Outsourcing: Finland overview
A Q&A guide to outsourcing in Finland.
This Q&A guide gives a high-level overview of legal and regulatory requirements on different types of outsourcing; commonly used legal structures; procurement processes; and formalities required for transferring or leasing assets. The article also contains a guide to transferring employees; structuring employee arrangements (including any notice, information and consultation obligations); and calculating redundancy pay. It also covers data protection issues; customer remedies and protections; and the tax issues arising on an outsourcing.
To compare answers across multiple jurisdictions, visit the Outsourcing Country Q&A tool.This article is part of the PLC multi-jurisdictional guide to outsourcing. For a full list of contents, please visit www.practicallaw.com/outsourcing-mjg.
Regulation and requirements
There is no Finnish regulation specific to outsourcing, except for within the financial services industry (see Question 2, Financial services).
All outsourcings are subject to:
General contract law requirements, including the general prohibition of indexation provisions (see Question 22).
Competition law, particularly issues involving exclusivity or tying.
The law protecting personal data and the privacy of personal communications (see Question 18).
Employment law (see Questions 9 to 17).
Tax and accounting law (see Question 37).
The Act on Investment Firms (2007/922) imposes certain limitations on the outsourcing of financial services. The outsourcing of certain material activities in investment firms can only be done if it does not harm:
The risk management of the investment firm.
The internal control.
Any other significant functions of the firm.
In addition, the Financial Supervisory Authority (FSA) must be duly notified. The outsourcing agreement must be made in writing specifying the term of validity and contents of the assignment. If the outsourced activity requires a licence, the outsourcing partner must obtain the proper licence for the activity. If the administration of property is outsourced to a non-professional entity outside the European Economic Area (EEA), the investment firm must ensure that:
The entity has the required licence or is a registered provider of financial services in its home state, and that it is subject to solvency control.
The FSA has entered into a reciprocal agreement with the equivalent authority in that state.
The administration of the aforementioned property can still be outsourced if these conditions are not met, provided the FSA does not oppose the arrangement.
Under the Act on Payment Institutions (2010/297), the outsourcing of certain material activities in payment institutions can only be done if it does not harm the internal control or the control by the FSA.
The Securities Markets Act (1989/495) imposes limitations on the outsourcing of securities exchange operations. The operations can only be outsourced if it does not harm the risk management, the internal control or any other significant functions of the securities exchange company.
In addition, the FSA has issued guidelines which require outsourcings of certain types of financial activity to be, among others:
Implemented according to the FSA's rules.
Notified in advance in detail to the FSA.
Business process outsourcing is increasing in Finland. In addition to traditional outsourcings involving accounting and product support, outsourcing is starting to cover more strategic activities, such as procurement and sales. Regulations that can apply to a business process outsourcing include those which concern:
Sales agents and consumer protection.
Unfair business practices.
IT outsourcing often raises complex data protection and privacy issues (see Question 18). In addition, given the relevance of IP rights, copyright and patent law (particularly the licensing, assignment and joint ownership of copyright and patents) are often highly important (see Questions 7, 8, 33 and 34).
Telecommunications outsourcings are subject to the:
Communications Market Act (2003/393).
Act on the Protection of Privacy in Electronic Communications Act (2004/516).
This legislation effectively limits the outsourcing of certain activities, because it includes:
Requiring telecommunications providers to have a certain in-country presence.
Imposing limits on the sharing of various network components.
Outsourcings do not relieve telecommunications operators of their duties under this legislation. In addition, the terms and conditions of an operator's licence can have an impact on outsourcing. The licence terms can include, among others:
The period of validity.
A definition of the geographical operation area.
The terms related to broadcasting technology.
Outsourcings are subject to the Act on Public Procurement (2007/348) if:
It constitutes public procurement, whether by the Finnish state, municipalities, or other similar public entities.
Its monetary interest exceeds the applicable threshold. Some thresholds were amended in 2010 (30.4.2010/321).
Where these criteria are met, but the outsourcing involves water, energy, traffic or postal activities, it is subject to the Act on Public Procurement involving Water, Energy and Postal Services (2007/349).
Both Acts are based on EU public procurement Directives and relevant European Court of Justice (ECJ) case law. The aim of the legislation is to ensure neutral and non-discriminatory treatment of all participating bidders, and it therefore provides detailed rules for the public procurement process.
