs to make a notification to the Finnish tax authorities when a foreign employee starts working for the Finnish economic employer
• The draft legislation does not include any tax withholding obligations for foreign entities, and thus, the taxes should be paid by the employee
  
  • The draft legislation states that process for reporting the income and paying the taxes is the same as currently for hired-out employees working in Finland
    • The employee should apply for an advance tax payment, and also a Finnish ID-number. The taxes would then become payable on a monthly basis. As long as the employee is a non-tax resident, the tax rate would be 35% (progressive tax if the employee stays more than six months and becomes a tax resident). In certain situations a non-tax resident would be able to claim to be taxed according to the progressive taxation, if more beneficial to the individual
  • The employee should file a Finnish tax return
  • The draft legislation does not state anything about the possibility for the foreign employer / economic employer to withhold taxes on the employee’s salary on a voluntary basis, but this will likely be clarified in the coming weeks
• The draft legislation also includes several examples on when a person is deemed to work for a Finnish economic employer. Among other examples, it also includes an example in which a member of a Finnish company’s executive board is employed by a foreign group entity. In the example it is stated that in such a scenario an economic employer would easily be triggered. This may impact many Finnish global companies who have executive board members employed by foreign group entities

We are having discussions with the relevant authorities to seek clarifications to the draft legislation as well as providing suggestions to it.

The Ministry of Finance has requested to receive comments on the draft bill by 18 August 2021. They have estimated that the draft bill would be presented to the government approximately on week 37. The schedule may, however, still change.

We are monitoring the progress closely and will keep you updated on the process of the finalization of the legislation.

Next steps

As a next step, it would be important to assess on how the proposed rules would impact the business travel and short term assignments to Finland in your organization. We are happy to have such discussions and make an impact analysis.

If you have any  questions regarding the matter, please do not hesitate to contact us.