This publication goes through the construction project obligations that apply to non-Finnish subcontractors participating in the Finnish construction and industrial projects as well as shows some of the pitfalls where foreign companies may stumble when working in Finland.
A) Key compliance requirements
B) Typical causes for problems
A) Key compliance requirements
International subcontracting projects suffer sometime from significant shortcomings in handling of compliance requirements and clear violations to what is stated in the law due to deliberate breaches of the regulations in order to avoid taxes and circumvent local employment conditions or just due to the failure to understand the complexity of the regulatory landscape in the construction field.
This section lists the main official requirements to be fulfilled by the non-Finnish companies that subcontract or work as a subcontractor in the Finnish construction and industrial sector.
1. The Act on Contractor’s Obligations and Liability
This Act obliges enterprises that subcontract work or use temporary staffing services to obtain information such as register status, tax payments and insurances from the counterparty to ensure the regulations and requirements are fulfilled in the interest of equal competition between enterprises and observance of the terms of employment. The complete list of requirements can be seen under the link in the end of this article. The Act is applied when the duration of the work by temporary agency workers exceeds 10 days, or the value of the subcontract agreement exceeds 9,000 euros, excluding VAT. Any company acting as contractor in a contractual chain is required to obtain the information.
2. The Posted Worker Act
The Posted Worker Act lays down the provisions on the minimum terms of employment of posted workers and concerns all employees being posted to Finland by non-Finnish employers. The Finnish Posted Workers Act requires foreign employers which post their employees to Finland to select a representative in Finland when the employees are posted for over 14 days and the employer does not have a business location in Finland. The local representative maintains the company and employee information regarding the project in Finland and shall be authorized to act for the company posting the worker in a court of law and to receive on behalf of this company documents issued by the authorities. The party for which the work is performed must ensure that the company posting the worker selects the representative.
In addition, the Posted worker act requires a non-Finnish company to follow the same terms as the Finnish companies and therefore, to comply with the following legislation in so far as they are more favorable to the worker than the legal provisions of the employee’s home country/existing contract.
Working Hours Act: The Working Hours Act applies to posted workers with regard to compensation and higher rates of pay on the grounds of working hours including overtime as well as work and rest periods and the compliance with working hours accounting.
Annual Holidays Act: The Annual Holidays Act applies to posted workers as far as the specification of annual holidays, annual holiday pay, holiday compensation and annual holiday accounting are concerned.
Employment Contracts Act: The Employment Contracts Act lays down the provisions concerning generally applicable collective agreements, family leaves, employee housing as well as occupational safety of posted workers.
It should be stressed that the remuneration determined on the basis of the generally binding collective agreement referred to in this Act is considered the minimum wage of posted workers.
Occupational Safety and Health Act: According to the Occupational Safety and Health Act, each person working on a shared construction site must be registered in the register of Tax Numbers, and wear an identification card with their photograph and individual Tax Number.
A foreign worker arriving in Finland for the first time gets a Tax Number from a tax office.
In addition, the Posted Worker Act requires all employers also to comply with the Equality Act, the Occupational Health Care Act, and the Young Workers’ Act.
3. Aliens Act
In accordance with the Aliens Act, the posted workers coming from EU/EEA countries do not need a residence permit for an employed person in order to work in Finland, but they have been resident in Finland over 3 months, their right to reside must be registered with the local police.
4. Social security and insurances for the posted employee
Social security for the posted employee is usually determined by the regulations applicable in the employee’s home country. The employee must have a posted worker’s A1 certificate as evidence of being covered by the social security insurance of the posting country. If there is no certificate, the Finnish social security legislation shall be applied to the worker and the employer needs to take out pension insurance, accident insurance, unemployment insurance and group life insurance for the employee with a Finnish insurance company, and pay a premium which amounts to about 20% of wages.
Although there is no need to take out an accident insurance in Finland when the posted worker has a valid A1 certificate, it is recommendable for foreign subcontractors or employers hiring temporary agency workers to take out a personal accident insurance for each posted employee to complement the posted employees’ social security from their home countries.