When offshoring functions to another jurisdiction, certain information must be stored in and/or be accessible from Finland, including (Accounting Act 1997/1336):
Key bookkeeping materials, such as company accounts, for a minimum of ten years from the expiry of the accounting year.
Individual receipts, communications involving specific business transactions, and certain other accounting materials, for six years from the expiry of the calendar year during which the accounting year expired.
According to the guidelines issued by the FSA, outsourcings of certain types of material activity must be notified to the FSA. Material activities can include:
Activities requiring authorisation.
Internal control and risk management activities.
Internal audit matters.
The notification must include:
The full name, domicile, business number and business address of the natural person or legal person acting as outsourcing partner.
A description of the type and scope of activity to be outsourced.
Clarification of the outsourcing partner's financial capability to manage the activities to be outsourced.
Clarification of how the activities are accounted for in the institution's internal control and risk management.
Clarification of how continuity and information security is ensured.
Specification of the conditions for cancelling the outsourcing agreement.
In case of cross-border outsourcing to a non-EEA state, clarification whether the host country's legal framework allows the Finnish FSA to obtain information needed to supervise the activities.
In addition, a copy of the outsourcing agreement and a notification concerning any tied agent should be submitted to the FSA. The notification must include the outsourcing partner's:
Failure to comply with the notification requirements can lead to liability for damages and other sanctions.
A data processing bureau, which processes personal data on the behalf of third party data controllers, must notify the Data Protection Ombudsman of its activity. In addition, when transferring personal data outside the EEA, for example, in conjunction with the offshoring of personal data processing, the Data Protection Ombudsman must also be notified in certain circumstances (see Question 18).
The notification must be made in advance, however, at the latest 30 days prior to the start of data processing or transfer of personal data. A failure to notify the Ombudsman can lead to both:
Prohibition against processing personal data.
Description of structure. The most common structure is direct outsourcing based on a contract between the customer and the supplier. The details of this type of arrangement can vary. For example, sometimes all or parts of the services are:
Provided to Finland from abroad.
Used by several affiliated customers.
Provided by multiple affiliated suppliers.
Provided by third-party subcontractors.
Advantages and disadvantages. The main advantage of direct outsourcing is its relative simplicity. This can also mean that the structure is not appropriate for more complex forms of outsourcing, such as those involving the transfer of assets or employees.
Contract-based direct outsourcing combined with an asset transfer
Description of structure. This involves direct outsourcing (see above), but the customer also contributes assets or employees that are needed to perform the outsourced services (this generally also includes transfer of the corresponding liabilities). The customer contributes these either directly to the supplier or to a new entity formed for outsourced services that the supplier will eventually own and run.
Advantages and disadvantages. This structure is often used in large strategic outsourcings. Its main drawback is that it can be difficult to unwind the arrangement and replace the supplier.
Joint venture, subsidiary or partnership
Description of structure. The customer and the supplier jointly form an entity. The customer contributes the outsourced activities and the supplier usually provides management, know-how and sometimes financing for the entity.
Advantages and disadvantages. The structure is relatively rare because of its inherent complexities. However, it gives the customer a greater degree of control and, in the financial industry, it can be a way to avoid value added tax (VAT) being imposed on the outsourced services (see Question 37). Drawbacks include difficulties in:
Interactions in the supplier's organisation.
Unwinding the arrangement.
Replacing the supplier.
Contract-based indirect outsourcing
Description of structure. The customer enters into a contract with an intermediary, which subcontracts the outsourced services to one or more third-party suppliers.
Advantages and disadvantages. This structure is relatively rare and mainly used for highly commoditised services of lesser importance.
Description of structure. This can be in the form of any of the above structures, but with multiple, sometimes competing, suppliers.
Advantages and disadvantages. The main advantages of this structure include:
Safety because the suppliers can replace each other.
Its in-built price competitiveness.
Disadvantages include competition law considerations and the structure's inherent complexities.
Description of structure. This structure is most commonly used for public procurement because of competition law concerns.
Advantages and disadvantages. Its main advantages involve economies of scale.
Non-public outsourcing processes commonly involve stages such as:
Data gathering, planning and pre-selection of bidders.
Request for information (RFI), if more data from bidders is needed.
Drafting the request for proposal (RFP) or request for quotation (RFQ).
Evaluating the responses to the RFP or RFQ and selecting one or more bidders for negotiations.
Due diligence of the bidder(s), and sometimes also due diligence of the activity to be outsourced.
