Legal Alerts/2 Oct 2012

Legal Alert – Foreign Personnel Fund cannot be discriminated in Taxation


A personnel fund (in Finnish “henkilöstörahasto”) is often a functional and tax efficient way to reward employees. The use of personnel funds in Finland has been encouraged inter alia by the introduction of a new Personnel Funds Act which entered into force in 2011. At the moment there are approx. 50 registered personnel funds operating in Finland. The number of personnel funds established has increased after the new act came into force.

There are certain tax advantages in connection with personnel funds when compared e.g. to traditional bonus plans. The employer may deduct the whole amount of the profit-sharing compensation payments transferred into the personnel fund when the payment has been made, whereas only 80 % of the the payments from the personnel fund are taxable earned income for the employees. The personnel fund payments are also exempt from social security contribution, health insurance premium, pension insurance premium and other social insurance contributions.

According to the wording of the Personnel Funds Act, the exemptions regarding aforementioned payments and contributions apply only to personnel funds registered in Finland. For example, when a Finnish subsidiary of a Nordic group has employees that are part of a foreign personnel fund, the prevailing practice has been that said payments and contributions are not exempted. Case law has been incoherent despite the fact that a personnel fund registered in another EU Member State could be comparable by its essential characteristics to a Finnish personnel fund.

Helsinki Administrative Court Decision 12/0561/6

The legally final decision of Helsinki Administrative Court issued on June 11, 2012, concerned a Finnish subsidiary whose employees were part of the groups’ personnel fund. The personnel fund was registered in Sweden. According to the decision, the application of a specific provision of the Finnish Health Insurance Act in a way that it concerns payments made to personnel funds operating only in Finland is placing the comparable Swedish personnel funds at a disadvantage on the basis of its state of origin. Therefore, levying employers’ social security contribution payments made to a Swedish profit-sharing fund was against the freedom of establishment and the free movement of capital enshrined by EU law, when the social security contribution was not levied if the payment was made to a corresponding Finnish personnel fund. Because no justifying grounds were at hand, the Administrative Court overruled the preliminary ruling issued by the Large Taxpayers’ Office and gave a new preliminary ruling stating that employers’ social security contribution must not be paid when making profit-sharing compensation payments to a Swedish profit-sharing fund.

Although the decision concerns only the employers’ social security contribution, it should be also applicable to health insurance premium and other social insurance contributions such as pension insurance premium, unemployment insurance premium, accident insurance premium and group life insurance premium.

The Significance of the Ruling

According to the Administrative Court decision, personnel funds residing in other Member States are to be treated in a similar manner than those residing in Finland. Respectively, personnel funds residing in tax treaty countries should not to be discriminated because the tax treaties normally include an article of non-discrimination. It can also be case-specifically possible to apply for refund if a company has previously paid social security contributions as regards to foreign personnel funds.  Attorneys at law Borenius Ltd is happy to assist in legal questions relating to personnel funds and other incentive schemes.

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Additional information

Heikki Wahlroos