Relocation Services Taxation
Question: Our company is recruiting an employee from abroad to work in Finland. We want to support the employee by offering relocation services to help the employee settle into a new country and to facilitate the practical matters. From tax perspective, what should we take into account while offering relocation services to the employee and are relocation services considered a taxable benefit for the employee in Finland?
There are a lot of official and practical matters that need to be considered when settling into a new country and employees generally need support to be able to address all of these matters in the host country. It is commonplace for the employer to support the employee in this respect through direct cost reimbursements or by engaging e.g. with a service provider that will guide the employee throughout the relocation process.
The Reimbursed Costs and Relocation Services May Include Different Types of Support
The costs paid by the employer may include, for example, travel expenses for the employee, removal costs and the cost of obtaining a work or residence permit. In addition, the employer may provide services to the employee to settle into a new country and helping to facilitate the practical matters. These can be, for example, handling tax-related matters, opening a bank account, handling the necessary registrations or house hunting.
The Tax Treatment of the Reimbursed Costs or the Relocation Services Paid by the Employer
The tax treatment of the cost reimbursements and relocation services has been partly subject to interpretation. Some of the costs paid by the employer are exempt from tax directly under the Income Tax Act, but there is no legislation that is directly applicable to the majority of the relocation services and thus the taxation of the services is based on the general provisions of the Income Tax Act and legal and tax praxis. The Finnish Tax Administration’s statement published in August 2021 brought more clarity to the tax treatment of relocation services.
Below you can find a list of the typical services and their tax treatment in the case of an employee and the employee’s family moving to Finland:
- Travel expenses
- Employee: Generally treated as taxable income but 50% of the employee’s costs can be treated tax free as the relocation takes place due to a change of location of the place of employment. In the case where a foreign employer temporarily assigns (i.e. less than three years) the employee to Finland, can be treated tax free
- Family: Same as employee, but the exemption during assignment does not apply to costs of family members, the 50% exemption would still be applicable to the costs attributable to the family members.
- Moving expenses
- Employee: Generally treated as taxable income but 50% of the employee’s costs can be treated tax free as the relocation takes place due to a change of location of the place of employment. In case the move has taken place due to the employer’s benefit and initiative can be treated fully tax free
- Family: Same as employee
- Support with employee’s personal authority obligations (e.g. registrations, tax return preparation, tax card application, obtaining passport etc.)
- Employee: Taxable income for the employee
- Family: Same as employee
- Support with the employee’s personal practical matters (e.g. opening a bank account, rental agreement, house hunting etc.)
- Employee: Taxable income for the employee with the exception of house hunting in case the apartment is leased directly by the employer
- Family: Same as employee
- The costs of obtaining visas and work and residence permits
- Employee: Not taxable
- Family: Taxable income for the employee
Furthermore, it should be noted that as per the statement the taxable value of the above mentioned services is generally considered to be the market value of the service, i.e. the amount paid to the service provider including VAT. The taxable event takes place when the employer makes a payment to the service provider with respect to the services provided.
It is Important to Identify the Different Situations and Review Internal Processes
Considering the recently published statement by The Finnish Tax Administration, it is recommended to review internal processes regarding the costs and relocation services paid on behalf of the employee. It is important to recognize the situations when providing the services or reimbursing the costs to the employee can create a tax obligation for the employee. Likewise, it would be beneficial for the employer to proactively decide whether the employee or the employer would bear the taxes payable for these services. In addition it should be noted that any taxable benefits should be processed through the payroll as the employee’s taxable income.
Evaluating the tax treatment well in advance enables for the employee a smooth settling into the new country. If the company has brought the internal processes up to date, the international recruiting will be even more streamlined.
Manager
Tax & Legal, People Services
KPMG Finland
This article was commissioned by Talent Turku as part of the national Talent Boost programme. You can find more information about Talent Turku by clicking here.