eThesis - School of Business electronic theses

TAX TREATMENT OF CHINESE FOREIGN DIRECT INVESTMENTS IN FINLAND

PURPOSE OF THE STUDY The purpose of this study is to examine the tax treatment of Chinese foreign direct investments in Finland, because cross-border economic transactions are often tax driven. In order to eliminate international double taxation, Finland and People’s Republic of China have concluded a bilateral tax convention in 1987, and the latest amendment came into effect on January 2011. This study aims to clarify how the new treaty differs from FDI’s perspective with respect to the old treaty and the OECD Model Convention. The purpose of the study is also to research whether the tax treaty with China differs from the ones Finland has concluded with selected other Asian countries and whether the Chinese investments are in disadvantage compared to FDIs from other countries.

DATA The key data used in this study consists of Finland’s agreements for the avoidance of double taxation concluded with China, Japan, South Korea and Vietnam. In addition the different updated versions of the OECD Model Convention and Commentary, which are used as a benchmark tax treaty, will cover an essential part of the research data.

RESULTS The new treaty between Finland and China has made changes to the old treaty with regards to passive incomes and extending PE’s definition. The findings of this study suggest that most of the amendments made to the treaty had larger effects on Finnish enterprises than vice versa. Furthermore according to the analysis most of the differences with respect to the OECD Model, extending the source state’s taxing right, are due to PRC’s tax policy. Chinese FDIs are not in particular disadvantage compared to select other Asian countries. On the contrary, tax credit provisions included in the tax treaty and Mainland’s tax law could act as an investment incentive. Regarding consideration payments from the use of computer software classification conflict may arise between contracting states, as Finland has interpreted the royalty definition in a different way than PRC.