In this GMS Flash Alert, we report on various measures in Finland’s budget for 2016 affecting the special expat tax regime, the income tax brackets, and the law regarding the terms and costs of employment.
The Finnish government presented its Budget proposal for 2016 to Parliament on 28 September 2015.1 Among other things, the government is proposing the continuation of the special expatriate tax regime for the period 2016-2019 and modification of the income tax brackets, which would impact most those individuals earning high salaries. Also being proposed are various changes to laws affecting the terms and costs of employment (for a three-year fixed-term period). Moreover, there is a proposal to significantly reduce private employer social security contributions.
In this newsletter, we also report that Finland has signed a social security agreement with South Korea (the Republic of Korea). The agreement is planned to take effect during 2016.
The proposed changes to Finnish law affecting the terms and costs of employment mean that companies with international assignees subject to Finnish tax may see their international assignment-related (and their employment-related) costs either rise or fall, depending on their circumstances – each individual assignee’s tax status should be determined in light of applying the changed rules to his or her particular situation.
Employees and employers need to observe the potential changes to laws affecting the terms and costs of employment, such as the peremptory provision of holiday bonus payment, the payment terms for sick leave, and the changing of public holidays and paid versus unpaid leave.
Foreign key employees starting employment in Finland may potentially benefit from the special expatriate tax regime and lower tax rate.
International assignment cost projections and budgeting for assignments to Finland, and for assignees outside Finland still subject to Finnish taxation, should reflect these potential changes above-mentioned and other Budget 2016 measures once they come into force. Where appropriate, adjustments by payroll administrators to withholdings will also have to be made.
The social security agreement between Finland and South Korea potentially means significant savings related to the social security costs of mobile employees between these two countries.
In the proposal affecting terms and costs of employment the Finnish government included, for example, changing the first sick-leave day as unpaid (currently paid); another proposal regulates the payment of holiday bonus by law (currently there is no peremproty law on this). Also two public holidays, currently paid holidays, are proposed to be changed into unpaid leave.2
The proposed tax measures impacting individuals – including those on international assignment – and their multinational employers are summarized below.
The social security agreement with South Korea has been signed but it is not in force yet.3 We further highlight the agreement below.
The temporary expatriate regime providing for flat-rate taxation (35 percent) of employment income received by qualifying foreign specialists and executives is proposed to be extended until 31 December 2019 (currently the regime applies with respect to employment which commences by 31 December 2015). No changes to qualifications were proposed (including the minimum EUR 5,800 monthly cash salary). The 35-percent flat rate can be applied for a maximum 48 months.
The rate table for the national income tax levied on earned income, in 2016, is proposed to be set as shown in the table below. In the proposal, the second highest bracket (in 2015 EUR 71,400 – 90,000 with a rate of 29.75) is removed and the highest bracket would be starting from EUR 72,300 (solidarity tax on high-income earners).
|Taxable income (EUR)||Tax on lower amount (EUR)||Rate on excess (%)|
|16,700 - 25,000||8||6.5|
|25,000 - 40,800||547,50||17.5|
|40,800 - 72,300||3312.50||21.5|
|72,300 and over||10,085.00||31.75|
The maximum amount of the earned income credit against national tax on earned income (työtulovähennys) is proposed to be increased to EUR 1,260 (currently, EUR 1,025). Furthermore, the percentage used to calculate the credit would be increased to 11.8 percent (currently, 8.6 percent) and the percentage to reduce the maximum credit would be increased to 1.46 percent (currently, 1.2 percent).
The government proposes to further limit the deductibility of mortgage interest. The percentage of interest on a loan used to purchase a dwelling in which the taxpayer or his family lives permanently that is deductible is proposed to be:
(Earlier, the percentage for each year was 10 percentage points higher.)
The social security agreement with South Korea was signed in Seoul on 9 September 2015. The purpose of the agreement is to avoid “insuring” and double charging cross-border employees in both countries. The main rule is to socially “insure” in the proper jurisdiction of the employee, that is, in the country in which he is working; however when the employee is on assignment in the other state, insuring the employee in the home state will be possible.
The agreement mainly concerns pension and unemployment insurance. Otherwise, social security will be determined according to national laws.
The agreement is expected to come into force in 2016.
The Budget proposal has been presented to Parliament. The law changes affecting the terms of employment are being discussed in Parliament.
The KPMG International member in Finland will endeavor to keep readers informed if the final legislation and proposed law changes affecting the terms of employment alter from the information provided above.
2 For further information regarding the changes potentially affecting the terms of employment (available also in English), see the Finnish government Web page.
3 For information on the social security agreement between Finland and South Korea (available also in English), see the Ministry of Social Affairs and Health Web page.
For additional information or assistance, please contact your local GMS or People Services professional or one of the following professionals with the KPMG International member firm in Finland:
Tel. +358 20 760 3394
Tel. +358 20 760 3190
The information contained in this newsletter was submitted by the KPMG International member firm in Finland.
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