ETLA Economic Research proposes expanding tax relief for skilled immigrants to include middle-income experts moving to Finland. At the same time, tax breaks should be graded based on time spent in Finland so that the tax rate increases as the length of stay increases. Finland should develop a tax relief model for international experts, similar to that in the Netherlands, where the tax benefit can be considerable for a specified period. According to a report published today by ETLA, research shows that highly skilled immigrants increase companies’ performance, productivity, and innovation.
Based on research data, the immigration of highly educated workers is economically profitable and has a positive impact on companies’ performance, productivity, and innovation. Amidst the challenges of an aging population and low economic growth, the immigration of skilled workers offers Finland a significant opportunity to strengthen its competitiveness.
According to a recent Etla Policy Brief entitled “Preferential Tax Schemes and High-Skilled Immigration: Lessons for Finland” (Etla Memorandum 168), Finland needs solutions from an economic and labor policy perspective that will attract foreign skilled workers to the country in the short term and also retain them in the long term. Finland’s goal of increasing research, development, and innovation spending to 4% of GDP will be difficult to achieve without a significant increase in skilled labor.
An expanded and predictable tax relief system could be one key to attracting skilled workers, according to ETLA.
According to a study conducted in the Netherlands, clear and transparent tax rules can significantly increase the attractiveness of international skilled workers. In the Netherlands, international employees who are eligible for tax benefits can receive up to 30 percent of their gross salary tax-free for a specified period. This increases the employee’s net income by about 15 percent and reduces the employer’s social security contributions.
Before 2012, eligibility for tax benefits in the Netherlands was based on a subjective assessment of “scarce skills.” The reform replaced this with an income threshold, meaning that employees whose annual taxable income exceeds €35,000 are now eligible for the benefit.
“The reform increased immigration among middle-income earners in particular, which shows that migration is sensitive to changes in net income and the predictability of taxation”, says ETLA’s chief research scientist and international taxation expert Olli Ropponen, Dr.Soc.Sc.
The 32% withholding tax rate applied to foreign experts in Finland currently only applies to individuals with special professional skills or a monthly salary of at least €5,800. Although the maximum duration of the benefit has recently been extended to seven years, Etla proposes further development of the system.
Finland could extend tax breaks to include middle-income experts and introduce a graduated model in which the tax would increase as the length of stay increases, suggests ETLA’s research director, Dr.Sc. Antti Kauhanen.
“A lower initial tax rate and a gradual increase could make the decision to move to Finland more attractive, while also softening the sharp tax increase when the benefit ends. The reform could also reduce emigration from Finland and thus support the long-term retention of important skilled resources. However, the tax benefit must be temporary in order to avoid excessive public expenditure and ensure fairness in taxation”, Kauhanen points out.
Tax benefits alone are not enough, as other factors, such as equality and job inclusiveness, also affect Finland’s attractiveness. Foreign-born workers continue to face discrimination in recruitment situations, which weakens Finland’s attractiveness in the longer term.
Kauhanen, Antti – Ropponen, Olli: Preferential Tax Schemes and High-Skilled Immigration: Lessons for Finland (Etla Muistio 168)
