Tax-resident vs. tax-nonresident
It's time to submit the annual tax returns in Finland and Finns are once again going through their receipts and checking for ways to reduce taxes. After all, Finland has made the top ten list of countries with the highest income taxes in the world.
Undisputable is however, that Finland is a welfare state much thanks to the high tax levels, and Finns living abroad have a tendency to move back home when having children or in need of healthcare when growing older. But people also leave Finland due to taxes. Both banker Björn Wahlroos and business women Maarit Koivisto-Toivanen have partly moved abroad due to Finland's gift- and inheritance tax. But at what point does one become a tax-resident or stop being one - i.e. tax-nonresident?
The basic principle is that individuals living in Finland permanently are tax-residents. i.e. unlimitedly liable to tax. Individuals living in other countries are tax-nonresidents. Anyone who has arrived in Finland and stayed more than 6 months will become resident.
Moving from Finland
A Finnish citizen that stays in a foreign country temporarily or for a short period, will still be considered a tax-resident in Finland - i.e. the stay will not affect the Finnish taxation. But if a Finnish citizen moves abroad permanently, he/she will be considered a Finnish tax-resident during the year of the relocation and for the subsequent three years - known as the ‘three-year rule’. Tax will be payable in Finland on both your Finnish and foreign-sourced income. At the end of the three years he/she will usually become a Finnish tax-nonresident, after which he/she will only pay tax in Finland on his/her Finnish-sourced income.
Finnish tax-nonresidency may already begin during the three-year period if he/she are able to demonstrate that he/she no longer have any 'close ties' to Finland. 'Close ties' may refer, for example to retaining living accommodation in Finland, family, or maintaining the right to Finnish social security.
Let's take the Finnish citizen Björn Wahlroos for example. He moved to Sweden in December 2013. Björn Wahlroos had and still has close ties to Finland, and therefore it is almost certain that he became a tax-nonresident after three years - i.e. in 2017. This means that starting from 2017, he pays taxes to Finland only on incomes derived from Finland.
Björn Wahlroos' children also live in Sweden (or at least they did when Björn Wahlroos moved in 2013), and therefore they do not have to pay inheritance- and/or gift tax to Finland, with one exception. You always pay inheritance- and/or gift tax to Finland on real property located in Finland. Consequently his son, Thomas Wahlroos did pay taxes to Finland when accepting the estate in Salo a couple of years ago, despite where he was tax-resident at the moment.
Moving to Finland
When moving to Finland you will become a resident after 6 months, but this does not automatically mean that you become a tax- resident at the same time. For example when you move to Finland to work factors like duration, tax residency of your employer and what kind of work you will be doing affect your tax treatment.
If you are a foreign citizen and leave Finland to live abroad permanently, you will become a Finnish tax-nonresident from the day of your move. If, on the other hand, your stay abroad is only temporary, your taxation in Finland will remain unaffected.
As a tax resident in Finland, your worldwide income is subject to Finnish tax. There is no distinction between the source country Finland or any other source country - worldwide liability to tax. In contrast with this, only the Finnish-sourced income is subject to Finnish tax for nonresidents.
Taxation has always been somewhat of a national affair. But with people moving around more, taxation has become a way to attract people to come and live, work and spend their life savings. For example Spain and Portugal has done some major tax marketing, and Maarit Koivisto-Toivanen did move to Portugal. She has successfully changed her tax-residency by fulfilling the rules set out. But what about her actual place of living? At what point is she considered to actually be living in Portugal and not in Finland - the status or attribution of being a lawful permanent resident in a particular jurisdiction?
The 'rules' for deciding a person's place of living is far more fuzzy than the rules deciding tax-residency, but can have important personal consequences when deciding what country has jurisdiction in matters like marriage, divorce or death.
More about this in my next blog - next week.