Finland – Proposed Reduction of Key Employee Withholding Tax Rate to 25 percent

WHY THIS MATTERS

The Reform Would Bring Competitive Advantage and Savings If Implemented

Lowering the key employee withholding tax rate to 25 percent would be a clear signal that Finland wants to compete in the international talent race. For employers, it would offer concrete benefits: cost savings, better recruitment potential, as well as the opportunity to use the tax benefit in existing employment arrangements.

KPMG in Finland is following the progress of the legislative proposal in Parliament.

KPMG INSIGHTS

Insights from KPMG in Finland:

Competition for Talent Intensifies – Finland Responds with Tax Incentives:

• As highlighted in public discussion, Finland needs special expertise in various sectors, especially in technology, energy, and research. As the population ages and the shortage of skilled professionals grows, attracting top international talent has become a strategic objective. Geopolitical tensions, climate conditions, and country image are typical recognized obstacles, but now the government aims to reverse the trend through tax incentives.
  
  
• Key employee taxation, i.e., the special law on the withholding tax for foreign specialists, has been in use in Finland since 1996. Originally, the law was temporary and the withholding tax rate for key employees was 35 percent. The law was extended until it was made permanent in 2020. At the same time, the withholding tax rate was reduced to 32 percent.
  
  
• Currently, the key employee withholding tax has been more favorable than progressive taxation mainly for foreign specialists earning around EUR 100,000 per year. The proposed 25 percent tax rate would make the tax status lighter than progressive taxation and thus preferable beginning at annual incomes of around EUR 70,000 - 80,000.

Cost Savings and Recruitment Advantage for Employers:

• For employers, the reform could mean significant savings, especially for employees working under net salary agreements or enjoying net benefits. If the tax rate decreases as proposed, the employer would not need to compensate for the higher tax burden, which could reduce overall costs or provide more flexibility when considering the scope of compensation elements offered—often a point of negotiation in international recruitment.
  
  
• In addition, the reform would also apply to key employees already working in Finland, which, depending on the compensation model, could immediately reduce employers’ current wage costs once the law comes into force.

A New Incentive for Finnish Returnees:

• Perhaps the most significant detail of the proposed legislative change is that the key employee withholding tax is proposed to be extended to cover Finnish citizens who have lived abroad and been treated as non-residents for Finnish tax purposes for at least five years and otherwise meet the criteria set for key employees. However, Finnish citizen could be eligible for the key employee taxation for up to 24 months.
  
  
  • The Government Bill has been recently reviewed by the Finnish Parliament’s Finance Committee. The Finance Committee is proposing that Finnish citizens qualified for the key employee taxation should be granted the key employee taxation for up to 60 months.
     
• For many Finns who have lived abroad for a long time, returning home is a major life change, just as moving to Finland is for foreign nationals. A financial incentive can be a decisive factor in the decision-making process—and for employers, it would open up the opportunity to recruit experienced professionals with international experience and networks.

Taxpayers with questions about how the above-noted measures may impact them and/or what steps they may need to take to be in compliance, should consult with their usual tax service provider or a member of the GMS tax team with KPMG in Finland (see the Contacts section).