Financial optimisation and accounting – Questions and Answers
We had a Q&A session on financial optimisation and accounting with accountant Olli Hautamäki on the Talented Developer Community Slack, and thought to share the answers with ya’ll! We have split the questions under a few topics to make it more clear. Also, note that the answers are from the Finnish legislation perspective.
Would you have any supplementary questions, you can contact us at hello@talented.fi or our expert Olli at olli.hautamaki@economos.fi.
Salary
“What is the best amount of salary to get in terms of tax perspective?”
The best amount of salary to get in terms of tax perspective is up to 26% on the income tax scale, assuming this person wouldn’t have any other economic activity outside his or her business and some dividends would also be received from the company.
“What are some common ways of taking money out of your company besides wage?”
1 Fringe benefits, that are not strictly speaking wage
2 Dividends
3 Shareholder loan, (although, payback to the company is required)
4 Renting your own space for company
There are a few other ways, but these are the most common ones besides wage.
“Can you pay yourself dividends (and 20% corporate tax) every month? If yes, are there any gotchas to know? Since dividends can be more tax effective than salary.”
The amount of dividends needs to always be based on a financial statement. If the entrepreneur wants to pay out another round of dividends, an interim financial statement needs to be made. Besides, this financial statement is to be confirmed in an extraordinary general meeting, where the decision on dividends is also made.
Thus in general, two rounds of dividends might be a feasible option for a solo entrepreneur. Any greater number of financial statements and general meetings will generate too much of work and defeats any possible gains dividends might give over salary.
“If you have an LTD, is it better to pay yourself dividends or salary? How do you calculate your personal tax when you are paying yourself dividends?”
Up to 150 000 euros and up to 8% of the net value of the share, 75% of the dividend is tax-free, 25% is taxed under the capital gain tax of 30%. Of course, before this, the company has to pay 20% for all the winnings.
In short term it is advisable to take the salary with a 26% income tax rate and the rest as dividends. Any extra money taken as salary will move you higher up on the progressive income tax scale.
“When talking about hourly rates, is it always assumed that’s without VAT?”
When talking with business clients, this is assumed. However, it doesn’t pay too much trouble to make it clear that you’re talking about prices without VAT. Just put (vat 0% / alv 0%) after the rate, to clarify your pricing. With private customers, it’s assumed that prices include VAT.
Taxation
“Assume you have a digital product (SaaS or anything else) and the customer base is global. How are taxes handled when you sell to other countries (VAT)? Do you have to register to some authorities if you sell lots to other countries? Is it enough to deal with local (this case Finnish) authorities?”
If the customers are private and the revenues are over 10k€, you should register for the MOSS service. This service handles the VAT accordingly. More information can be found here.
If the customers are business customers, a normal reverse VAT charge procedure is applicable. This can be handled via multiple service providers (e.g. Stripe) or via normal billing.
“Do you have any insight/data on what’s the probability of getting a tax inspection and does your own finance actions affect that probability? Do many one man companies get tax inspections? There is a lot of hearsay if “this and that is allowed or not” tax-wise, but not really hard evidence.”
In recent years tax officials have made around 4000 tax inspections in a year. There are around 600 000 active private traders / LLC’s in Finland. This gives some perspective on the probability of getting a tax inspection.
The industry has some correlation with probability. For example, businesses in the construction industry will have a higher probability of receiving inspection. Small companies or solo-entrepreneurs are not excluded from tax inspections. In these cases usually, tax officials want to make sure, that personal expenses are not mixed in the company’s accounts.
Your own actions also play a big role. Any unusual activity (i.e. sudden bigger VAT returns compared to your own previous history/industry in general) will raise a red flag and it’s highly likely that you will at least receive a phone call from a tax official requesting receipt(s). Tax officials are also developing an AI-based system that runs through the database and tries to find any anomalies.
The tax code is pretty through and simple in the majority of the cases concerning a solo-entrepreneur. Tax officials will gladly help if you give them a call.
