U.S. income tax treaty with Finland

The U.S. income tax treaty with Finland is the 1989 convention as amended by a 2006 Protocol, which added a 0 percent dividend rate and removed a royalty cap.

Treaty documents and protocols

The 1989 convention and its 2006 Protocol work as one treaty, and the Protocol changed rates the 1989 text states. It added a 0 percent dividend rate for qualifying parent companies and removed the 5 percent source cap on certain royalties. The IRS lists a technical explanation for each document. IRS Table 3 shows the convention effective January 1, 1991 and the Protocol January 1, 2008.^[1]^[4]^[6]

Convention articles

The convention has 29 numbered articles. Their titles cover the persons and taxes within its scope, along with definitions, residence and permanent establishment. Other subjects include income from immovable property and business profits, as well as shipping and air transport. The articles address associated enterprises and dividends, plus interest, royalties and gains. Later articles cover personal services and limitation on benefits. They also address artistes and sportsmen, along with pensions and government service. Students and other income are covered as well. Additional subjects include capital, double taxation and non-discrimination, plus mutual agreement. The final articles concern information exchange and diplomatic or consular personnel. They also cover entry into force and termination.^[2]

Selected article titles in the convention text
Article	Title
4	Residence^[2]
10	Dividends^[2]
11	Interest^[2]
12	Royalties^[2]
16	Limitation on Benefits^[2]
26	Exchange of Information^[2]

Dividends, interest and royalties

Article 10 allows dividends paid by a company resident in one country to a resident of the other to be taxed in the recipient's country. The company's country may also tax them under its own law, subject to a ceiling when the beneficial owner is resident in the other country. That ceiling is 5 percent of the gross dividend when the beneficial owner is a company owning at least 10 percent of the payer's voting stock. In other cases, the ceiling is 15 percent. A company that has held at least 80 percent of the voting power for 12 months pays no source-country tax if it meets the limitation on benefits conditions, as amended by the 2006 protocol. Special rules apply to dividends from U.S. regulated investment companies and real estate investment trusts. The 15 percent limit for the latter applies only where the beneficial owner is an individual holding less than a 10 percent interest. The article's limits do not apply when the holding is effectively connected to a permanent establishment or fixed base in the payer's country; the business profits or independent personal services article then applies.^[2]^[4]

Article 11 states that interest beneficially owned by a resident of one country is taxable only in that country. The article provides an exception when the debt claim is effectively connected with a permanent establishment or fixed base in the other country, in which case rules for business profits or independent personal services apply. Where a special relationship exists between the payer and the beneficial owner, or between both of them and another person, the article applies only to the amount that would have been agreed without that relationship. Any excess remains taxable under each country's law, subject to the convention's other provisions.^[2]

Article 12, as amended by the 2006 protocol, assigns royalties beneficially owned by a resident of one country to taxation only in that country. The protocol removed the 5 percent source-country cap that the 1989 text allowed for patents, trademarks, designs, plans and processes. The article defines where royalties arise and excludes cases where the relevant right or property is effectively connected to a permanent establishment or fixed base in the other country. A special relationship may also limit treatment to the amount that would otherwise have been agreed.^[2]^[4]

Residence and dual residence

Article 4 defines a resident as a person liable to tax in a country because of domicile, residence, place of management, place of incorporation or a similar criterion. For purposes of Article 4, a U.S. citizen or lawful permanent resident is a U.S. resident only with substantial presence, a permanent home or habitual abode in the United States. For U.S. tax purposes generally, U.S. citizens and lawful permanent residents are treated as U.S. residents regardless of where they live. The article excludes a person liable to tax there only on locally sourced income or locally situated capital. For partnerships and estates, as well as trusts, it applies only to the extent their income is taxed as resident income, either to the entity or to partners or beneficiaries.^[2]

For an individual who is resident in both countries under those rules, the convention applies a sequence of tie-breakers. The person is assigned to the country where a permanent home is available. If a home is available in both, the closer personal and economic relations decide. If that center cannot be determined, or there is no permanent home in either country, habitual abode is used. If habitual abode is in both or neither, nationality decides. If the person is a national of both or neither, the countries' competent authorities settle the question by mutual agreement. For a dual-resident person other than an individual, the authorities also settle the question by mutual agreement and determine how the convention applies.^[2]

Information exchange and limitation on benefits

The convention has an article titled Limitation on Benefits. Article 16 sets conditions for a resident of one country to qualify for convention relief from tax in the other. Listed categories include individuals and governments, as well as certain persons carrying on an active trade or business. The article also includes ownership and income tests, companies with substantial and regular trading in a recognized stock exchange, and certain not-for-profit entities. A competent authority may grant benefits to a person who does not qualify under the listed tests. The article defines recognized stock exchange for its purposes.^[2]

The saving clause and U.S. citizens

Paragraph 3 of Article 1 is the convention's saving clause. Subject to specified exceptions, it says a country may tax a person treated as its resident under its tax laws. It may also tax its citizens as if the convention had not come into effect. The convention text lists exceptions, including benefits under specified provisions on associated enterprises and pensions, as well as provisions on double taxation, non-discrimination and mutual agreement. It also describes exceptions for certain provisions on government service and students, plus diplomatic matters. These apply to individuals who are neither citizens nor lawful permanent residents of that country.^[2]

Questions and answers

Which Finland treaty documents does the IRS list?

The IRS lists the Income Tax Treaty and a Technical Explanation identified as 1989. It also lists a Protocol and a Technical Explanation identified as 2006.^[1]

How does the convention treat interest?

Interest beneficially owned by a resident of one country is taxable only in that country under Article 11. The article provides exceptions for a debt claim effectively connected with a permanent establishment or fixed base, and for amounts exceeding what would have been agreed without a special relationship.^[2]

What does the convention say about royalties?

Royalties are taxable only in the beneficial owner's country. The 2006 protocol removed the 5 percent source-country cap that applied to some royalties under the 1989 text.^[2]^[4]

How does the convention resolve an individual's residence in both countries?

It applies tie-breakers in order, beginning with the country where a permanent home is available. Further steps use closer personal and economic relations, then habitual abode and nationality. In some cases, competent authorities settle the question by agreement.^[2]

Does the convention contain a limitation on benefits article?

Yes. Article 16 lists categories and tests for a resident seeking convention relief in the other country, and allows a competent authority to grant benefits in some cases outside the listed tests.^[2]

What does the saving clause say about U.S. citizens?

The convention says a country may tax its citizens as if the convention had not come into effect, subject to specified exceptions. Treasury's explanation says a U.S. citizen resident in Finland may be taxed by the United States on employment income without the dependent personal services article's limitations.^[2]^[3]

Related glossary terms

Treaty rate table: A treaty rate table summarizes income categories and tax rates or exemptions under U.S. income tax treaties. The IRS explains the tables' scope and limits.
Tax residence: Tax residence describes a person's status in a country for tax purposes. Treaty texts address how it affects income items and applicable treaty requirements.