When expanding into the Finnish market, foreign companies have two alternative structures to consider: a Finnish subsidiary or a Finnish branch. Both allow the conduct of business in Finland and are relatively straightforward to establish and manage. While the legal structure differs, the taxation and administrative requirements are largely similar, with the most relevant differences relating to liability and governance obligations. Every business case is unique, and choosing the right structure can have long-term implications. We are happy to help with ensure the best fit for your company’s goals in Finland.
Finnish Subsidiary
A Finnish subsidiary is a separate legal entity, established as a limited liability company (osakeyhtiö). It is registered with the Finnish Trade Register and governed by Finnish law.
Key Features of Finnish Subsidiary
- Legal Independence: The subsidiary operates independently from the parent company and is liable for its own obligations. It enters into contracts and assumes liabilities in its own name.
- Taxation: The subsidiary is subject to Finnish corporate income tax on its global income. The subsidiary must file annual corporate income tax returns. As subsidiary is an independent legal unit, it will file tax return according to Finnish tax laws. Possibly occurring losses are confirmed in subsidiary’s taxation. Subsidiary’s confirmed losses are available to be decreased from taxable profits during the following 10 years.
- Value Added Tax: As a separate legal entity, the subsidiary is treated as an independent taxable person for VAT purposes. Supplies of goods and services between the subsidiary and the parent company are generally subject to VAT, unless a specific exemption applies.
- Employer obligations: If subsidiary has employees in Finland, subsidiary is treated as a Finnish employer and has full employer obligations.
- Governance: The subsidiary is subject to Finnish corporate governance rules, which include appointing a board and certain cases an auditor, holding an annual general meeting and preparing and annual financial statements.
Advantages of Finnish Subsidiary
- Limited liability protects the parent company from legal or financial exposure.
- Typically viewed as more established and independent in the local market.
- The company is entirely governed by Finnish laws, which makes the governance more straight forward compared to a branch.
Finnish Branch
A Finnish branch (sivuliike) is an extension of a foreign parent company, not a separate legal entity. It is also registered with the Finnish Trade Register and can carry out commercial activities in Finland. A branch is governed by both Finnish law and the local laws of the foreign parent company.
Key Features of Finnish Branch
- Not Legally Independent: The parent company bears full liability for the branch’s operations.
- Taxation: The branch is taxed in Finland on income derived from its Finnish activities. The branch must file annual corporate income tax returns. As a branch is not an independent entity, the taxable income must follow the arm’s length principle. Thus, the result if a branch should always be profitable, and losses are usually not confirmed in the tax assessment of the branch. This applies even in the case where the head office is also making a loss.
- Value Added Tax: The branch office is not a separate legal entity from its head office. Therefore, supplies of services between the head office and the branch are not regarded as taxable transactions for VAT purposes. However, the transfer of goods between a head office and a branch located in different EU member states may give rise to VAT obligations, as such transfers can be treated as deemed supplies under EU VAT rules.
- Employer obligations: In certain situations, a branch’s employer obligations regarding salary reporting and tax withholding may be limited compared to a subsidiary.
- Governance: A branch must have a local representative if the parent company is outside the EEA. If the parent’s financial statements are prepared according to EU rules, the branch does not need to draw up its own financial statements, but the financial statements of the parent must be registered with the Trade Register.
Advantages of Finnish Branch
- May offer a leaner administrative and compliance burden, especially for smaller-scale operations.
- No separate financial reporting required if the parent’s reports are compliant with EU standards.
- Simple to close comparable to a subsidiary in this respect.
How to choose between subsidiary and branch?
The choice between a subsidiary and a branch should be based on the nature of the planned business activities, risk management, and long-term strategic goals.
If your company seeks a long-term, independent presence in Finland with full local credibility and limited liability, a subsidiary is typically the preferred route. If the goal is to test the market or maintain a lighter footprint with simpler compliance, a branch may be more suitable. Each case is unique, and we are happy to help assess the best structure for your business goals in Finland.
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