“In English with taxes, we have two words; tax evasion and tax avoidance. Evasion is under-reporting or not reporting of income, and let’s put that straight away out of the equation because it’s illegal. About tax avoidance, sometimes when talking with different accountants they tell me “tax avoidance is illegal, but you can do tax planning”. This confuses me, because in essence, tax planning is tax avoidance. So, is this just a terminology confusion for accountants or is there two different things such as avoidance and planning?”
I can’t speak for other accountants but personally, I don’t have any problem using the term tax avoidance and no accountant should. I believe this is only terminology confusion, which is probably due to the fact that Finnish accountant usually serves Finnish customers and the English accounting/taxation terminology is not in every-day use.
“Regarding maximizing the mathematical value of the share (which is used when calculating how much lightly taxed dividends can be paid out to the owners)
- I’ve learned that it’s possible to recognize software developed by the company itself in the balance sheet. How would one evaluate such assets — could the number of hours used for development (together with a reasonable hourly EUR rate) be used as a basis for valuation? Does the company have to sell the software (or licenses to the software) in order to recognize it as an asset in the balance sheet, or is it enough that it’s a utility used internally by the company?
- Publicly traded shares owned by the company are normally listed based on their purchase price in the balance sheet. If the share price goes up significantly, is the only way to reflect this increase in value by selling the stocks (and get taxed on the capital gains)?”
The number of hours and wages in bookkeeping can be used as a basis. It is useful to have some internal documentation of how many hours have been dedicated to the project, so wages can be allocated accordingly.
The law mentions that the business has to be able to benefit from the immaterial assets or sell it. It also mentions that the company should have likely financial gain from the immaterial asset. Neither of these clauses technically mandates that one needs to make sales. However, in practice, it might be difficult to show/prove, how the asset has generated financial benefit internally. I would be hesitant to activate the assets and play it safe by deducting the costs right away at once. (Case example, sorry in Finnish.)
Regarding the second question, you are right. The original purchase price is used in accounting, and if the market price is lower on the balance sheet day, this price is recorded in the financial statement (KPL 5:2 §). When the market price is higher, the original purchase price still remains in the financial statement.
However, an addition has been made to the previously mentioned law (KPL 5:2 a §) and the share can also be valued at a fair price. There is a number of requirements to do so. If you’d like a few articles for further reading, you can contact our bookkeeping expert Olli via email.
“If you invoice customers inside the EU with VAT 0, can you still deduct the VATs you pay for stuff you buy in Finland? Does it matter if the customer is inside the EU or not in this case?”
Sure thing! Whether your clients are inside or outside the EU doesn’t have any impact on your possibility to deduct VAT from purchases in Finland.
“Is there any benefit of paying taxes before the end of fiscal year? For example, if your fiscal year is 1.1. – 31.12. and you pay taxes 31.12.”
I consider it wise not to pay taxes beforehand. Although the government doesn’t pay any interest for the tax money, you can still generate income with that tax capital. Of course, if you make a bad investment, you run the risk of losing the tax capital, which in turn can make your business go bankrupt. So, I would advise you to closely monitor the amount you owe for the government (VAT + income tax), and take calculated risks using that capital for investments during the fiscal year.
Also, the government has certain thresholds that dictate, for example, the VAT-period. The pre-payed income tax is usually generated based on the income generated on the previous year, but this can be adjusted on the fiscal year freely.
“Which of the “employee benefits” (car, lunch etc) are really net beneficial for a solo entrepreneur after taking into account all taxes and similar associated fees?”
All of the employee benefits are net-beneficial. They are beneficial because they are taxed at an inferior value than the fair value. The car benefit is too complicated matter whether it’s net-beneficial or not. One should always study the matter case by case.
The rule-of-a-thumb is that car benefit is beneficial only if one drives a lot of private trips (around 18 000 km/year) and always wants to drive a new car. However, if one has only little private kilometers and can use an older vehicle, then it’s more beneficial to have the tax-free kilometers from the company.
