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Changes to rules on the elimination of international double taxation

10 Mar 2010

The Finnish credit method used to eliminate double taxation has been revised as of 1 January 2010. Using the credit method the foreign tax paid for certain income will be deducted from Finnish tax imposed on the same income. The amendments remove certain problems related to the double taxation of foreign income and the allocation of payment of taxes. Hence, Finnish entities now benefit from better measures to avoid double taxation of foreign income arising when tax is imposed on the same income both abroad and in Finland. Taxand Finland reviews these changes.

Since the start of 2010, the credit method has also applied to foreign advance tax corresponding to the final tax imposed on the same regular taxed income. If taxation is carried out in Finland the advance tax is credited in Finland as foreign tax so long as the final tax has not been paid abroad. Should the amount of the foreign final tax differ from the advance tax deducted in Finnish taxation, the Finnish taxation is adjusted so that the foreign final tax is accepted as a deduction.

Amendments have also been made to the maximum amount of foreign tax credited, which no longer is calculated per country. Instead, the total amount of foreign taxes from different countries is taken into account by sources of income and by types of income, and the maximum amount of foreign tax credit is determined based on these. Should the amount of foreign taxes exceed the maximum amount of credit set out in the law, e.g. the amount of Finnish tax to be paid for the same income, the foreign tax becomes unused foreign tax credit that can be deducted in Finnish taxation in the future. The carry forward of the unused foreign tax credit has been extended to five years instead of the former one year time limit.

In addition, the time limit for crediting foreign tax in the taxation of shareholders of CFC-companies has correspondingly been changed to five years. Also the order of use in which unused foreign tax credits can be deducted has been altered: the oldest unused foreign tax credit is now always deducted first.

Taxand's Take

These amendments aim to improve Finnish entities' ability to avoid international double taxation on foreign sourced income. These amendments will therefore improve our Finnish entities' competitiveness in the international business operations.

Your Taxand contact for further queries is:
Einari Karhu
T. +358 9 615 333

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