Share Issue to Employees: New Favourable Regime Proposed
The Finnish government has proposed amendments to the Income Tax Act in a form of a new section on share issue to employees. If adopted, this will create a new favourable regime in terms of share subscriptions. The proposed changes would increase the available options for larger employee ownership in private companies. The new rules would also eliminate some of the uncertainties related to the valuation of the shares.
The Finnish government has issued a draft proposal on the directed share issue for employees working in privately held companies. Based on the proposed new section 66a, employees could subscribe shares in their employer company based on the mathematic value (in practice substance value) of the share without receiving any taxable benefit. The employee would receive taxable employment benefit only if the paid subscription price will be lower than the determined mathematic value of the share. If such shares will be disposed of in future, the paid subscription price would form the tax deductible acquisition cost and the gained profit would be taxed as capital gain.
The proposed section 66a would be applicable to directed share issues as of 1 July 2020. The reasoning behind the proposed tax treatment is to provide alternative rewarding methods and investment opportunities for the employees, and to address some of the current uncertainties in the valuation of privately held shares.
Current tax treatment of directed share issue for employees
Currently, any difference between the fair market value and the paid subscription price of the shares is considered as taxable earned income for the employee.
However, if the opportunity to subscribe employer company’s shares is offered to the majority of the personnel, the employee subscribing the shares will receive taxable benefit only if the discount granted from the fair market value exceeds 10%. No changes have been proposed to the section 66.1 that is currently regulating the directed share issue to employees.
Proposed changes for the tax treatment
Based on the proposed section 66a, taxable income would be assessed only if the subscription price is lower than the determined mathematic value of the share. The new Section 66a would be applicable only if all of the following conditions will prevail during the share subscription:
- The opportunity for the share subscription of new shares issued by the employer company is offered to the majority of the personnel with equal subscription conditions. The majority means more than 50% of the company’s employees.
- The company that issues the shares is the employer of the taxpayer subscribing the shares.
- The company issuing the shares is located in the EEA and the shares of the company are not subjected to a public trade.
- The taxpayer together with any of their family members do not directly or indirectly own more than 10% of the company’s shares or alternatively do not possess more than 10% of the voting rights in the company.
- The company issuing the shares is carrying out business activities as provided in the Finnish Business Tax Act and it pays salaries regularly, and it is also registered in the withholding register and it does not have any recorded tax defaults.
Determination of the mathematic value applied in the share subscription
The mathematic value of the share is determined by dividing the company’s net assets (i.e. company’s assets deducted with liabilities) by the number of the company’s shares. The lowest applicable value is EUR 0. The net assets are determined based on the latest financial statements of the company accepted by the shareholders’ general meeting. The net assets are adjusted by any additional investments made in the company and/or any assets distributed by the company after such date. As a main rule, fixed assets will be valued based on the non-depreciated acquisition costs and assets other than investments or inventories will be valued based on the reference value confirmed in taxation for the previous tax year.
The proposed changes will increase the available options for larger employee ownership in private companies, as a result of which this is a good amendment. The new rules will also eliminate some of the uncertainties related to the valuation of the shares.
The application of the new regime should be carefully planned in order to meet the requirements for favourable tax treatment.
Borenius’ lawyers are available to assist in addressing any questions you may have regarding these new rulings.