Contract negotiation with the bidder(s).
Execution of the outsourcing project with the successful bidder(s).
If the activity being outsourced was already outsourced earlier (sometimes referred to as second- or third-generation outsourcing), the process is often complicated by the involvement of the current supplier, perhaps even as one of the bidders.
Transferring or leasing assets
Formalities for transfer
The transfer of title to real estate must be (Code of Real Estate 1995/540):
Signed simultaneously by the parties in front of a witnessing notary.
In a form that identifies:
the intent to convey;
the real estate conveyed;
the seller and buyer;
the price; or
Failure to meet these requirements means that title is not legally transferred and that the purchaser cannot be registered as the new owner.
The parties can generally agree on the terms of the transfer. Provisions typically included in a transfer are:
The dates when title and possession are transferred.
Transfer of mortgages.
Responsibility for taxes.
The following provisions are void:
Limitations on the buyer's freedom to dispose of the property.
Grants of redemption rights for the seller.
Rights for the buyer to rescind the sale on certain grounds or to retain title to the real property until payment has been made, to the extent that they apply beyond five years from the acquisition.
Municipalities have pre-emption rights of first refusal over real property transactions exceeding certain thresholds (Pre-Emption Act (1977/608)). They also levy annual real estate taxes.
Transfers of real property in outsourcings are commonly made through a transfer of shares in a real estate company. These companies own buildings, and usually also the real estate underneath the buildings, and charge maintenance fees. Shareholders in turn own all, or specific, premises in the buildings owned by the company. An acquisition of shares in these companies is generally a share deal with very broad freedom of contract. A detailed written contract is recommended.
Transfer tax is payable on transfers of real estate in Finland, including transfers of shares in a real estate company (see Question 37, Transfer of assets to the supplier).
Real property is rarely transferred in outsourcing deals, because of:
Difficulties in regulating potential obligations over real property when the outsourcing contract expires.
IP rights and licences
Transfer formalities depend on the type of IP right and licence:
Registered IP rights. No formalities are required for transferring registered IP rights or licences. However, in practice transfers must be made in writing for the recipient to be registered as the new owner. This registration allows the new owner to enforce and license the right, and means the transfer is binding on subsequent transferees. Transfers of IP licences should also be made in writing so that the assignment is binding on a future owner or licensee.
A trade mark assignment can cover the exclusive trade mark rights for all or some products and services that the trade mark covers. If a business is transferred, the corresponding trade marks also transfer, unless the parties agree otherwise. Trade names can only be transferred by a transfer of a business.
Copyright. There is no register for copyright, so transfers and licences of copyright are made without registration. However, moral rights (that is, the author's right to oppose modification of the copyrighted work and to be mentioned as its author) cannot be transferred. In addition, once copyright has been transferred, its subsequent transfer is only allowed if the parties to the original transfer have specifically agreed to this.
In general, the new owner of the right must also have access to some materials that embody and/or reflect the relevant IP. For example, in the transfer of copyright to software, access to the source cord and the support documentation is important to be able to fully utilise the transferred rights, that is, to further develop or maintain the software.
Generally there are no formalities to transfer title to movable property. However, transfers of title to certain registered movable property, such as motor vehicles, ships and aircraft, must take place in writing for the transfer to be registered. Without this registration, the property may not be usable as intended. In other cases, it is advisable for the supplier to take possession of movable property at the earliest opportunity, as possession gives rise to a presumption of ownership.
To transfer movable property permanently outside of the EU, a general notification must be made to the Finnish Customs before export. The notification can be made electronically and it can be delegated to the transporter. The purpose of the notification is primarily to:
Gather trade statistics.
Enforce international trade restrictions.
Enforce anti-terrorism and money laundering laws.
A contract can generally be assigned if the parties to the contract have agreed on this. The contract usually requires that the parties meet additional requirements, such as obtaining an advance written consent to the assignment from the other party. Certain types of agreements, such as licence agreements with sublicensing rights, entitle the contracting party to pass rights on to certain third parties, even without any assignment.
Formalities for leasing or licensing
Legislation. Leases of commercial premises are subject to the Act on Lease of Business Premises (1995/482). This legislation significantly favours the tenant and provides certain limitations to the parties' freedom of contract.
Formalities. A lease of commercial premises must be executed in writing. If it is not, the lease is deemed to be in force only until further notice, and can be terminated with a reasonable notice period.
