The potential for increased Chinese FDI in Finland remains promising. The country’s stable business environment, advanced technological landscape, and alignment with global sustainability goals position it as an attractive destination for Chinese firms looking to expand in Europe. As the demand for sustainable development and innovative technologies continues to rise, Finland could serve as a key partner for Chinese companies aiming to strengthen their presence in the European market.
Finnish FDI trends in China
Finland has emerged as a significant recipient of Chinese FDI in Europe, particularly in the technology sector, where major acquisitions have occurred.
Notably, companies like Nokia, which has been instrumental in building China’s telecommunications infrastructure, reported significant revenues from its partnerships in the region. In 2018, Nokia secured contracts worth approximately EUR 1.3 billion (US$1.45 billion) to support the rollout of 5G networks in China.
Similarly, Wärtsilä, known for its marine and energy solutions, has established joint ventures with local firms, focusing on eco-friendly technology; their collaboration has contributed to China’s goal of carbon neutrality by 2060.
Other Finnish companies, such as UPM-Kymmene and Stora Enso, have ventured into the renewable materials sector, with UPM investing around €500 million (US$557 million) in a new biorefinery in China to produce sustainable biofuels and biochemicals.
Despite Finland’s non-participation in initiatives like the Belt and Road Initiative BRI and regional groupings such as the 17+1, its strategic location and advanced technological capabilities continue to attract Chinese investors. This trend highlights Finland’s growing importance in fostering economic collaboration with China, particularly in clean technology and digital innovation, which align with both nations’ development goals.
Trade and investment treaties
China-Finland bilateral investment agreement
In 2004, China and Finland signed a bilateral investment agreement (BIT), aimed at promoting and protecting mutual investments between the two countries. This agreement fosters a stable and transparent environment for investors from both nations, contributing to economic cooperation and growth. Key provisions of the China-Finland BIT include:
Investment protection: The agreement ensures that investments are protected from expropriation, nationalization, and discriminatory practices, guaranteeing fair treatment for investors in both countries. Compensation for expropriated assets is provided under fair market value principles.
Fair and equitable treatment: Investors from both China and Finland are entitled to treatment no less favorable than that accorded to domestic investors or investors from any third country, ensuring fairness in the management, operation, and expansion of their investments.
Dispute resolution mechanisms: The BIT provides a framework for resolving investment-related disputes through negotiation, mediation, or arbitration. It includes an investor-state dispute settlement (ISDS) clause that allows investors to seek legal remedies in cases of disputes.
The BIT guarantees the free transfer of investment-related funds, including profits, dividends, interest, and proceeds from sales, in and out of both countries. Transfers are to be made without delay, in freely convertible currencies at the prevailing exchange rate, ensuring smooth financial flows for investors.
Moreover, the BIT facilitates the temporary entry and stay of essential personnel involved in investment projects, ensuring smooth business operations. Immediate family members are also accorded similar privileges.
Lastly, in addition to these protections, the agreement encourages further investment by providing legal assurances and reinforcing the importance of rule of law, stability, and non-discrimination. This helps create favorable conditions for business development, fostering closer economic ties between China and Finland.
China-Finland double taxation avoidance agreement
In addition to the BIT, China and Finland signed a new double taxation agreement (DTA) on May 25, 2010, which replaces the previous 1986 treaty, amended by a 1995 protocol. The new DTA, which officially took effect on January 1, 2011, is designed to prevent double taxation on income derived from both countries and aligns with the 2008 OECD Model Convention, while introducing provisions that may impact business structuring between Finland and China.
The DTA pertains to income taxes imposed by both China and Finland. In China it covers:
On the other hand, in Finland the DTA applies to:
The state income taxes (valtion tuloverot; de statliga inkomstskatterna);
The corporate income tax (yhteisöjen tulovero; inkomstskatten för samfund);
The communal tax (kunnallisvero; kommunalskatten);
The church tax (kirkollisvero; kyrkoskatten);
The tax withheld at source from interest (korkotulon lähdevero; källskatten på ränteinkomst); and
The tax withheld at source from non residents’ income (rajoitetusti verovelvollisen lähdevero; källskatten för begränsat skattskyldig).
The DTA introduces a reduction in withholding tax rates on dividends to 5 percent, applicable when the parent company directly holds at least 25 percent of the subsidiary’s capital. This decrease from the previous 10 percent benefits Finnish companies with Chinese subsidiaries. Similarly, the Finnish withholding tax on dividends paid to Chinese parent companies is also reduced.
The withholding tax rates under the new DTA are as follows:
Dividends: 5 percent for parent companies holding at least 25 percent of the paying company’s capital, otherwise 10 percent.
Interest: Set at 10 percent.
Royalties: Ranging from 7 to 10 percent, depending on the type of royalties.
The DTA also abolishes Finland’s tax sparing provision, which previously allowed Finnish entities to credit withholding taxes on Chinese-sourced dividends, interests, and royalties. This change may increase the overall tax burden for Finnish entities receiving income from China.
Additionally, the new agreement broadens the definition of “permanent establishment” (PE), specifically affecting insurance enterprises that collect premiums or insure risks within the other contracting state, even through non-independent agents.
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Capital gains provisions are also revised, allowing China to tax gains derived from the sale of shares by a Finnish resident if the Finnish seller had a 25 percent or greater ownership in a Chinese company at any time within the 12 months preceding the sale. However, this provision does not apply to the alienation of shares in Finnish companies.
Through these changes, the DTA aims to streamline tax policies between Finland and China, promoting smoother cross-border business operations.
Multilateral treaties
China and Finland, both members of the WTO, are signatories to various multilateral treaties concerning trade and investment. These include:
The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which mandates WTO members to extend intellectual property rights to owners in any member state. It incorporates a most-favored-nation (MFN) clause, ensuring equal treatment for IP rights protection across all member countries. Additionally, it provides mechanisms for dispute resolution and compensation.
The Agreement on Trade-Related Investment Measures (TRIMs), which prohibits the implementation of investment measures that restrict trade between members. This includes measures like local content requirements, which mandate the use of locally-produced goods or services by companies operating in a market.
The General Agreement on Trade in Services (GATS), which grants most-favored-nation status to service providers of any WTO member, excluding governmental services such as social security, public health, education, and certain services related to air transport.
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