An abundance of job opportunities in the IT and healthcare industries plus the natural beauty of the nation draw American expats to Finland. Many questions have been posed to our firm from clients who are considering a move to Finland about how the tax system is structured, the social security benefits and ways in which they can minimize their US expat taxes. They also ask if we are able to assist them with filing US expat tax returns while they are working and living in Finland. The following tax tips provided by our experts will cover all of these questions along with many others.
Guide to Filing US Expat Taxes For Americans Living in Finland
Does Your Firm Provide US Expat Tax Services to Americans Living in Finland?
Yes, our team of experts is equipped in providing a full range of expat tax services to Americans working and living in Finland.
Are American Expats Living in Finland Required to File US Expatriate Tax Returns?
An American expat is required to file taxes with the Internal Revenue Service (IRS) when living in Finland each year. The tax return should reflect all of their earned income for the tax year, including that which was earned from foreign employment even if it was already taxed. There is a chance that a US expat can have their taxes reduced by using certain tax credits and deductions from that money which was earned from employment in Finland.
How Can Americans Living in Finland Minimize US Expat Taxes and Avoid Double Taxation?
Some provisions are provided to US expats that can help in avoiding being double taxed on the income that they earn while living in Finland. These include:
• Foreign Earned Income Exclusion (FEIE)
• Foreign Housing Exclusion or Deduction
• Foreign Tax Credit
FEIE allows for an American expat in Finland to decrease their taxable earned income from Finnish employment by the first $101,300 for the 2016 tax year and $100,800 for the 2015 tax year. To qualify for this tax exclusion, the US expat must be able to meet either the physical presence test or bona fide residence test. A physical presence test requires an expat to spend at least 330 days out of a 365 day period in Finland, and earn an income from a foreign source during that time. With the bona fide residence test, an expat would have to show that they have been overseas for at least one year and have no immediate plans of returning to the US.
A US expat who is able to claim FEIE may also be permitted to exclude certain housing expenses from their foreign earned income.
The foreign tax credit or deduction may be used for the income taxes paid in Finland. The foreign tax credit works like most US tax credits and reduces the US tax amount owed. Each dollar of credit will reduce the US tax by one dollar. The foreign tax credit is limited to the Finland taxes that were applied to Finland earned income which is subject to US taxation. In other words, any tax on your excluded Finland earnings, either by the FEIE, foreign housing exclusion, or Finland tax rules, will not be included when calculating the US foreign tax credit.
Who is Considered a Resident of Finland for Tax Purposes?
In Finland, an expat is considered a resident if he or she has a permanent home or habitual abode or has stayed in the country for a time period of six months or longer. A Finnish citizen will still be considered a tax resident for the calendar year in which he or she moves abroad, and for the following three years unless they are able to provide compelling evidence showing that they have not maintained any substantial ties to Finland during the tax year that is being questioned.
Is Foreign Income Subject to Taxation in Finland?
Residents of Finland are taxed on earnings made globally. If they were a resident for only a portion of the tax year, then they will only be obligated to pay taxes on their worldwide income earned during the time they were a resident. For the portion of the tax year where they were a non-resident, only their Finnish sourced income will be taxed. A non-resident individual will be subject to taxation on their income derived from employment in Finland only.
What are Personal Income Tax Rates in Finland?
Earned income in Finland is considered any salary, wage, director’s fees and benefits connected to employment. This personal earned income is taxed at a progressive rate, which will increase as the individuals earnings increase. There is a special provision where a qualifying expatriate can choose to be taxed on their earned income at a flat rate of 35% for up to 48 months instead of at the progressive rates listed below:
Taxable Income in Euro Tax on Lower Amount in Euro Rate on Excess in Percent (%)
Exceeding Not Exceeding
0 16,300 0 0
16,300 24,300 8 6.5
24,300 39,700 528 17.5
39,700 71,400 3,223 22
71,400 100,000 10,039 31.75
100,000 18,547 31.75
When are Tax Returns Due in Finland?
Taxpayers in Finland will receive a pre-completed tax return form in April. At this time they have to check the tax return and make any corrections if necessary before sending it back to their local tax office.
The tax office may grant an extension for filing a pre-completed tax return of up to a couple of weeks. The application for an extension must be filed prior to the tax return filing due date and must reveal justification for the extension.
Completed tax returns are due by the 7th of May or the 15th of May in 2014.
What is the Tax Year-End for Taxpayers Living in Finland?
As in the United States, the tax year ends on the 31st of December in Finland.
What Income is Considered Taxable Income in Finland?
In Finland, taxable income constitutes all compensation which has been received by an employee for services rendered. This includes amounts that have been derived directly or indirectly from the work performed for the employer.
Are Investment Income and Capital Gains Taxed in Finland? If so, How?
Since the 2012 tax year, there has been a progressive tax schedule for investment income earned in Finland. Investment income of up to 40,000 Euro is taxed at 30%, while investment income in excess of 40,000 Euro is taxed at 32%. Up until 2013 there was a limit of 50,000 Euro. These percentages will apply unless otherwise noted in an applicable tax treaty.
Taxable investment income will include all of the following:
• Interest earned on bank deposits and bonds
• Dividends paid to Finland residents
• Capital gains
Where dividends are earned from a publicly listed company, 85% will be taxed as investment income and 15% will be exempt from taxation. This is as of 2014. Prior to this, only 70% of the dividends were taxable.
What is the Social Security System in Finland?
There is a social security tax imposed on employers, employees and self employed workers in Finland. There is also a mandatory contribution for Medicare and a per diem contribution. This is 0.74% of the individuals income, while Medicare is a 1.3% contribution from the municipal taxable income.
Is there a Social Security Agreement or Tax Treaty Between the USA and Finland?
There is a tax treaty and totalization agreement in place between the US and Finland. These are helpful in determining which country should be paid specific taxes and when those taxes should be paid. The US-Finland tax treaty is an expat’s guide to making sure that income taxes are being paid to the correct nation. A US expat with doubt about how the treaty affects them should talk to a tax expert with specialized knowledge of US expat tax filing and returns.
Are there Other Taxes Assessed on Expats Living in Finland?
An individual is required to pay a capital gains tax of 30%. If those capital gains exceed 40,000 Euro in a given tax year that percentage rises to 32%. A capital gain that results from the sale of a residential property that was used as a primary residence for at least two years during the time of ownership will be exempt from capital gains tax.
Municipal taxes range from 18% to 26% of the taxable income depending on the municipality. Church tax is required of members of certain churches and range from 1% to 2% of the earned income.
What are FBAR and FATCA Requirements for Americans in Finland?
Under the Foreign Bank Accounts Report (FBAR) an American citizen is obligated by law to report to the IRS their bank balances held in foreign accounts. This is regardless of where they live. FBAR requires that a US expat file FinCEN form 114 if their foreign bank account balance is in excess of $10,000. If this form is not filed by the 30th of June deadline, the expat stands the risk of heavy fines by the IRS.
In addition, the Foreign Account Tax Compliance Act (FATCA) requires foreign banks to report expat bank balances in order to prevent US citizens from evading taxes. In accordance with FATCA, banks around the world and expats must report a bank balance of $200,000 or more at the end of the year or $300,000 at any point during the year. Married US expats have a higher threshold to meet before FACTA rules take effect. A qualifying expat will need to file a completed Form 8938 along with their US tax return.
Do You Have any Additional Questions about Filing US Expat Taxes?
Do not hesitate to call upon an expert in US expat tax laws if you are still unsure of how the taxation system will work once you are in Finland. An expat taxes expert will be able to provide assistance in a variety of tax circumstances.