Assignment. Generally, the tenant cannot assign the lease without the landlord's consent. However, a lease can be assigned in connection with a transfer of business, unless otherwise agreed and provided the landlord has no justified reasons for objecting.
Subleasing. Unless the parties have agreed otherwise, the tenant can sublease up to one-half of the leased premises, provided this would not cause substantial harm or disruption to the landlord. The tenant remains liable to the landlord for any damage caused by the subtenant.
Security. A mortgage as security for a lease can be registered against a unit, fixed share or parcel of land. In addition, a lease of premises can be registered against a lease of real property.
IP rights and licences
Licence formalities depend on the type of IP right and licence:
Registered IP rights. There are no formalities for granting licences to registered IP rights (such as patents and trade marks). However, these licences are generally executed in writing and can be registered. A licence is not binding on subsequent assignees or licensees unless it was registered before the subsequent assignment or grant of a conflicting licence.
In practice, licences are rarely registered. Therefore, licences often impose certain contractual obligations on the licensor, including preventing the:
licensed rights from being assigned without the licensor contractually ensuring that the assignee maintains the licence;
licensor from granting subsequent conflicting licences.
A breach of this type of contractual obligation only entitles the licensee to a contractual claim against the licensor, rather than against the assignee or subsequent licensee.
Trade mark licences are often limited to certain geographic areas, products or services, and contain detailed rules on issues such as the use of the trade mark (font type, colour, and so on). Patent licences are often very detailed, and either:
constitute a general licence to exercise the patent in all possible ways;
include a detailed field-of-use limitation.
Copyright. Copyright, and therefore copyright licences, cannot be registered. A written contract is still advisable. Copyright licences are becoming increasingly detailed. In addition, licences for modification rights are required to maintain and develop software. The customer may also need the right to sublicense modification rights to subsequent suppliers. If modification rights are not included, a lock-in situation can arise where the customer is unable to replace the current supplier on reasonable terms.
The licensee must often have access to materials that embody or reflect the relevant IP for the IP to be of true value. A mere abstract licence of the right may be insufficient for the licensee's purposes (see Question 34).
No formalities are generally required for leases of movable property, but a detailed written contract is recommended.
Transfer by operation of law
If the outsourcing involves a transfer of business under Directive 2001/23/EC on safeguarding employees' rights on transfers of undertakings, businesses or parts of businesses, all the employees of this business transfer to the transferee. This occurs if the transferor discontinues all or part of a certain business, and the transferee continues to operate it (including the transferred assets, employees and other properties) in a similar manner. Share deals are not considered business transfers for these purposes.
Change of supplier
If a change in supplier involves a transfer of a business, all employees of this business transfer to the transferee by operation of law.
Termination of an outsourcing contract does not in itself constitute a transfer of a business. Therefore, employees do not automatically transfer back to the transferor on termination, unless the business is transferred back to the transferor after termination.
If there has been a transfer of a business:
The transferor's rights and obligations towards the employees of this business transfer to the transferee by operation of law. This includes employment terms, such as working time and wages, and collective agreements (see below, Other matters).
The transferor and transferee are jointly and severally responsible for liabilities that fell due before the transfer, such as wages. Additional guidance can also be obtained from Finnish domestic and ECJ case law.
A transfer of business does not generally render redundancies more difficult or easier to implement. The transferor and the transferee can change the terms of employment or make the employees redundant on the same grounds as any employer.
All employees are subject to a mandatory pension scheme. On a business transfer, any additional pension obligations also transfer with employees, although the transferor is generally responsible for funding these obligations until the transfer. If additional pensions are insurance based, it is generally simple, although sometimes expensive, to arrange them. However, some businesses have complex pension arrangements based on their own pension funds, which can lead to additional costs and administrative challenges.
All employee benefits transfer on a business transfer, including:
Fringe benefits such as a mobile phone or car.
However, some benefits may be non-transferable because of their company-specific nature (for example, equity and incentive schemes). However, these must be either replicated or replaced with new schemes of equivalent value.
Collective agreements are common and provide additional regulation for all areas of employment law. They can contain specific provisions to be considered in relation to outsourcing and business transfers in general. Most collective agreements are not only binding on the employers, organisations and unions that have signed the agreement, and their constituent members, but also on all other companies within the relevant industry. When a collective agreement applies, all conflicting terms and conditions in individual employment contracts to the detriment of employees are void.
