Last updated on 7 de April de 2023
Finland is one of the most prosperous countries in the European Union. It also enjoys a very high standard of living. We analyze the most important taxes in Finland.
- Taxes on Earned Income
- Capital Income Taxes
- Corporate Tax
- Real Estate Transfer Tax
- Finland Public Finances
Finland is one of the richest countries in Europe. According to the International Monetary Fund, Finnish GDP per capita is higher than that of countries such as Germany, Austria or Belgium.
At the same time, the unemployment rate in the Scandinavian country is extremely low and its standard of living high. All this makes Finland a very interesting destination for expats.
Another very important aspect to analyze a country is its taxation. In the next sections we will analyze the most important taxes in Finland.
Finland is in the Eurozone and therefore uses the euro as its currency. In fact, it is the only Scandinavian country within the monetary union.
When it comes to the cost of living, according to the comparison website WorldData.info, prices in Finland are about 8% higher than in the United States. Finland is one of the more expensive countries in the European Union.
Taxes on Earned Income
Labor income in Finland is subject to both social security contributions and income tax:
Both the employer and the employee have to make social security contributions. Most of this burden falls on the employer who is subject to the following payments relative to the employee’s gross salary:
- Pension system: 17.40% (without any limit, i.e. on the entire gross salary)
- Healthcare insurance: 1.34% (on the entire gross salary)
- Accidents insurance: 0.7% (on the entire gross salary)
- Common life insurance: 0.06% (on the entire gross salary)
- Unemployment insurance: 0.5% on the first €2,197,500, and 2.05% for the amount above that threshold. Unemployment insurance is not paid for workers aged 65 or above.
If we add all these percentages, we end up with employers paying the equivalent of 20% of the employee’s gross salary to the social security. If that salary exceeds €2,197,500, the percentage increases to 21.55%.
As for workers, they must make the following payments to the Finnish social security system:
- Pension system: 7.15% for workers aged between 17-52 and 63-67, or 8.65% for workers aged 53-62 years old (on the entire gross salary)
- Sick leave: 1.71% (on the entire gross salary for workers with salaries of €14,766 or more), or 0.53% (for those with salaries below €14,766)
- Unemployment insurance: 1.50% (on the entire gross salary for workers aged 17 and older)
Thus, the worker must pay between 9.18% and 10.36% of their salary in social security contributions.
If we combine the payments made by both employer and employee, social security contributions are the equivalent of between 29.18% and 31.91% of the employee’s gross salary.
Income taxes in Finland are broken down into three different categories: state taxes (paid nationwide), local taxes, and church taxes.
State taxes, set by the central government, are progressive. Therefore, the percentage increases the higher the income level. There are a total of 5 brackets:
- Less than €19,900: 0%
- From €19,900 to €29,700: 19%
- From €29,700 to €49,000: 30.25%
- From €49,000 to €85,800: 34%
- More than €85,800: 44%
When it comes to local taxes, which are set by the municipality in which we live, it is a flat tax rate applicable to the entire gross salary. The local tax rate is usually between 4.36-10.86%.
Finally, unless we proactively take action to not pay tax to the church, we will pay between 1-2.1% of our gross salary for this concept.
Nonetheless, it is important to mention that the amount we will have to pay in income taxes can be reduced if we take advantage of the available deductions. Some of these apply to everyone, while others are optional and depend on our individual circumstances. Deduction amounts are annual:
- General household expenses (repairs and improvements): €2,250
- Other general household expenses: €3,500
- Travel expenses: €8,400
- Other expenses directly associated with work: without limit in most circumstances. The limit for the costs of a second home near the place of employment is €450 per month.
All these deductions mean that the final tax bill will be lower than the amount that would result from applying the applicable tax rates.
However, because the three types of income taxes are calculated on our gross income, if we combine our final tax bill with social security contributions, we can end up with an effective level of taxation higher than 50%.
