The Finnish transfer pricing (TP) laws are aligned with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the OECD Guidelines). TP rules are governed by the Assessment Procedure Act (AP Act), and Government Bills.
Arm’s Length Principle
The arm’s length principle, as stipulated in Article 9 of the OECD Model Treaty, is transposed in Finnish law employing Article 31 of the AP Act. This article requires that when two related parties do business with each other, they must use the same terms and prices they would if they were independent and unrelated. If the terms differ from what would be agreed between independent companies, and this causes the Finnish taxpayer’s income to be too low or losses to be too high, the tax authorities can adjust the taxable income to reflect what it should have been under normal market conditions. To check this, the authorities look at aspects such as the contract terms, functions, risks, assets used, economic conditions, and business strategies.
Related Party Definition
Under Article 31 of the AP Act, two parties are considered related (or in a special relationship) if one has control over the other, or if a third party controls both. Control can be direct or indirect and exists when one party:
- Owns more than 50% of the other’s capital,
- Holds more than 50% of voting rights,
- Has the right to appoint over half of the board or similar governing body, or
- Can otherwise exercise actual control over the other party’s decisions.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Finland are:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost Plus Method
- Transactional Net Margin Method
- Profit Split Method
Finland follows the “most appropriate method” approach, meaning the method that provides the most reliable result should be used. The OECD Guidelines are used as a reference for when interpretation is needed on the matter.
Comparability Analysis
An important part of the transfer pricing compliance is the comparability analysis. Below is a summary of the main points regarding comparability analysis in Finland:
In practice, Finland follows the OECD Guidelines and applies the comparability analysis outlined in Chapter III, as regulated in the Ministerial Order, articles 5 and 7. This means Finland’s tax authorities focus on determining the fair market value in related-party transactions, these transactions are compared to similar ones between independent parties.
Finland’s legislator does not allow for the usage of secret comparables; neither does it state a preference between internal and external comparables, except when a transaction is closely tied to the specific characteristics of the local market.
When doing a comparability analysis, the Finnish Tax Administration recommends using the inter-quartile range to determine if a transaction falls within the arm’s length range. This helps ensure that prices between related companies are consistent with what independent companies would agree to.
Documentation Requirements
Documentation requirements for transfer prices in Finland are based on the three-layer method of OECD. That means multinationals have to report the following to the French tax authorities:
- Master file;
- Local file; and
- Country-by-Country (CbC) report.
Master and Local Files
In Finland, companies conducting cross-border transactions are required to prepare transfer pricing documentation, which includes both a Master File and a Local File. However, small and medium-sized enterprises (SMEs) with fewer than 250 employees, turnover below €50 million, or a balance sheet total under €43 million are exempt from such obligation. However even a small Finnish company may be required to prepare documentation if it is part of a larger multinational group.
The Master File is expected to give information on the organizational structure, business activities, use of intangibles, intra-group financing, annual reports, and any relevant tax rulings or APAs. The Local File, on the other side, focuses on the Finnish entity and informs on organizational setup, transactions with related parties, functional and comparability analysis, pricing policy, and any foreign-issued tax rulings related to those transactions.
The files should be submitted within 60 days of a request by the tax authorities, and not earlier than six months after the accounting period ends. If additional explanations are needed, they must be provided within 90 days of the request.
Country-by-Country Reporting
- In Finland, Country-by-Country (CbC) reporting is required for multinational groups with consolidated revenue of at least €750 million. Normally, only one entity in the group, typically the ultimate parent company, submits the report.
- The CbC report includes key financial and tax information for each country where the group operates, like the revenue, profits, taxes paid and accrued, capital, retained earnings, employee numbers, and tangible assets. It must also list all group entities and describe their main business activities.
- As of 2024, Finland will also implement public CbC reporting rules based on EU law. This means that certain large EU-based companies and subsidiaries of non-EU parent groups have to publish CbC reports online within 12 months of the year-end, and keep them available for five years.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
In Finland, there is no specific law for Advance Pricing Agreements, but APAs may be negotiated with nations that have a tax treaty with Finland. These agreements are conducted based on the tax treaties, according to Article 25 of the OECD Model Tax Convention. Companies can apply for an APA procedure by making an application with the Finnish Tax Administration. Alternatively, they might also approach a pre-trial decision or even directly talk to the tax office for unofficial advice.
The MAP is a formal mechanism through which Finland works with another treaty state to settle taxation disputes. The purpose of the MAP procedure is to eliminate double taxation and provide interpretations of treaties. In addition to tax treaties, MAPs can also be based on the EU Arbitration Convention or the EU Directive on Tax Dispute Resolution (EU 2017/1852).
Approach to Transfer Pricing Audits
The Finnish Tax Authority has been very active in monitoring transfer pricing policies and has regularly conducted audit controls. Since 2015, transfer pricing has been handled by a team within the Large Taxpayers’ Office, and it is expected that audit controls will increase and be more proactive.
Penalties
In Finland, if a company does not follow the arm’s length principle, the tax authorities can adjust the company’s profits or losses as if proper pricing had been used. Also, in the case that an incorrect pricing results in profit being shifted from a subsidiary to its parent, it may be treated as a hidden dividend. If the authority concludes that a company’s transactions are aiming to avoid taxes, then general anti-avoidance rules can also apply, and the company may face a penalty.
Taxation at a Glance
Finland is a member Finland has been a member of the European Union (EU) since 1995. Personal income taxes are levied on the national level; however, a municipal tax and church tax also apply. Corporate income is taxed at a national flat rate on their worldwide income. Its official currency is the Euro (EUR), and the official name of the tax authority is called Verohallinto .
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 20% |
VAT | 25.5% |
Withholding tax on dividends to non-residents | 20% |
Withholding tax on interest to non-residents | 0% |
Withholding tax on royalties to non-residents | 20% |
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