Foreign companies should note that there is a 9-month rule for VAT fixed establishment in Finland for construction and installation activities. If the 9-month threshold is exceeded, the fixed establishment is considered to be formed from the beginning of the project. Therefore, the possibility of a fixed establishment should be analysed and considered before construction and installation activities in Finland begin. Misidentifying a fixed establishment can lead to penalties and unexpected VAT liabilities in Finland.
Definition of a fixed establishment
A fixed establishment is currently defined in Article 11 of the Council of the European Union Implementing Regulation No 282/2011, whereas it was previously outlined separately in the Finnish VAT Act. According to Article 11 of the Regulation, a fixed establishment is any establishment, other than the main place of business, that has a sufficient degree of permanence and an appropriate structure in terms of human and technical resources to enable it to receive and use services or to perform the services it offers.
In Finland, the government proposal for amending the Finnish VAT Act 30.12.1993/1501 (HE 56/2014 vp) removed the specific rule on fixed establishment, which previously included the definition of fixed establishment for construction and installation activities. However, according to the government proposal, if a construction or installation project – or a series of successive projects – lasts longer than nine months, it constitutes a fixed establishment. Based on Finnish tax practice, a fixed establishment based on the 9-month rule can be formed solely based on the 9-month threshold so that the other requirements for a fixed establishment – such as sufficient degree of human and technical resources – do not have to be fulfilled.
What changes due to a fixed establishment
If a company is deemed to have a fixed establishment in Finland and it is engaged in construction or installation activities, it is likely that the company would be liable to register for VAT in Finland. It is also likely that the company would be liable to declare Finnish VAT either for its supplies or purchases.
Recommendations
It is recommended for companies to carefully analyse their VAT status and VAT treatment of their supplies and purchases in Finland if they operate in the construction or installation sector.
In addition, Finland applies a specific reverse charge VAT for the construction sector. It is also important to analyse the applicability of the reverse charge for the construction sector as it affects the party liable for VAT, and thus can also affect the party liable to VAT register in Finland.
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