Tax deductions for a Finnish Ltd Company, easy eh?

Whether different expenses can be deducted in a company’s taxation or not is interesting yet not always the easiest question to answer. When the VAT is deductible? And is it possible to have expenses that can be deducted in income taxation even if the VAT is not deductible? Are there any exceptions you should be aware of? This post won’t be the Philosopher’s Stone of deductions, and with trickier questions it is mere wisdom to turn to your accountant or tax administration, but however we will give you few guidelines to navigate through the most basic questions.

Deductible: VAT and Income taxation

Expenses closely related to the business

This is an easy one: If the expense is clearly related to the business, the VAT is deductible as well as the whole expense in income taxation. Simple examples of this kind of expenses are purchase of materials, rent of business premises, tools needed for work, etc. Wages paid to employees are also inextricably linked to enabling business, so wage costs are fully deductible for corporate income tax purposes.

In addition to the core business, the company’s operations often involve many other expenses that can reasonably be considered business-related and therefore deductible.

Such are e.g. The following costs:

Workwear

In many sectors, work clothes are already a business-related expense, even for reasons of occupational safety, but any clothing or accessories is not eligible for deductible work clothes. Even if the industry expects representative or uniform clothing, these are not sufficient criteria for deductibility. Deductible work clothes should instead be those that are only worn at work (not casual clothes or equipment) and must have the employer’s logo. In short: an overalls should hardly be worn elsewhere than at work, but a jacket embroidered with the company logo can slip on even in your spare time and therefore does not meet the criteria for work wear.

Professional Development Costs: Training, Literature, and Membership Fees as Tax Deductions

Expenses caused by maintaining of the professional competence of the entrepreneur and employees training, professional literature or magazines and membership fees related to the company’s industry are deductible expenses for corporate taxation.

Recreational expenses and internal meeting and conference expenses

Well-off employees are an integral part of running a successful business, so the costs of investing in their well-being can be considered deductible under certain conditions. Most often, recreational expenses consist of recreation days, internal festivities such as Christmas parties, or even a joint exercise shift organized by the employer. Recreational expenses are fully deductible for both VAT and income tax purposes when recreational facilities are offered to all staff (although branch- or department-specific expenses are possible in certain situations). The weekly golf and padel shifts are therefore ideal for the company’s recreational expenses, but only as long as all employees have an equal right to participate in them.

Internal conference and meeting expenses can also be considered deductible recreational expenses. Alcohol services as negotiation costs often raise questions, but alcohol service as negotiation costs can also be deductible for both VAT and income tax purposes. However, as with other serving, it should be noted that serving should be moderate and standard. As an internal expense, it is also good to take into account the collective nature of the expense, ie. regular after work by the management alone cannot be considered deductible, even if the moderate serving of the entire workforce could be such from time to time. The definition of custom or moderation may, of course, vary depending on who is asked, but it is safe to say that dinners of five kinds or boozy after works that lasts well into the night are not deductible for VAT purposes.

The employer may also choose to offer tax-free recreational benefits to employees in other forms, in which case they are, within certain limits, fully deductible items for corporate income tax purposes. If you wish, you can read more about these benefits in our blog post. (though only in Finnish, sorry!)

External meeting and conference expenses

Deductible meeting and conference expenses may also be incurred when meeting with parties outside the company. In this case, the usual hospitality, coffee, refreshments or buffet priced lunches are deductible, both for VAT and income tax purposes. External conference expenses may also include the serving of alcohol, but again within the framework of moderation (e.g., a glass at lunch). The normality (and thus deductibility) of catering or meeting facilities can therefore be measured by considering whether you would be prepared to provide similar catering or meeting facilities to all representatives of the various stakeholders. That is, unless you are willing to negotiate with suppliers at the ski resort while skiing, it cannot be considered as the usual hospitality with a potential customer either.

Travel expenses

The company can pay tax-free mileage and daily allowances to both the entrepreneur and the employees, which are deductible expenses for the company’s income tax. Travel expenses required by the business, such as taxi trips, train tickets and accommodation expenses, are also deductible for the company in both VAT and income taxation. However, a small whimsical exception to the deductibility of VAT on these costs is the hotel breakfast, which the taxman considers to go into private use more than other parts of the stay, and therefore its VAT cannot be deducted. With taxi journeys it is good to remember that just about any ride is not deductible. VAT cannot be deducted on taxi journeys between home and office. A taxi home from a late customer meeting is also non-deductible for VAT.

A car can also be purchased for the company’s equipment, which enables the deductibility of vehicle costs as a business-related expenses. However, it is also good to remember that if a company does not have a vehicle, there can also be no car-related expenses, such as fuel costs. In other words, if an entrepreneur or employees use their own car for work-related traveling, they should be compensated by mileage allowances, not for fuel or other vehicle costs. If running a business involves a lot of moving from one place to another, it may be a good idea to consider the possibility of a car benefit as well. You can read more about the car benefit in our blog (but only in Finnish, I’m afraid).

Gifts for the staff

It’s nice to give and receive gifts, but what are the conditions for a gift to be deductible? And when can you know if it’s really a gift and when it’s a salary? The taxpayer sees this as follows: An employer may give his employees gifts in addition to anniversary gifts (such as a Christmas present), but in order not to be equated with an employee’s salary, they must meet the following conditions:

• Giving gifts applies collectively to all staff
• The value of the gift or gifts may not exceed EUR 100 in the tax year

The usual small gifts are Christmas gifts as well as welcome or farewell gifts, if the company has an established practice of giving such gifts to all employees.

