Our co-founder tax lawyer Paula Bock successfully sought a change from the Supreme Administrative Court regarding the earlier ruling by the Tax Administration on the matter of a Finnish citizen’s substantial connections and limited tax liability.

In the annual decision published on December 3, 2021, KHO 2021:172, the rulings of the Tax Administration and the Administrative Court were overturned, and the applicant was deemed to have limited tax liability starting from the year following their departure from Finland.

This was a significant question both from the taxpayer’s perspective and legally, as previous rulings on substantial connections, especially those related to the taxpayer’s economic ties to Finland, dated back to 1979 and 1981.

LIMITED TAX LIABILITY

Generally, a taxpayer is a natural person who resides in Finland. A person with limited tax liability, according to section 9(2) of the Income Tax Act (TVL), is someone who does not reside in Finland or stay here for more than six months. A person with limited tax liability only pays tax in Finland on income received from here.

On the other hand, a taxpayer with general tax liability is taxed in Finland on all of their income, both in Finland and abroad.

However, according to section 11(2) of the Income Tax Act, a Finnish citizen is considered to be residing in Finland, even if they do not continuously stay here for more than six months, until three years have passed since the end of the year during which they left the country unless they can demonstrate that they had no substantial ties to Finland during the tax year.

Substantial ties are not defined in the law but are left to be determined on a case-by-case basis, as per the government proposal (HE 40/74 vp). According to legal practice, substantial ties are assessed based on an overall evaluation of the taxpayer’s spouse and family, residence or vacation home in Finland, income from Finland and its nature, work in Finland, the overall permanence of the move, and stay in Finland.

Assessing the severance of substantial ties involves evaluating factors that indicate the permanence or temporariness of a Finnish citizen’s departure.

PREVIOUS HANDLING OF THE CASE

Previously, the Tax Administration had considered in a requested advance ruling on March 24, 2020, that person F should be regarded as a taxpayer with general tax liability for the tax years 2020 and 2021, according to section 9(1)(1) of the Income Tax Act, as it was not deemed that they had demonstrated the severance of their substantial connections.

F had moved out of Finland with their family (spouse and children), terminated their rental apartment in Finland, and secured employment in another country. The taxpayer solely owned a company in Finland engaged in investment activities, through which they held a significant portfolio of publicly traded stocks and small stakes in other unlisted companies. Additionally, the taxpayer served as the CEO of their owned company and as chairman and board member in certain other companies. The applicant also owned a small property in Finland with no buildings. The taxpayer did not have any other substantial ties to Finland in dispute.

In previous proceedings, it was considered that the taxpayer’s economic ties, in particular, created substantial ties to Finland, and therefore, the taxpayer could not be regarded as having limited tax liability in Finland after their departure. The Administrative Court of Helsinki, in its decision on March 18, 2021, case number H1123/2021, concurred with the Tax Administration, concluding that the economic ties were so strong that they created substantial connections to Finland, thus classifying the taxpayer as having general tax liability in Finland for the tax years 2020 and 2021, based on section 11(1) of the Income Tax Act.

PETITION FOR LEAVE TO APPEAL AND APPEAL

In the appeal drafted by Paula Bock, LL.M., the Supreme Administrative Court was asked to decide:

  1. whether F’s company should be considered passive investment assets or active business, and
  2. whether the ownership mentioned above constitutes a factor indicating the temporariness of F’s departure from Finland, creating substantial ties to Finland in the overall evaluation.

According to the arguments presented in the appeal by Bock, in the overall evaluation, the factors indicating the permanence of F’s departure from the country were significantly stronger than those indicating its temporariness.

SUPREME ADMINISTRATIVE COURT YEARBOOK RULING KHO 2021:172

In the published annual decision KHO 2021:172, the Supreme Administrative Court overturned the previous rulings, stating that a Finnish citizen who had moved out of Finland was to be considered to have limited tax liability, even though they were still deemed to have economic ties to Finland. Since there were no other connections to Finland, what became crucial was the fact that the preserved economic ties did not require regular visits and active operations in Finland. Therefore, in the overall evaluation, these economic ties did not constitute substantial ties to Finland, and the applicant had demonstrated the severance of their substantial connections as required by the Income Tax Act.

The Supreme Administrative Court considered it noteworthy that although F still had economic ties to Finland, all other relevant connections related to residence had been severed when they moved to the Czech Republic with their family and worked there under a permanent employment relationship. Therefore, the active conduct of business alone, according to the KHO decision, did not constitute the kind of substantial ties to Finland required for a general tax liability. Consequently, the taxpayer’s substantial connections and general tax liability were deemed to have been severed from the beginning of the tax year following the year of the move, and the applicant was considered to have limited tax liability in Finland as of January 1, 2020. F was deemed to have limited tax liability in Finland starting from January 1, 2020.