I would advise taking into use the lunch benefit, free sport and cultural benefit (up to 400 euros), phone benefit, and commuting benefit.
Is it tax-efficient to buy a car (either new or used) for the company vs. buying it as a private person? The usage of the car is mixed, covering both personal usage as well as business usage (visiting clients).
If you are a private trader and the mileage driven for working purposes exceeds regularly 50% over the total mileage, the car should be in the business’ balance. When this is the case, all the expenses are deducted as they come in the bookkeeping, and private kilometers are converted to revenue at their true cost on the tax return. If the private kilometers exceed regularly the business kilometers, then the business kilometers are deducted using a standard rate (0,43 € / kilometer in 2020) on the tax return.
In my experience and to my knowledge, this deduction rate reflects in general pretty accurately the true costs of owning and driving the car (i.e. when one takes into account also the depreciation of the car). Naturally, when you drive a 1.3 liter -94 Corolla, the standard deduction rate might very well exceed the true costs. Then it would be actually beneficial trying to maintain the car outside the business’ balance, drive private kilometers over 50% of the total, and deduct the business kilometers using the standard rate. The opposite example is true as well. A new Land Rover that breaks down every 10000 km might very well exceed the standard deduction rate, thus making it advisable to have the car in the books.
When it comes to LLC’s, there are more options. There are obviously too many variables in play, and one should make detailed calculations based on the car make, model year, mileage between private and business purposes, etc. The general rule of thumb is that if you have a lot of business trips, it might be advisable to own the car by yourself and then raise the tax-free kilometers from the company. This is true, especially if the car doesn’t cost much and its maintenance fees are low. On the other hand, if you have a lot of private trips, then it might be better to buy or lease the car for the company and use the car benefit.
Tax officials confirm every year the amount of the car benefit. That and more information can be found here.
“Let’s say as the business owner, not everything you do relates to the current days. Sometimes you have to plan, and pay costs for something that’d become a reality in the future. Let’s say now I’m running my business in English, but I wanna expand my business to Sweden and need to learn Swedish and I pay for a Swedish course with my company money. So, even though I’m not using it now, I need to learn Swedish first in order to increase my chances.
So if there’s a tax inspection, and the officer disagrees with my judgement that this is a company expense, what happens? In general, I wanna know how the dialogue would go? Is it “This is not a business cost. End of story. Goodbye” type of talk? Or is it more like “Tell me more, why do you think this affects your business?“”
Here’s an article that goes through some examples related to your case (in Finnish, unfortunately).
If you are a private trader this cost wouldn’t be accepted at tax inspection and tax return from that year would be corrected. If you have an LLC, this cost could be accepted if though you are the sole owner of the company. Tax officials probably would ask you to clarify the matter before deciding whether it’s a deductible cost or not. If tax inspection happened and the officials wouldn’t accept the cost, the taxation from that year would be corrected. This could also be considered as a hidden dividend distribution, and the person would have to pay normal personal income tax for the amount of the benefit.
“When does it make sense to change your company from a one person company (toiminimi) to an LTD (oy) from a tax perspective?”
(Assuming that the balances of both the private traded and LLC are the same)
A private trader can divide his or her income in the following ways:
100% under income tax
90% under income tax & 10% of net capital under capital gains tax of 30%
80% income tax & 20% of net capital under capital gains tax of 30%
One can earn roughly 77000 euros until the personal tax income rate exceeds the capital gains tax rate of 30% (this calculation is made with tax rate calculator, using Oulu as the municipality). Until the income exceeds this, it is wiser to tax everything under the personal tax rate.
However, when the entrepreneur operates under LLC he or she gets to use the ‘cheaper’ tax bracket earlier i.e. the entrepreneur gets to divide the income into personal income and capital gain at a lower income rate. The magical percentage lies at 26%. This is because the company pays a flat 20% tax for the wins and the entrepreneur pays a capital tax of 30% for 25% of the dividends (from a non-listed company) and the rest is tax-free. Thus the effective tax rate for dividends is 26%. Using the same tax rate calculator this percentage is met at 56000 euros. Thus, when the tax percentage starts to exceed this threshold, one should start thinking about switching from a private trader to LLC.