5. Contractor’s liability to register
The registration obligation of a foreign company depend on for how long it is coming to Finland, the type of assets present in Finland and whether the company is likely to form a permanent establishment, among other things. If the operation in Finland only amounts to the handling of a one-off assignment, the company may ask for a tax-at-source card instead of being entered in the registers. If a foreign company is planning to stay longer in Finland, works on multiple sites and for several clients, it is necessary to be registered at least in the Prepayment Register.
Other possible and usual registrations include VAT registration and the registration as an employer that might be necessary especially when the company operates longer in Finland or subcontracts work to other companies.
6. Information reporting requirements
Companies need to comply with requirements to report how they operate in Finland and there are a number of possible notifications that might come in question during their Finnish operations.
Among them are periodic notifications and tax returns that are required when the company has been entered in the earlier mentioned employer or VAT registers.
If a permanent establishment in Finland is formed, the company will be required to handle accounting locally and submit annual tax returns.
When working on a shared construction site, the employers operating on the site are required to submit the data on their employees to the project supervisor.
In case the company subcontracts work to other companies or uses leased employees, it is required to notify the Tax Administration about the contract details for the contracts that exceed 15,000 euros excluding VAT.
7. Taxation, employees
When the employee stays less than six months (max. 183 days) in Finland during a period defined by the tax treaty (usually 12 successive months or a calendar year), the employee will normally only have to pay the appropriate taxes in the home country.
When the employee stays over six months, he/she will become liable to income taxes. The taxes will be calculated retroactively according to the progressive taxation scale and therefore it is important to visit the tax office right in the beginning to receive a tax card.
However, if a foreign employee is employed by a Finnish company or a foreign company with a permanent establishment, the income will be taxed from the beginning normally at the rate of 35% for the first six months and progressively thereafter. The same applies to certain situations where a foreign employee will be leased to Finland.
8. Taxation, companies
A company becomes tax liable for its Finnish income once a permanent establishment is created. In tax treaties a permanent establishment is often defined as a building site or construction or installation project where activities are carried out longer than 6 or 12 months. In addition, a business branch or office or a person in Finland with authority to conclude or sign contracts on behalf of the company, may constitute a permanent establishment. Once a permanent establishment comes into effect, the company must pay income tax as an estimated prepayment amount that equals the corporate tax rate of 20% and file a tax return to report the revenues, expenses, assets and liabilities of the PE on a yearly basis. Other obligations include the withholding and payment of non-wage labor costs, employee insurances and arranging accounting of the PE locally in Finland.
When a company has several independent projects in Finland, they should be considered separately as far as the project duration is concerned and should not be summed together.
B) Typical causes for problems
The construction sector presents unique challenges due to changing project situations and supplier chains as well as its complex set of accounting rules, tax regulations and other obligations that a foreign company must consider when starting a project in Finland. The following sections cover some of the situations that foreign companies operating in Finland might come across.
1. Unexpected Permanent Establishment
Unexpected permanent establishments create particular compliance difficulties as they require the company to retroactively comply with a number of requirements including income tax liability, registration, withholding, social security contribution in connection with a permanent establishment, the employer payroll report and employers’ periodic tax return.
The Tax Treaty defines the time period that the company may work on one project before a permanent establishment will be formed under this condition. Several projects carried out on the same construction site may be considered to be one project and if they can be considered to link to one another, all projects are counted in as the duration of the project is evaluated.
If a project lasts longer than expected initially and the time period exceeds the time limit that constitutes a permanent establishment, the permanent establishment is considered to be created retroactively. The time limit might also be exceeded if a company leaves the country but returns later on in the same building site to work on same or another project.
According to the Tax Treaty, a person in Finland with authority to conclude or sign contracts on behalf of the company may also constitute a permanent establishment, which might be an issue if the owner or a director of a foreign company participates in the project in Finland.
The only way to guarantee that a permanent establishment will not be formed in a specific situation, is to apply a preliminary ruling from the Tax Administration.
