In principle the guidance is written for foreign employers who have posted employees to Finland and have agreed on net salary. However, basically the same principles also apply in case of a domestic employer, but the domestic employers will need to gross up the salary already at payroll stage. This is because a Finnish employer is required to withhold payroll tax at the time of salary payment. Permanent establishments of foreign companies are regarded as Finnish employers and those are subject to all Finnish regulations regarding registrations, withholding, monthly and annual reporting etc.
Foreign employers with no permanent establishment in Finland are not required to withhold payroll tax in Finland, but are subject to certain reporting obligations, where the new guidance on net salary should be taken into account.
Foreign companies enter into various types of employment contracts with employees posted in Finland. The guidance sets principles on how the net salary should be grossed up for Finnish tax purposes. The guidance should be applied at least in following situations:
- When salaries are defined in terms of net salary (certain net granted).
- When the employer has a tax equalization policy in place. If the employee is responsible for any hypothetical tax and the actual Finnish tax will be paid by the employer, the salary will need to be grossed up for Finnish tax purposes in order to determine the actual taxable gross salary and Finnish tax due.
- When the employer has other tax policy, e.g. tax protection clause or similar and in fact the employer covers at least part of the actual Finnish taxes.
The revisions in the new guidance change the procedure in certain circumstances compared to previous guidance:
- Prepayments or supplementary tax payments that exceed the amount of calculated residual tax and are paid by the employer are not considered a part of employee´s net salary as long the employee has to return the excess amount of prepayment made back to the employer.
- Interest on residual tax paid by the employer is not considered as part of employee´s net salary.
Neither is interest on refunds that the employee pays to the employer, deducted from his net salary. Please note that as the guidance has several detailed instructions, it would be recommendable to use assistance when calculating the gross income for Finnish tax purposes. Please also note that nowadays also foreign employers with no permanent establishment in Finland are required to file employer’s annual notification in case there are employees who have worked in Finland for more than six months. The net salary will need to be grossed up for employer’s annual notification. For salaries paid in 2012 the annual notification needs to be filed by 31 January 2013.