Gift cards are often a desirable gift, but in order to offer a gift tax-free to an employee, the employer must take into account the same considerations as for other gifts, ie the gift card must not be given more than 100 € (remember any other gifts given earlier in the year). In addition to this, the gift card must be personal and individualized, ie the employer must limit where and what can be obtained with the gift card. To identify a gift card, it is not enough that the gift card is valid for the entire range of a particular company. If this is the case, the gift card is income equivalent to salary and thus taxable for the employee.

Marketing expenses

The purpose of marketing expenses is to promote a company’s business just like the cost of representation, but where then goes the line between representation and marketing? Sometimes it may be a little difficult to distinguish between the two, but certain characteristics can be identified from both. Marketing always targets parties outside the company, as does representation, but unlike representation, marketing seeks to reach several people or entities at the same time.

Typical deductible marketing expenses include customer events and low-value promotional gifts. In general, customer events should be open to everyone, but the costs of marketing to the target group can also be deductible (for example, it makes sense for a textbook publisher to invite teachers and not all municipal employees to present new products). Promotional gifts, on the other hand, must take into account the value and prevalence of the gifts. According to the taxman, a promotional gift may be a product with a taxable purchase price of up to EUR 50, which is generally distributed as a promotional gift, ie not a product specially selected for a person (even if the company logo is added to the product). When using products of your own production as promotional gifts, the normal delivery price of the product can also be a maximum of 50 euros.

Partly deductible entertainment expenses

In order to ensure the continuity and growth of the business, it is necessary to take care of the relations with external stakeholders. Entertainment / representation aims to maintain these relationships and promote business. However, as has already been shown in the previous paragraph, it can sometimes be difficult to distinguish between deductible marketing and non-deductible entertainment costs. However, here are some characteristics of representation:

• Entertainment and representation is always directed to an external party, limited person or client company. 
• Representational gifts go beyond the definitions of customary: a gift is more valuable than the average promotional gift or just exceeds the gift recipient.
• Abundant, out of ordinary catering (in the framework of the event) is also considered to be representation. 
• In contrast to previous years, alcohol does not automatically make the event a representation (see Meeting and conference Costs), but when combined with supper, it cannot be seen as anything else than representation. 
• Tickets for hockey games, concerts or other cultural events are always entertainment, as are gift cards given to customers! A representation gift also constitutes taxable income for the recipient, which should be reported to the incomes register by the giver.

For all representation expenses, it should be noted that the expenses are never deductible when it comes to VAT, but half of the representation expenses are deductible in income taxation.

Due to the close nature of marketing and representation, it is also possible that the same event can include both marketing and representation, i.e. both deductible and non-deductible expenses. In order to be able to draw the line and verify it, it is good to think about and write down the following things:

• What is the purpose and nature of the occasion?

This can be well verified, for example, with the event’s program plan.

• What kind of expenses have been incurred?

For example, the advertising material printed for the event is deductible, but the catering for the event goes to the representation.

• Who has participated in the event?

The list of participants is a good way to verify the event’s target group and the purpose of the event.

Non-deductible expenses for VAT and income taxation:

1. Living expenses

In company taxation, no personal expenses of an entrepreneur or employee can be deducted, even if these are indirectly considered to promote the business (e.g. “I work at home, so I can certainly put the costs of living, e.g. electricity bills as my company’s expenses” → Wrong! If it is not a housing benefit, the expenses paid by the company are comparable to wages, i.e. subject to withholding tax).

In their personal taxation, individuals can deduct expenses related to the acquisition of salary income within certain limits, but if personal expenses (such as non-work-related trips, own clothing/accessories purchases, hobby expenses, etc.) are tried to be included in the company’s expenses, it is a salary or, in the case of an entrepreneur, even a hidden dividend distribution.

2. Fines and other penalties

Did you drive a bit too fast or park a little carelessly in a hurry? If you drove a company car or you were otherwise in traffic related to your work duties, the company can pay the expense, but the payments are not tax-deductible.

3. Donations (most of the time)

It’s great that many companies want to make donations to various organizations of their choice, especially at Christmas time. From the point of view of the tax authority, however, not all donations are deductible for income tax purposes. The deductible donation must be more than €850 and be directed to entities supporting domestic culture and science (the list of such can be found from here), or to similar entities based on public funding in the European Economic Area. In practice, therefore, for example, donations allocated to humanitarian aid and non-governmental organizations are unfortunately non-deductible for income tax purposes.

Also nice to know:

• In the case of a sole proprietor, it must be noted that not all expenses are deductible in the same way as for an entrepreneur who, in addition to himself, offers the same benefits to the entire staff, for example in terms of recreation. In other words, a sole proprietor cannot buy a golf club membership for recreational use on the grounds that he is offering it for use by the entire company’s staff (i.e. for themself). Of course, the same also applies on a smaller scale. For example anything that would be a valid recreation expense as a collective staff benefit (a massage organized by the company, an exercise session, etc.) is not a deductible expense for the sole proprietor for company taxation.

• During Covid-19 pandemic remote working from home became everyday life of many companies in one fell swoop. Working telecommunication connections are a prerequisite for remote working. Consequently, many companies have paid for employees’ internet connections to enable working. However, it is more than likely that the internet connection is also used in free time, which is why the internet costs should not be considered entirely as deductible company expense. The tax authority has considered that half of the home internet connection’s VAT is deductible, half is not. However, in income taxation, the total expense is definitely deductible.

We are here to help

If you need assistance or more information on the subject at hand, please don’t hesitate to contact us with the form below or at: myynti[at]valjas.fi.