EC Asks Finland To Amend Tax Rules For Resident Taxpayers With Overseas Income

by Ulrika Lomas, for LawAndTax-News.com, Brussels

19 July 2005

The European Commission announced on Friday that it has sent Finland a formal request to amend its legislation, under which personal deductions to resident individuals are limited to a pro-rata share of their global income derived from Finnish sources.

The Commission explained that it considers that not allowing full personal deductions is contrary to EC Treaty rules, notably those on the free movement of persons, as interpreted by the European Court of Justice in the "de Groot" case.

Under some of the tax treaties that Finland has concluded with other Member States (or EEA countries) foreign source income of a Finnish resident individual may be exempt from tax in Finland, although the foreign source income would be included for tax calculation purposes so that progressively higher rates would, if appropriate, apply to the Finnish source income.

In such situations, as a result of the application of the Finnish national tax provisions contained in Section 6 of the Act on the Elimination of International Double Taxation, resident individuals are granted only limited, pro-rata, personal deductions. The Commission considers, on the basis of an analogous case decided by the European Court of Justice (Case- C-385/00 "de Groot"), that the unavailability of full personal deductions can dissuade Finnish residents from pursuing occupational activities, as migrant workers, in the other Member States and EEA countries.

The Commission therefore has taken the view that by not granting full personal deductions to resident individuals with foreign source income which under the relevant tax treaty is exempt with progression in Finland, the Finnish tax law provision contravenes the free movement of workers and self-employed persons guaranteed by Articles 39 and 43 of the EC Treaty and the corresponding provisions of the EEA Agreement.

The request is in the form of a ‘reasoned opinion’ under Article 226 of the EC Treaty. If Finland does not reply satisfactorily to the reasoned opinion within two months the Commission may refer the matter to the Court.

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