The current agreement between Australia and Finland for the avoidance of double taxation with respect to taxes on income and the prevention of fiscal evasion (the 2006 Finnish Agreement) was signed in Melbourne on 20 November 2006. This agreement replaced the previous agreement between Australia and Finland and its associated protocol, that were both signed in 1984, and the amending protocol which was signed in 1997.
Date of effect
The 2006 Finnish Agreement entered into force on 10 November 2007.
For Australian withholding tax on income derived by a non-resident, the 2006 Finnish Agreement has effect in relation to income derived on or after 1 January 2008. For other Australian taxes covered by the 2006 Finnish Agreement, the convention has effect in respect of income, profits or gains of years of income beginning on or after 1 July 2008.
For Finnish taxes covered by the 2006 Finnish Agreement, the agreement has effect in respect of income relating to the 2008 calendar year (including accounting periods beginning in any such year) and subsequent years.
The exchange of information article (Article 25) has effect from 10 November 2007.
The mutual assistance in collection article (Article 26) will have effect from a date to be agreed in an exchange of notes through the diplomatic channel.
Main features of the new agreement
Income from real property may be taxed in full by the country in which the property is situated. Income from real property for these purposes includes rights to explore and mine natural resources (Article 6).
Business profits (including income derived from professional services or other non-employment activities) are taxable only in the country of residence of the recipient, unless they are derived by a resident of one country through a permanent establishment in the other country. In that instance, that other country may tax the profits attributable to the permanent establishment. These rules also apply to business trusts (Article 7).
Profits derived from the operation of ships and aircraft in international traffic are generally to be taxed only in the country of residence of the operator. However, profits of an enterprise derived from the operation of ships or aircraft may be taxed in the country where the ship or aircraft is operated, to the extent that those profits are derived directly or indirectly from ship or aircraft operations confined solely to places in that country (Article 8).
The associated enterprises article authorises the reallocation of profits between related enterprises in Australia and Finland, on an arm's-length basis, where the commercial or financial arrangements between the enterprises differ from those that might be expected to operate between unrelated enterprises dealing wholly independently with one another. Where a reallocation of profits is made to adjust upwards the profits of an enterprise of one country, the other country may also make correlative adjustments (Article 9).
Dividends, interest and royalties may generally be taxed in the country in which the beneficial owners of such income are residents and may also be subject to tax in the country from which such income is paid, up to certain limits (Articles 10 to 12).
Source country tax on dividends is limited to 15% [Article 10, subparagraph 2(b)], except as follows:
- No source country tax is payable on dividends where the beneficial owner of the dividends is a company that is a resident of the other country and has owned shares representing at least 80% of the voting power of the company paying the dividend for the preceding 12 months (subject to certain additional conditions) [Article 10, paragraph 3].
- A 5% rate limit applies to dividends where the beneficial owner of the dividends is a company that holds directly at least 10% of the voting power of the company paying the dividend [Article 10, subparagraph 2(a)].
The dividend rate limits apply to the gross amount of the dividend and to both franked and unfranked dividends.
Source country tax on interest is limited to 10% (Article 11, paragraph 2). However, no tax will be chargeable in the source country on interest derived and beneficially owned by:
- a country or a political or administrative sub-division or a local authority thereof, or any other body exercising governmental functions in that country, or a bank performing central banking functions in that country [Article 11 subparagraph 3(a)], or
- a financial institution that is unrelated to, and dealing wholly independently with, the payer [Article 11 subparagraph 3(b)].
Source country tax of royalties is limited to 5% (Article 12, paragraph 2).
The definition of 'royalty' now includes payments or credits in respect of the use of, or right to use, some or all of the radiofrequency spectrum specified in a spectrum licence, but not payments or credits in respect of the use of, or right to use, industrial, commercial or scientific equipment (Article 12, paragraph 3).
