The Finnish Supreme Administrative Court (“SAC”) recently handed down two decisions (SAC 2023:65 and SAC 2023:66) clarifying the application of employee share issues. In qualifying personnel share issues, private companies can issue shares to their employees using the mathematical value of the shares as the subscription price (in practice the substance value) without the employees receiving any taxable benefit if certain requirements are met. The discount, which is not taxable, often represents a significant benefit for the participants. One of those requirements is that the benefit must be available to the majority of the personnel (i.e. to over 50% of the employees) on the same terms and conditions.
It has been subject to much debate on what grounds and to what extent the number of shares allocated to employees may vary between different employees and employee groups. The decisions clarified the acceptable ways for the allocation of shares.
In case SAC 2023:65, the planned allocation of shares was based on the length of employment of each employee. The employees that had started in 2018 could subscribe for three times the number of shares that the employees that had started in 2020 or 2021 could. The employees that had started in 2019 could subscribe for double the number of shares that the employees that had started in 2020 or 2021 could. The SAC confirmed that the number of shares allocated to each employee could vary based on the duration of employment, as it did not mean favouring certain employees or employee groups or discriminating other employees so that they would only be able to subscribe for a nominal number of shares in comparison to others in the company.
In the second case (SAC 2023:66), the allocation of shares was based on each employee’s category that was determined by the company based on the employee’s role and contribution to the company. The company evaluated each employee’s work contribution on the basis of the criteria that had been communicated to the entire staff by comparing the merits and performance of the employees in the same role to each other.
The SAC held that the allocation criteria based on the employee’s role and contribution could be used between the employees as the company did not limit any employee group’s possibilities to subscribe for shares to the nominal number of shares, and the allocation was based on equal and appropriate criteria.
The above decisions clarify the allocation criteria that can be applied to personnel share issues. In practice, the allocation of shares can vary between employees and groups of employees. The number of shares allocated to an employee can be based for example on the length of employment, the employee’s role and contribution to the company or the employee’s gross salary. However, the allocation criteria cannot be based on any discriminatory factor or result in a situation where some employees have the possibility to receive only a nominal number of shares.
We expect the Finnish tax authorities to update the applicable guidance shortly on the basis of these rulings. If you have any questions about this legal alert and what it could mean for your business, please contact the Borenius Tax team or your regular Borenius contact.