Local and foreign businesses in Finland have a new reason to rejoice. A fresh tax law came into effect on January 01, 2021. It allows for additional tax relief to organizations. The new law is part of Finland’s aggressive strategy to build a stronger presence in the EU and globally. This new law is not an isolated incident. The bigger picture indicates that there are more reforms to come. Here is a look at what this is all about.
Supercharged Tax Deductions
Finnish President Sauli Niinistö signed off on the new law in December 2020. It gives an additional tax exemption to firms involved in research and development. The R&D activities must be in collaboration with research organizations or educational institutions. The law allows for an additional 50% tax deduction on R&D investment costs from 2021-2025.
The law also defines a lower limit for investment. Only firms with a minimum of EUR 10,000 in tax-deductible R&D costs during 1 fiscal year can enjoy the additional tax relief. The maximum tax-deductible R&D costs can be EUR 1 million in a year. So the minimum additional tax deduction is EUR 5,000 while the maximum is EUR 500,000. Moreover this 50% deduction is over and above the 100% deduction provisioned by the old law. This effectively brings the total deductions to 150%.
The R&D expenditure as a share of Finland’s GDP has been constantly declining for the past few years. Between 2009 and 2018 it decreased by 2.35% annually on average. According to Statistics Finland, the total appropriated research and development costs in 2019 amounted to EUR 1,991 million. The research expenditure formed merely 0.83% of the GDP (EUR 268 billion). The government’s 2019 agenda places a strong emphasis on increasing the share of research funding to 4% of GDP by 2030.
Prime Minister Sanna Marin declared her R&D goals days after coming to power in 2019. In April 2020 the Marin administration unveiled a ‘National Roadmap for Research, Development, and Innovation (RDI)’. Its objective is to improve the investment attractiveness of Finnish RDI globally. International organizations in Finland are equally eligible for the new tax deduction. The new law is designed to make Finland attractive for research.
Better Access to Funds
In the aftermath of the global financial crisis of 2008 the Finnish economy suffered many blows. Research funding declined and its share of GDP fell. Several Finnish economists refer to the 10 years after 2008 as ‘the lost decade’. Director General of Business Finland Pekka Soini remarked in 2019 how it was “…worrying that while public expenditure on R&D has declined, private sector investment in R&D also decreased by €1bn between 2008 and today.”
With the new law, Finnish companies pursuing research will have better access to government funds. A double tax benefit of this kind also provides a big incentive for international organizations to seriously consider pumping their research funds into Finland. Client Director at Finnish Tax Administration’s Corporate Taxation Unit Miika Wires believes that a wide range of businesses will benefit from the new law. He found it noteworthy that “the new super-deduction also makes it possible to carry forward and deduct the costs during the following 10 years in a loss-making situation.”
Finland already has the skilled manpower to innovate in niche technologies. Vast communities of expat professionals live and work in Finland. They send remittances to their families back home via the Ria Money Transfer App and similar channels. Finland also has a robust policy framework to support research. The country’s revamped, investor-friendly image has already started attracting international organizations. In a study titled ‘Finland as a Business Location Barometer 2020’, Business Finland found that 44% of foreign owned companies plan to hire more personnel in 2020 and 2021. The study also said that 30% of the companies intended to invest more in R&D. Every new job created in Finland in research will lead to at least 2 additional jobs. The report forecasts a tremendous labor shortage in Finland in the coming years. Notably there will be a rise in demand for healthcare and IT professionals.
This is an example of the far reaching and profound effects of a single regulation. With the new tax law Finland has stimulated research, FDI, and employment generation for years to come.
About the author:
Hemant G is a contributing writer at Sparkwebs LLC, a Digital and Content Marketing Agency. When he’s not writing, he loves to travel, scuba dive, and watch documentaries.