Income, profits or gains from the alienation of real property and from the alienation of shares or other interests in land rich entities, business assets of permanent establishments or those otherwise attributable to a permanent establishment may generally be taxed by the country in which the property or permanent establishment is situated. Gains of a capital nature arising from the alienation of other property will generally be taxable only in the country of residence (Article 13).
Income from employment (other than directors' fees, pensions and annuities, remuneration for government service and entertainers and sports persons) are taxed in the country of residence of the employee, unless the employment is exercised in the other country. In such a case, the income generally may be taxed in the country where the services are performed. However, where the services are performed during short visits to one country by a resident of the other country (who is employed by a resident of that other country) the income will generally be exempt in the country visited (Article 14).
Directors' fees and other similar payments derived by a person in his or her capacity as a member of a board of directors (or similar body) of a company may be taxed in the country in which the company is a resident (Article 15).
Income derived by entertainers and sportspersons from their entertainment and sports activities may be taxed by the country in which the activities are performed (Article 16).
Pensions and annuities will generally be taxed only in the country of residence of the recipient, other than government service or social security pensions paid to an individual who is a citizen or national of the paying country (Article 17). Salaries and wages (but not pensions or annuities) from government service will generally be taxed only in the country that pays the remuneration. However, the remuneration shall be taxed only in the other country if the services are rendered in that other country by a resident of that other country and that person is either a national of that other country, or did not become a resident of that other country solely for the purpose of rendering the services.
Payments made from abroad to visiting students or business apprentices for the purposes of their maintenance, education or training will be exempt from tax in the country visited, provided that the student is (or was immediately before visiting) a resident of the other country and is visiting solely for the purpose of their education or training (Article 19).
Other income (that is, income not dealt with by other articles, including income from countries other than Australia and Finland) derived by a resident of one country is taxed only in the country of residence, unless it is derived from sources in the other country. Where other income is derived from sources in the other country, it may also be taxed in that country (Article 20).
Source rules effectively deem income, profits or gains derived by a resident of a country which may be taxed in the other country under the 2006 Finnish Agreement to have a source in that other country (Article 21).
Double taxation relief for income that may be taxed by both countries is required to be provided by the country of which the taxpayer is a resident under the terms of the 2006 Finnish Agreement as follows:
- in Australia, by allowing a credit against Australian tax payable for the Finnish tax on income derived by a resident of Australia from sources in Finland (Article 22, paragraph 1), and
- in Finland, by allowing a deduction against Finnish tax for the Australian tax paid on income derived by a resident of Finland from sources in Australia [Article 22, subparagraph 2(a)].
However, dividends paid by a company that is an Australian resident to a company that is a Finnish resident and which controls at least 10 per cent of the voting power in the paying company will be exempt from Finnish tax [Article 22, subparagraph 2(b)].
In the case of Australia, effect will be given to the double tax relief obligations arising under the 2006 Finnish Agreement by application of the general foreign tax credit (or foreign income tax offset) provisions of Australia's domestic law, or the relevant exemption provisions of that law where applicable.
Rules in the 2006 Finnish Agreement will protect nationals and businesses from tax discrimination in the other country and will give them private rights of appeal. However, the article does not apply to anti-avoidance rules (including thin capitalisation, dividend stripping, transfer pricing and controlled foreign companies measures), rebates or credits for dividends paid by resident companies, research and development concessions, consolidation rules or capital gains deferral rules (Article 23).
Consultation and exchange of information between the two tax authorities is authorised by the 2006 Finnish Agreement. The agreement authorises and requires Australia to exchange information where the information relates to taxes administered by the Commissioner of Taxation (Articles 24 and 25).
The 2006 Finnish Agreement provides for mutual assistance in the collection of tax debts. This will allow the Australian Taxation Office, in certain circumstances, to seek assistance from the Finnish tax authorities to collect Australian tax debts (Article 26).
What to read/do next
More information relating to this and other Australian tax treaties can be found on the Treasury website
Visit the International tax agreements homepage.