2. Monitoring prepayment taxes and insurance premiums
It is important that the prepayment tax payments and the employee insurance premiums are closely monitored especially if the project does not progress constantly or as anticipated. When sales invoices are not regular or planned in advance, project income fluctuates and there are significant changes in resource or workforce requirements, it might be necessary to negotiate and adjust prepayment tax payments and employee insurance premium accordingly.
3. Project duration exceeds 9 months
The foreign company has to register to the VAT register, if it pursues building or installation activities in Finland, either individual project or several successive ones that last over 9 months. Regardless whether it is known in the beginning or later on that the project will last over 9 months, the company is VAT liable from the beginning of the project. VAT liability requires the company to submit regular tax returns to the tax administration that should be done retroactively once the time limit of 9 months is exceeded unless carried out from the beginning.
4. New obligations through the usage of temporary staffing services
A company is obliged to submit information of a foreign leasing company and file reports about contracts and employees, when using leased employees. This information should be given as soon as the first leased employee starts working.
In addition, the service recipient must be registered in the VAT register and report the VAT regularly in respect of its construction-related purchases through periodic tax returns. More information about the taxation of leased employees can be found under the link in the end of this article.
5. New obligations through subcontracting
A company is also obliged to file reports about contracts when subcontracting work to other companies in the amount exceeding 15,000 euros excluding VAT. Non-compliance with reporting requirements may lead to significant sanctions from the tax authorities.
6. Temporary tax-exempt use of a vehicle in Finland
Some foreign companies bring vehicles temporarily to Finland that are registered in some other country than Finland and which are to be used for example for employee transport between their accommodation and the construction site. The vehicles can normally be used after a declaration of use has been confirmed by Customs, but not for longer than seven months and this time limit cannot be extended. If the time limit expires, the vehicle shall either be exported, moved to a free zone or other place decided by the authorities, or otherwise, tax should be paid for the vehicle. Non-compliance with the provisions may lead to imposing increased taxes or other consequences.
7. Employee details not in order
A foreign employer should make sure to keep the details of employees participating in the project in order and inform both their client and local representative about changes.
Problems could arise if the employee details are not matching when the construction site, foreign contractor or client is being audited by the local authorities. In addition, the employee that has left the country unnoticed could be considered tax liable later on if it appears that his stay in Finland exceeds the time limit of 183 days.
In case an employer or their representative intentionally or through negligence violates the provisions of the Posted Workers Act, which requires keeping the employee information in order, they shall be fined for the violation of the Posted Workers Act.
8. Purchasing services from private persons or freelancers
A foreign company may use service providers such as interpreters that practice their profession only in a secondary capacity without being a registered company. When foreign companies purchase services from an individual taxpayer that this type of service provider is, their role may change to the role of an employer and they will be obliged to submit an annual notification to the Tax Administration with summaries of paid wages, compensation and other remuneration to the employees. The Tax Administration uses this information in the taxation of individual taxpayers.
9. Non-compliance with the regulations
In case a company intentionally or through negligence violates the provisions of local regulations such as the minimum wage or notification duty, or practice tax evasion, they may be obliged to pay increased taxes or fined up to 65,000 euros depending on the applicable Act and the degree and impact of a violation.
10. Failure to terminate your registration after the project
Unless a company is planning to continue their operations in Finland, they should terminate their registration status in Finland. In addition, they may still be required to submit a tax declaration or other declaration to clarify the nature and scope of their past operation and the reason why they should be removed from the registers. If this is not done properly, a permanent establishment may be formed, which could create obligations and tax liabilities that were discussed earlier.
If you have any questions, you may contact the writer, Mikko Hirvilammi (MBA Finance): mikko.hirvilammi (at) promolior.com, tel: +358(0)44 2398224.
Links
The Act on Contractor’s Obligations and Liability (See the section 5 for the complete list of documentation requirements)
The Posted Worker Act
The Taxation of Leased Employees in the Finnish Construction Projects
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