Finland has overhauled its tax framework for permanent establishments with three new laws that take effect on 1 January 2027. The reforms adopt the OECD's arm's length approach, requiring foreign operations to be taxed as independent entities and recognising internal transactions between branches and head offices for the first time.
Finland has enacted three major tax laws—323/2026, 324/2026, and 325/2026—published in the Official Gazette on 28 April 2026, fundamentally reforming how permanent establishments operating in the country are taxed. The reforms bring Finnish domestic tax law into alignment with the Authorised OECD Approach (AOA) as outlined in Article 7 of the 2010 OECD Model Tax Treaty.
Separate entity approach becomes standard
The core principle underlying these amendments is the “separate entity approach,” which requires permanent establishments to be treated as distinct and independent enterprises for tax purposes, even though they remain part of a larger corporate structure. This represents a significant shift in how Finland taxes cross-border business operations.
Under the amended Income Tax Act (1535/1992), foreign entities and non-residents operating permanent establishments in Finland will be taxed on all income attributed to their Finnish operations. The new Section 9b establishes detailed rules for calculating this taxable income using arm’s length principles—the same standards applied to transactions between unrelated parties.
The calculation considers the specific functions performed by the permanent establishment, the assets it employs, and the risks it assumes. This means a permanent establishment must be analysed as if it were making independent business decisions, determining what income it would reasonably generate based on its actual economic activities in Finland.
Treatment varies based on tax treaties
The legislation creates a tiered approach depending on whether Finland has concluded double taxation agreements with the relevant country. When an applicable income tax treaty includes provisions matching Article 7 of the 2010 OECD Model, those treaty provisions take precedence. The new domestic rules guide situations where treaties contain different provisions, as well as cases where no tax treaty exists at all.
Even in the absence of treaty provisions, permanent establishments will still be allowed to deduct management and administrative expenses incurred anywhere in the world, provided they relate to the Finnish operations.
Recognition of internal transactions
A major change comes through amendments to the Business Income Tax Act (360/1968), particularly in new provisions added to Sections 4 and 7. These changes formally recognise intra-company transactions in the calculation of taxable income.
Internal dealings between a permanent establishment in Finland and its head office or other foreign branches—such as internal services, royalties, and other charges—will now be treated as generating taxable income and deductible expenses, respectively. This allows for a more accurate reflection of the permanent establishment’s true economic contribution and eliminates previous ambiguities around internal dealings.
Coordinated framework for double taxation relief
The Act on the Elimination of International Double Taxation (1552/1995) has been revised to ensure that calculations properly account for the new permanent establishment attribution rules. This is particularly important when applying the credit method for eliminating double taxation on foreign-sourced income.
The amendments ensure that when Finnish tax authorities grant relief from double taxation, the calculations reflect the arm’s length income attributed to the permanent establishment under the new rules, creating consistency across the entire tax framework.
All three legislative amendments will take effect simultaneously on 1 January 2027 and will apply for the first time to tax assessments for the 2027 tax year.