Collective agreements that cover the transferred business continue to bind it after the transfer until the agreement's expiry. Sometimes, the transferred business was not subject to a collective agreement before the transfer, but falls under one afterwards.
Transferred employees are entitled to retain the existing terms of their employment, and the transferee cannot forcibly harmonise the terms and conditions. However, it is possible to offer new employment contracts to transferred employees, on terms that are equal to or more beneficial for them than the old ones.
The transferor and the transferee can implement dismissals on the same individual grounds as any employer. The employment of an employee who has neglected or breached his employment duties cannot be terminated before he has been given a warning and a chance to amend his conduct. A warning transfers as a part of the business to the transferee. Therefore the dismissal procedure from the first warning to the end of the employment relationship can generally be started by the transferor and finished by the transferee.
It is relatively uncommon to have a profession where the service provider must be a local national trained in Finland. However, the exercise of public power cannot be outsourced and Finnish nationality is required for some state officials, for example, policemen. A local university degree is required in at least some legal professions.
Information, notice and consultation obligations
If the number of persons regularly employed by the transferor and/or the transferee, including the transferring business, is at least 20 employees, the transferor and/or the transferee respectively must comply with the information obligations imposed under the Act on Co-operation within Undertakings (2007/334).
The employer is not under an obligation to conduct any consultations with the employees concerning a transfer of business, but both the transferor and the transferee are under an obligation to inform the employees about the transfer, either directly or through their representatives. The information to be given to the employees affected by a transfer of business includes the following (Act on Co-operation within Undertakings):
The time, or the estimated time, of the transfer.
The reasons for the transfer.
The legal, economic and social consequences of the transfer for the employees.
Any contemplated measures concerning the employees.
The transferor must give this information to the employees well in advance of the transfer. The transferee must also inform the transferring employees of these matters one week after the transfer at the latest. The employees can pose questions concerning the transfer, which the transferee is required to answer.
Data protection and data security
General requirements. Finnish law on the processing of employees' personal data, the confidentiality of employees' e-mails, and other communications is restrictive compared to other jurisdictions. In global outsourcing contracts, Finland-specific wording must often be included.
The Personal Data Act (1999/523) regulates personal data processing and is based on the Directive 95/46/EC on data protection (Data Protection Directive). Any processing of personal data must be justified. Processing and personal data are both defined broadly. Transfer of personal data falls under the definition of processing, and the need for a transfer must be justified.
Specific permissions are required for data processing in certain situations described in the Personal Data Act. If the processing does not qualify as "commissioned processing" under the principal's control, the transfer of customer and employee personal data can cause difficulties.
Transfers of personal data outside the EEA, to suppliers or to another part of customer's organisation, can be challenging, and can be subject to the following requirements:
The transfer must be notified to the Data Protection Ombudsman.
Each person whose data is being transferred must consent to the transfer. This consent must be specific and can be withdrawn.
However, it may be possible to avoid these requirements for transfers:
Where the outsourcing contract includes a so-called EU model clause.
To the US, where the US data recipient has joined the US safe harbour system.
Transfers to certain other countries can also be permissible without notification, under relevant EU decisions.
Depending on the structure and earlier notifications, the outsourcing may require notification to the Data Protection Ombudsman.
Mechanisms to ensure compliance. Compliance largely relies on self-enforcement. The Data Protection Ombudsman also functions as a supervising authority and may undertake various measures to ensure compliance. The general courts may also address individual breaches.
International standards. Finland has implemented EU Directive 95/46/EC on data protection and Directive 2005/58/EC on privacy and electronic communications, together with the Strasbourg Convention for the Protection of Individuals with Regard to Automatic Processing of Personal Data 1981.
General requirements. Banking secrecy is regulated in the Act on Credit Institutions (2007/121). In addition, the Federation of Finnish Financial Services published guidelines on banking secrecy in 2009. The main rule is that no information concerning a customer's banking matter is to be given to any other entity. However, there are exceptions to this and the bank can, for example, disclose information if the customer gives his consent or explicitly, in a written document, authorises someone to access the information. Generally, customer consent should be obtained before any outsourcing that may require accessing information protected by banking secrecy.
Mechanisms to ensure compliance. Compliance largely relies on self-enforcement. The Financial Supervisory Authority is the supervising authority and may undertake various measures to ensure compliance.
International standards. There are no mandatory international standards applicable in Finland.
