Legal Alerts / 6 Nov 2012

Legal Alert – Employer’s Financial Support to Employees Starting Their Own Businesses

INTRODUCTION

The principal rule with employment-related compensations is that they are deemed as taxable earned income (salary) for the employee.

Recent Supreme Administrative Court’s ruling (KHO 2012:90) confirmed that also financial support (business subsidy) given to an employee’s start-up business is regarded as employee’s salary income and not business income of the start-up.

SUPREME ADMINISTRATIVE COURT DECISION 2012:90

The decision of the Supreme Administrative Court issued on October 11, 2012, concerned a case where the employee’s employment contract had been terminated by his employer due to financial and production related reasons. The employer in this case was a Finnish company which belonged to a group of companies. In an effort to support the employees made redundant within the group, the employer’s parent company had voluntarily launched a business subsidy program which enabled employees to apply for business subsidy for starting their own businesses. The business subsidy was paid against actual receipts of start-up expenses of the business and required e.g. submitting an initial business plan.

During the notice period the parent company granted and paid a business subsidy of 20 000 euros to the employee’s business’ bank account. The parent company did not make any salary withholding from the payment and the payment was entered as received subsidy at the bookkeeping of the employee’s business. In practice, the received subsidy was used to cover the start-up costs of the business.

In its decision the Supreme Administrative Court stated that the received business subsidy was to be regarded as earned income (salary) of the employee and not business income received by the start-up. The Supreme Administrative Court stated that in this assessment it was irrelevant that the payment was made by the parent company and also that the purpose and conditions set for the granting of the subsidy did not have an effect to the actual nature of the payment as the employee’s salary income.

THE SIGNIFICANCE OF THE RULING

Based on the Supreme Administrative Court’s decision, business subsidy payments made by the employer or by an affiliated party of the employer to an employee’s start-up business during the notice period are deemed as salary income of the employee. The same applies also to business subsidy payments made even after the notice period if the payment is deemed to be connected to the former employment relationship.

Taxpayers should also bear in mind that the Finnish Tax Administration has also recently given written guidance on the topic of employer’s support to employees starting their own businesses. It appears that the above-discussed ruling of the Supreme Administrative Court is in line with the respective Tax Administration’s guidance. However, as stated in the guidance, certain forms of business support to the employee’s start-up are possible to implement without this being regarded as taxable salary income for the employee.

From the employment law perspective, when planning to support current and former employees with different kind of subsidy programs, it is important to remember employer’s obligation to treat its employees in a fair and equal way. Thus, objective and non-discriminatory criteria should be the basis for granting possible support in order to ensure the compliance with the employment legislation.

Attorneys at law Borenius Ltd is happy to assist in employment and tax law questions relating to termination of employment and other employment related matters.

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