Of course, this is an oversimplified version but highlights the main variable of what to look, when the entrepreneur is deciding whether to make the switch from private trader to LLC. Other factors such as fringe benefits and the amount of administrative work play also a role when choosing the right form of operation.
“How do you take money out from your company in the most tax optimal way (fundamentals, circumstances for every company are different)?”
In short term, one should pay oneself salary up to 26% and take the rest as dividends. In long term, it is more optimal to leave the capital in the company and raise the net value / mathematical value of the stock. This way one can later raise more dividends (the absolute sum/limit is 8% of the stock value or up to 150 000 €).
One should also use all of the fringe benefits assuming that the entrepreneur would in either case use these benefits outside of his or her work.
Bookkeeping and accounting
“As a fresh entrepreneur, I’d like to know more about the best practices for invoicing. Can the job be done with simple DIY (do it yourself) PDF-invoice + business bank account + accountant, or should I invest in some invoicing tool? I’d love to hear tool recommendations, for example, business bank account, Holvi, OP Light Entrepreneurship service → I’d like to hear prices, weaknesses and strengths.”
The most important feature I would like the billing service to have is the ability of monitoring receivables (plus automatic reminders) (this requires that your bank account and billing service talk to each other). Monitoring receivables isn’t obviously so tedious when one sends only one or two bills per month. But if you start sending multiple bills, you will soon find yourself checking the due dates and whether the client has paid the bill or not.
Simple pdf-invoices can be used (for example tinyinvoice.com), but be sure to get all of your receivables. I have seen quite many times my clients being unaware of some of the receivables they have had the due date being long gone.
I would be somewhat hesitant using services that charge some fixed percentage of your revenues, such as OP Light Entrepreneurship (OP Kevytyrittäjä, hereafter OPK). If your revenues are anything greater than 5000 euros, there’s a good chance you will find yourself a personal accountant that does the job cheaper. Although I must say that a streamlined billing service that works in tandem with accounting is something I always find satisfying, thus I don’t want to dismiss OPK either. OPK would be good in a case, where you know your billing will stay under, say 10k€, and you don’t want to consume your energy finding a good accountant.
This in mind, I would recommend for example Holvi. It’s probably the simplest tool out there to get billing integrated into your bank account. Their starter package is free and the grower account (includes e-voicing) 12 euros per month. One can easily export monthly data to Dropbox for your accountant.
Another service I have used is by Ropo Capital. You can use any bank account to connect with their service. They don’t have fixed fees and you pay only for the invoices you have sent. Monthly reports can be generated automatically and sent to a bookkeeper. Getting e-invoicing is cheaper with Ropo compared to Holvi. However, once you also want to start paying the e-invoices from the service, you will need bank connection services that cost more money. Before that, paying bills with Ropo requires more manual work, which isn’t nice when it comes to paying your bills.
And thirdly, as a legacy alternative, I could recommend Finago Solo. This is another streamlined service that has a fixed rate (29 euros/month), but unlike OPK, their rate is not tied to billing. This could be an alternative if your billing will be in tens of thousands, you want automatic monitoring of receivables, and to find an accountant that can do your books with lower fixed rate. Finago Solo has pretty good tools for automating the bookkeeping, so it receives my approval.
“If I, a solo entrepreneur (independent IT contractor) want to handle bookkeeping myself, what kind of bookkeeping tools do I need (minimum + extra recommendations)?”
Holvi is probably the best tool for a private trader (toiminimiyrittäjä). The Finnish law doesn’t anymore require for private traders to submit the financial statement, which is the only thing excluding the fiscal ending tax return, you cannot do in Holvi. So, if you pay and label all of your expenses, and produce all of the invoices in Holvi, you will be good for using only Holvi.