Total Tax Burden on Earned Income
We will now compare the employer’s total cost in Finland, which include social security contributions, with the employee’s net salary. This will allow us to see the total tax burden on labor income.
The table below summarizes, for employees with different salary levels, the total cost of employment to the company and the corresponding net salary. We can then derive the total level of taxation for labor income.
For these calculations we will assume a worker who is unmarried, has no children, is 40 years old, and does not use any of the optional deductions:
As we can see, the tax burden on labor income in Finland is extremely high. In fact, it is very similar to what can be found in France.
Low-income people effectively pay almost half of their income to the tax authorities. The middle classes face a tax burden around55-60%. And the highest incomes must contribute almost 70% to the state in the form of taxes and social security payments.
Capital Income Taxes
Let us now analyze how income from savings and investments is taxed:
Interest from bank deposits or fixed income investments is taxed at 30% for the first €30,000 in capital income. Any amount exceeding that threshold will be taxed at 34%.
The dividends we receive from our equity investments receive a slightly more favorable tax treatment. 15% of the dividends received will be fully tax-exempt. The remaining 85% will be taxed. This will be done at a rate of 30% for amounts of up to €30,000 per year in capital income, and 34% for amounts above that figure.
We will have to pay tax on our net rental income. This means all costs associated with the ownership and upkeep of our properties are tax deductible.
Net rental income will be subject to the same tax rates as interest income: 30% for the first €30,000 in capital income, and 34% above that.
Realized Capital Gains
Finally, realized capital gains from our financial or real estate investments will also be taxed at the same rates of 30% and 34%. The exception is if we sell our main residence after having lived there for a minimum of 2 years. In that case, capital gains would be exempt from taxation.
While tax rates for workers and investors are high in Finland, corporations receive a much more favorable treatment.
The general corporate tax rate in Finland is 20%. This percentage applies to corporate profits regardless of the size of the company or its sector.
That makes Finland one of the more attractive countries in the European Union when it comes to corporate taxes.
Value Added Tax (VAT) taxes the consumption of goods and services in the country. Finland has 4 different VAT rates:
The general VAT rate in Finland is 24% and applies to all goods and services that are not explicitly subject to one of the reduced rates. This rate has been in place since 2013, when it was increased from the previous 23%.
The first reduced rate is 14% and used for most food products, beverages, as well as restaurants and bars.
The second reduced rate of 10% applies to a wide range of goods and services. Some of these are hotels, newspapers, books, e-books, pharmaceutical products, transportation within the country, entertainment, and cultural and sporting events.
Finally, certain things are exempt from VAT, such as international transport services, art and gold investment products.
Real Estate Transfer Tax
The purchase of a property in Finland, regardless of whether it is an apartment, a house, or a commercial dwelling, is subject to a flat tax rate of 4% of the value of the transaction.
It is worth mentioning in this section that Finland does not have a wealth tax.
Finland Public Finances
Before we conclude our analysis of taxes in Finland, it is interesting to take a look at the state of its public finances. This will indicate whether the current tax policy is on a sustainable path.
The following graph shows Finland’s public debt as a percentage of the country’s GDP since 1995:
As we can see, Finland’s public debt is moderate and under control. In fact, it has remained fairly stable for almost three decades.
Finland is usually one of the sovereigns considered safest in the Eurozone. Therefore, it is able to borrow money at lower rates than other countries. Its government is also one of the most vocals when it comes to urging Southern European countries to implement budgetary reforms.
While Finland might be an interesting country due to its high standard of living, we need to consider its onerous tax rates if we are considering moving there.
The most likely scenario is that we will end up paying between half and two thirds of our income to the tax authorities. We will probably be able to benefit from its generous welfare state. It is a matter of pondering pros and cons.
Interestingly, Finland becomes a more tax-friendly country if we are looking for a place to establish our business.
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And if you want to read about taxes in another Scandinavian country, check out this link:
Taxes in Sweden – A Complete Guide
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