Legal Alert – Changes in the taxation of share exchange arrangements – Retroactive applicability calls for special attention
Amendments to the regulations concerning the taxation of share exchanges have been proposed in the recent government bill 148/2011. The proposal affects the exit tax regulations and includes amendments to the Business Income Tax Act (360/1968; BITA ) and the Income Tax Act (1535/1992; ITA).
Amendments to the BITA and the ITA are expected to be implemented on 1 March 2012. They would be applicable for the first time in the assessment of 2012. Due to the extension of the time limit, the amendments to exit tax regulations are applicable to share exchange arrangements which have taken place after 1 January 2009.
The Law in Force
Exchange of shares is defined in section 52f of the BITA. The exchange of shares is at stake when a limited liability company acquires a sufficient number of shares in another limited liability company to give it the majority of the voting rights, or when a company which already has a sufficient number of shares acquires more shares. The acquiring company issues new or already existing shares in exchange for the acquired shares. In case money is used as consideration, the proportion of payment in money shall not exceed 10 % of the nominal value of the shares used as consideration.
The special provision regarding the exchange of shares in force does not trigger taxation of profit on sales, share exchange arrangement being a tax neutral transaction, but the taxation is postponed until the replacing shares are forwarded. For the part that has been paid in money, profit on sales is taxable without postponement.
However, the profit on sales has been taxable before forwarding the shares if the shareholder moves abroad from Finland within three years after the end of the year of the share exchange according to section 52f(3) of the BITA. In case of this exit tax, the taxable profit is counted as the difference between the acquisition cost of the original shares and the value of the shares received in exchange. The values are counted at the moment of exchange. Thus, changes in the value of the replacing shares do not affect the amount of the taxable profit.
According to the proposed regulations, the exit tax is triggered when the shareholder moves outside of the EEA or forwards the shares after moving to another EEA country within five years after the end of the year of the share exchange. This means that the exit tax is applicable in fewer cases when moving within the EEA does not trigger the taxation, but on the other hand the time limit has been extended.
Regulations in force have been applied only when the shares issued in exchange have been new shares, whereas the new regulations also allow applying the exit tax in case of already existing shares which have been owned by the acquiring company. According to the proposal, the exit tax applies only to individuals.
In order to clarify the legislation, a new provision is also added to section 10 of the ITA. This defines the profit on sales which has not exceptionally been taxable as Finnish-source income due to section 52f of the Business Tax Act.
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