Confidentiality of customer data
General requirements. Customer data may classify as a business or trade secret if the legal prerequisites are met. The legal framework protecting business secrets has a number of sources, and relevant provisions can be found in the:
Criminal Code (1889/39).
Unfair Business Practises Act (1978/1061).
Employment Contracts Act (2001/55).
Mechanisms to ensure compliance. Violations of the Criminal Code should be reported to the police, which may lead to the prosecutor initiating criminal proceedings. Violations of the Unfair Business Practices Act can be brought before the Market Court.
International standards. See above, Data protection and data security.
Service specification and levels
The services specification is typically drawn up at an early stage based on input from a large group of stakeholders in, or related to, the customer, such as:
Internal specialists with the right expertise.
External consultants, accountants and lawyers can also participate.
Sometimes the supplier takes the lead in drawing up the services specification, particularly in smaller-scale outsourcings where the supplier is much more experienced. The services specification is then typically refined during subsequent negotiations between the supplier and the customer.
The parties commonly agree on certain criteria against which to assess the supplier's performance including:
Key performance indicators (KPIs).
The criteria should be:
The criteria are often contained in a separate schedule to the agreement. Compensation is usually partly, and sometimes entirely, based on meeting this criteria.
Alternatively, the contract can specify more generic performance target ranges.
If the supplier falls short of these target ranges, either the compensation is reduced or liquidated damages are imposed (see below). If the supplier exceeds the target range, compensation can be increased.
Service credits generally entitle the customer to reduce or eliminate payable fees. They are often used as a more lenient method than liquidated damages to sanction the supplier for poor performance and compensate the customer for the loss incurred.
Charging methods and key terms
Many different types of business and charging models are used in outsourcing contracts. The most common ones are described below.
This is particularly suitable for short-term outsourcing activities that have low strategic importance and a very predictable demand and volume. A typical example is payroll services. Adjustment mechanisms provide fixed pricing with increased flexibility for more strategic or longer-term outsourcing.
Pay-as-you-go pricing based on pre-determined unit prices is often used for outsourcing activities of low strategic importance, which are long term and have an unpredictable demand, for example, maintenance of IT equipment. Suppliers typically insist on some minimum payments to ensure that a certain pool of resources can be allocated to the services.
This is based on the quantity and quality of resources allocated to the services. It is commonly used for activities of high strategic importance, such as business development and marketing. It generally provides flexibility, even if demand is unpredictable. Ensuring that sufficient good quality resources are available when needed, while no excess resources are allocated, generally requires compromise and advance commitments from both parties.
The parties agree on a certain price margin, which is charged on top of the actual costs incurred from performing the services. This method is best suited for outsourcing non-strategic activities with fluctuating demand and multiple potential suppliers, as competition drives down the amount of margin. Typical examples are employee cafeterias or other catering services.
Risk and reward-based pricing
Risk and reward-based pricing remains rare. The supplier is usually provided with a proportional share of profit or revenue achieved, to reward it for strong performance and risk taking. Fixed or other guaranteed payment elements are generally very low or non-existent, to reduce the risk of the supplier performing poorly. This method is best suited for outsourcing critical business activities, such as outsourced sales, marketing and business development. These are areas where it is particularly important to provide strong incentives for the supplier to perform, and equally strong adverse incentives to avoid poor performance.
Charge variation mechanisms are inherent to some pricing mechanisms (see Question 21). In addition, various types of benchmarking or indexing variation mechanisms are used, whether inflation or cost-of-living based. Clauses based on changes in the price of producing specific goods or services are also used. However, these provisions can be void if they constitute contractual price adjustment mechanisms linked to a particular index, such as (Act on Limiting the Use of Index Clauses (1195/2000)):
Wage or price indexes.
Other comparable dependencies.
These adjustment mechanisms are allowed in certain situations, for example, if they are linked to changes in foreign currency exchange rates. In addition, indexation provisions can be included in agreements between foreign contracting parties or agreements that only involve the procurement of services from abroad. In any case, the validity of a price adjustment provision must always be assessed on a case-by-case basis, looking at the provision's actual wording.
Customer remedies and protections
A breach of contract can give rise to many types of relief, including:
Termination after a reasonable notice period (see Question 29).
Immediate rescission of the contract.
The right to withhold payments or the performance of other obligations under the agreement.
The right to reduced prices.
