Based on current information, there will be significant changes in Finland’s taxation in upcoming years, which every current or future entrepreneur should take into account in their own activities. These changes will involve both the development of entirely new types of taxes and the tightening of existing ones.
This fall, we will be looking at these upcoming changes in our articles. This article focuses on one of the taxes referred to above, the so-called exit tax.
What is the exit tax all about?
The exit tax is a new tax that, subject to certain limitations, aims to tax the increase in value of individuals’ assets when they move out of Finland. The Ministry of Finance published a draft proposal for the upcoming amendment on 12 August 2022, with the aim of introducing the exit tax as early as the beginning of 2023.
According to the draft, the exit tax would apply to the calculatory increase in value of an individual’s assets (e.g. the deferred capital gains would be in the focus). The calculatory increase in value of an individual’s assets would be determined by deducting the assets’ acquisition cost from the probable transfer price (as per the day prior to moving out of Finland). This calculatory increase in value would be regarded as capital income in the taxation of the year when moving out or, if the taxpayer so requests, in the year in which the assets are actually transferred, up to the following eight years, after which the tax liability would cease.
The aim of the exit tax is to apply to all domestic and foreign assets, excluding real estate and housing shares as well as the companies that typically own them. The draft specifically notes that the exit tax will also cover crypto-based assets. The tax is intended to be comprehensive; therefore, it is irrelevant what legal form the business has.
Under what condition is the exit tax applied?
The draft lays down certain conditions for the exit tax, which, if met, would apply. The conditions consist of 1) the euro-denominated threshold values; and 2) the tax residence requirement of individuals in Finland. These are presented in more detail below.
The exit tax will not apply if the total value of the assets subject to the calculatory increase in value is less than EUR 500,000 or if the calculatory increase is less than EUR 100,000. If both above-mentioned euro-denominated threshold values are exceeded, the exit tax would be paid on the excess of the calculatory capital gain of EUR 100,000, and that gain would be taxed according to the capital gains tax rates (30 – 34%) under Finland’s Income Tax Act (1535/1992).
The exit tax would apply to natural persons who move out of Finland, who have had unlimited tax liability in Finland and have lived in Finland in accordance with the possibly applicable tax treaty for at least four of the ten years preceding the move. Therefore, tax liability also arises for non-Finnish citizens.
Who is affected by the exit tax?
In particular, the exit tax would affect entrepreneurs who have created and grown their businesses from scratch. If such an entrepreneur moved to another EU member state or outside the EU altogether, he would have to pay the exit tax, even if he has not actually sold any of his assets. Moreover, the calculatory increase in value of the assets of such an entrepreneur is likely to be high, given that the acquisition cost can be regarded as close to non-existent and that the assets typically consist of other resources than real estate or housing shares.
On the other hand, the exit tax will most probably affect the attractiveness of Finland and, consequently, the attractiveness of Finnish companies. Attracting labor from abroad can be challenging when the exit tax also applies to non-Finnish individuals. Internationally competitive employees have the choice to work in whichever country they want. They may not find settling in Finland for a longer period of time and thus subjecting themselves to the exit tax particularly attractive.
What consequences may the exit tax cause?
In the worst case, the exit tax may force entrepreneurs, even before starting a business, to decide whether it would be wiser to set up a business in a country with no exit tax if the aim of the business is international growth and a possible subsequent move from Finland. This may lead to Finnish startups being set up outside Finland and thus withering away the entire startup infrastructure.
The threat for entrepreneurs is that if the company was founded in Finland and the move abroad happens at a stage where the valuation of the company's ownership exceeds the set euro-denominated threshold, the entrepreneur must pay the exit tax, even though the company may not have generated any cash for the entrepreneur yet. As a result, the entrepreneur may have to liquidate his or her assets or find another way to organize his or her personal finances to be able to pay the exit tax.
The exit tax, if implemented, would constitute a significant change to Finnish taxation. However, it should be noted that its final content is not yet finalized and may be subject to changes after the hearing rounds.
In addition, when it comes to the exit tax, it is important to follow the upcoming Finnish parliamentary elections, which will be held in April 2023. The National Coalition (Fin. “Kansallinen Kokoomus”), currently leading in the polls, has announced that it does not accept the exit tax and will abolish it if it gets into government. Thus, even if implemented, the exit tax may be very short-lived or even not be enacted at all.
At Nordic Law, we assist our clients in a wide range of tax law issues, and we are happy to discuss future changes and their impact on your business planning. Do not hesitate to contact us.
Our Associate Trainee Mikael Huhtala took part in writing this article.