If you are an LLC-entrepreneur you might want to get some software, that generates balance sheets and income statements automatically (i.e. Excel is not worth it). Finland is the promised land of accounting software. I personally use Procountor (legacy software in the cloud), which is pretty automated. Also the old school Asteri Atsoft is still a pretty handy and quite cost-effective solution.
What are the benefits of outsourcing bookkeeping?
Bookkeeping isn’t rocket science (the learning curve is not nearly as steep as coding). Especially the technical aspect of doing the books is pretty much learning basic accounting principles and putting the right account number in one of the two columns. These can be learned in a matter of days or weeks. However, the laws covering accounting are numerous. In my opinion, for an entrepreneur, it’s always beneficial to learn about these laws as your business skills also increase.
Thus general principles of outsourcing benefits apply, the first one being time and money savings. If I wanted to learn accounting, save money, and also commit myself to do my company books for years to come, I could see the benefits of doing the books by myself. However, I have seen a few entrepreneurs doing their books by themselves but not yet any, who would have benefitted from it. All of them had made some obvious mistakes that had costed money in taxation. So I would emphasize the commitment to learn accounting – it doesn’t happen overnight. All of this being said, one needs to decide how to use his or her time most beneficial way. If you don’t want to spend your time reading books on law, then outsource. I’m quite sure, that in the long run, you will also save money by not missing some tax break.
In addition to money and time savings, I would mention support. Usually, solo-entrepreneurs spend enough time by themselves. A good accountant is someone you can lean on, ask questions that are also related to your business’ finances in general.
“If you don’t understand bookkeeping yourself and you don’t trust your bookkeeper too much, how can you avoid having problems? What kind of things should one compare and take into account when choosing a bookkeeper?”
Take an introductory course or read an introductory book on accounting, and then have a discussion about the possible problems you think you might face with the current accountant. The relationship between the client and accountant runs both ways i.e. it needs input from both parties in order to be successful.
Another suggestion is to hire another accountant who is trustworthy. Accredited accountant companies have at least one accountant who is a KLT-accountant. KLT-accountants should have the necessary know-how and experience to run an accounting company serving its customers successfully.
Other
“Advantages/disadvantages of investing through your company vs personal?”
When one makes investments through a personal account he or she will be paying 30/34% tax on 85% of the dividends. Thus the effective tax rate is 25,5% or 28,9% depending on whether the threshold of 30000 euros exceeds or not. The investor can then invest the remaining 74,5-71,1% back to stocks.
However, a company pays 20% flat rate company tax on the dividends, and the entrepreneur can then re-invest the remaining 80% of the dividends back to stocks.
This is the biggest advantage with investing via the company, which assumes the dividends are invested back into stocks. The benefits are only gained if this re-investment is long-term. If the entrepreneur wants to cash-out the dividends, the net-effective tax rate will be 26%, which is higher than the personal capital gain tax from dividends.
“Due to COVID-19 there are a lot of home offices. Is it shady to give a “home office budget” to yourself via your company to buy monitors, standing-desk etc? If so what are the consequences to this if I also use those monitors etc in my free time?”
It’s not shady at all and those purchases are pretty reasonable in this situation. Using a company’s computer that is mainly used for work purposes, for private tasks doesn’t induce a fringe benefit for the entrepreneur/employee. This applies also to the internet connection.
When the place of work is considered temporary and when not? Ie. if your company address is your home address, but you work for 3 months in client premises (3-5 days a week), is trip between home and client premise considered as work trip (työmatka) or trip between home and work (=commute) (työn ja kodin välinen matka)? Is it possible to pay travelling costs as company or should those be covered by individuals (and deducted in personal tax)?
The time limit defining the temporary nature of work is three years.
It’s not sufficient grounds to have your home as your default working premises if only your company address is the same as your home address. In other words, actual work needs to be done at your home office so that it becomes your default working premises.
Considering the given information, I would label these trips as work trips and traveling expenses can be compensated.
More examples can be found here.
Independent contractor, why waste precious hours on the lookout for projects when you could just as well be billing for them?
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