Outsourcing contracts typically include contract-based remedies to provide the customer protection from the supplier's failure to perform its obligations. These can include:
Collateral, such as an on-demand bond, bank guarantee or a deposition.
Audit rights and enhanced reporting requirements.
Service credits or reduced compensation (see Question 20).
Liquidated damages (see Question 20).
Indemnity for damages incurred because of the supplier's breach (see Question 25).
Immediate rescission of the contract (particularly in the case of a material breach).
A parent company guarantee.
Requirements to take out insurance and to name the customer as a beneficiary.
Governance or escalation mechanisms (which requires top management to get involved) to ensure sufficient prioritisation of the supplier's obligations.
Security measures, for example, an obligation for the supplier to promptly comply with any of the customer's reasonable additional requirements that are necessary to ensure security within services of a sensitive nature.
Warranties and indemnities
Outsourcing contracts commonly include representations and warranties involving:
Good standing and solvency.
Authority and required corporate approvals to enter into the agreement.
Performance of the outsourced activities in a professional, commercially diligent manner and in accordance with good industry practices.
Allocation of sufficient and appropriate personnel (skills, experience, and so on) and other resources (financial, IT, management resources, and so on).
Compliance with legislation and other applicable regulations (for example, tax legislation).
The absence of conflicts with the supplier's other customers.
Transferred assets' freedom from all liens and encumbrances.
Performance of the contract in a manner that does not infringe third-party IP rights.
The supplier having all the licences, rights, governmental or municipal permits and other third-party approvals that are required to perform the services.
Adequate insurance coverage and other specified safety precautions.
Compliance with provisions involving data security and other security (natural disasters, crime, and so on), and prompt compliance with the customer's reasonable additional requirements to ensure such security.
IT-specific representations and warranties, for example, the availability of IT services 24 hours a day with no more than 1% downtime.
Only specified transferred employees being entitled to employment with the supplier.
The absence of claims (other than pensions) by the transferred employees.
Contracting practice does not generally distinguish between representations and warranties compared to indemnities. However, indemnities are commonly used for IP, tax and employment law related issues. Therefore, outsourcing contracts can include indemnities involving, for example:
Infringement of third-party IP rights.
Breach of specified key representations or warranties.
Breach of insurance obligations or other safety precautions.
Non-compliance with data security or other similar security requirements.
Protection of personal data and privacy of communications.
Breach of confidentiality.
Compliance with tax legislation and regulations.
Liabilities, claims and obligations involving transferred employees.
If the supplier uses subcontractors to perform the outsourced activities, it is customary for it to make representations and warranties for their performance and for its ability to control them.
There are no limitations on warranties involving fitness for purpose or quality of services. If no warranties are provided in this area, the Sale of Goods Act (1987/355) may be applied by analogy to determine the level of quality required. In theory, an "as is" limitation on the quality of the services is possible, although this is not used in outsourcing practice.
A broad range of insurance types are available in Finland, including insurance for:
Product liability and recall.
In general, the extent of the insurance coverage is dependent on the premiums agreed to and the nature of the covered business. If necessary, very extensive coverage can be agreed on. The insurance agreements usually contain a limitation on the aggregate amount payable under the insurance. Certain types of damages can also be excluded from the coverage. The exact extent of the insurance coverage depends on the negotiations with the insurance company.
Term and notice period
Termination and termination consequences
Events justifying termination
A contract can be terminated if there is a material breach. Guidance on what constitutes a material breach can be found in:
The International Institute for the Unification of Private Law's Principles of International Commercial Contracts.
A material breach can be composed of several breaches that, in isolation, would not be material. Insolvency events do not, in themselves, give rise to a termination right (see Question 32). Termination can sometimes be available for an anticipatory material breach.
The parties are generally free to agree on additional termination rights. A common termination trigger in outsourcings is change of control, as outsourcings are dependent on the relationship between the parties and their respective owners. Generally, termination triggers linked to insolvency are not binding on the bankruptcy estate, provided there has been no breach or anticipated breach of contract (see Question 31).
The parties also sometimes agree that the customer can terminate the contract for convenience. The notice period in these situations is typically longer than in others, and specified compensation can become payable to the supplier.
IP rights and know-how post termination
Licences and rights to know-how can be implied in certain situations (see Question 33). However, the parties usually expressly agree in the contract that the customer has certain post-termination licences and rights to the supplier's IP and know-how. The wording of these clauses generally determines the scope of these licences and rights. A mere abstract licence or right is not always of any true value. The licensee or owner of the right must often also have access to the materials that embody or reflect the relevant IP. Therefore, outsourcing contracts typically contain provisions allowing for the transfer of materials to the customer on specified triggering events. For example, in the case of software, an escrow agreement with triggering events can be used to ensure access to the source code and documentation needed for the software's maintenance and further development.
If the outsourced activities are outsourced again, it is important to ensure that the new supplier, as well as the customer, can benefit from relevant licences and rights and access to the relevant materials. Otherwise, the customer may become unable to replace the old supplier with a new one on acceptable terms (lock-in).
Liability, exclusions and caps
The parties can cap all liability except for damages caused intentionally or by gross negligence (see Question 35). A common way to limit the damages is to cap it to a percentage of the consideration paid by the customer to the supplier.
Transfers of assets to the supplier
Assets should, as a starting point, be transferred on arm's-length terms. In an asset transfer, the values of the assets are stepped up to their acquisition price and a capital gains tax of 26% is charged for a corporate seller over the difference between the assets' sale price and the residual tax acquisition cost. The purchase price is, as a starting point, allocated to all the different assets. However, this tax charge does not arise if the transfer constitutes a transfer of a branch of activity as defined in the Finnish Business Income Tax Act (1968/360). This can be accomplished when all the assets and liabilities of the outsourced business are transferred to a subsidiary in exchange for new or treasury shares in that subsidiary and certain other requirements, as set out in section 52(d) of the Business Income Tax Act, are met. For tax purposes the assets are transferred at the residual tax acquisition cost, but for accounting purposes a step-up is allowed. Alternatively, the assets could be transferred as part of a share sale, which can be tax exempt if certain requirements are met.
A transfer tax is payable on 4% of the purchase price for transfers of real property. Transfers of securities, including those of real estate companies, are generally subject to a transfer tax of 1.6%. The buyer usually pays these taxes. A tax neutral transfer of a branch of activity, as described above, can be exempted from transfer tax.
See also Question 7, Immovable property.
Transfers of employees to the supplier
The transfer of employees does not, as such, give rise to any tax consequences. However, it usually has a fundamental role when considering whether a transfer of assets constitutes a branch of activity and therefore is not subject to capital gains tax (see above, Transfer of assets to the supplier).
VAT or sales tax
Outsourced services are commonly subject to VAT. If the customer's operations are VAT exempt (such as in the finance and insurance industries), the customer may not be able to reclaim input VAT. This increases outsourcing costs, unless the outsourced services are also VAT exempt. Addressing this can be challenging, but the costs can be minimised through certain structures, such as the customer entering into a joint venture or partnership. This can take the form of setting up specific subsidiaries that both:
Are subject to VAT.
Provide certain partially outsourced services to their parent companies.
The transfer of assets to the supplier is not subject to VAT, provided both:
It is made in connection with the transfer of the whole or part of a business.
The supplier continues to use the transferred assets for activities that allow the deduction of VAT.
There are no service taxes in Finland.
There is no stamp duty in Finland.
There are no corporate income tax consequences from outsourcing as such, other than those possibly resulting from a transfer of assets (see above, Transfer of assets to the supplier).
Complex transfer-pricing and revenue-recognition issues can arise if:
Several affiliated companies from different jurisdictions perform outsourced activities.
A group of affiliated companies procure outsourced activities.
Generally, transfer pricing rules are based on the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2001.
Certain payments, such as royalties for IP licences, can also give rise to withholding taxes.
Roschier, Attorneys Ltd
Qualified. Finland, 2001
Areas of practice. Information and communication technologies; IP; dispute resolution.
- Lead counsel for a leading global telecommunications company in the outsourcing of a software development unit of over 2,500 employees.
- Lead counsel to a leading regional player in the automotive industry in a single-source outsourcing of all of its IT services.
- Lead counsel to leading global suppliers and buyers in a multitude of disputes relating to development and delivery of ICT software and services in various industries, from healthcare to internet services.
Roschier, Attorneys Ltd
Qualified. Finland, 2005; New York, 2009
Areas of practice. Information and communication technologies; IP; dispute resolution.
- Advised a leading regional healthcare provider in the outsourcing of its HR and IT services.
- Advised a leading regional player in the mining industry in the outsourcing of its IT services.
- Advised clients in numerous disputes relating to the development and delivery of ICT software.