Legal Alerts/9 Jun 2025

Tax Treatment of Covering Employees’ Legal Expenses to Be Amended

The Finnish government has released a long waited draft bill setting up rules on how employers can cover employees’ legal expenses without constituting taxable benefit for the employee.

The planned amendments stem from Supreme Administrative Court decision KHO:2023:116, in which employer-paid legal fees in a criminal matter were deemed taxable earned income for the employee even though the events in question occurred within the scope of employment.

Legal fees on criminal defence have been regarded as taxable earned income for the employee if the employer has covered them, even if the employee’s actions were closely related to their work duties. The goal of the new legislation is to sharpen the rules on when such employer-paid legal fees may be treated as a tax-free benefit.

Planned amendments

Under the draft bill, defence costs paid by an employer on behalf of an employee in a criminal case would not constitute a taxable benefit if all of the below conditions are met.

Employer interest: The employer must have a valid business or reputational interest in covering these legal costs.
Connection to work duties: The matter must have arisen in the course of the employee’s work duties. Work duties refer specifically to tasks for the employer that is paying the costs. Even actions outside standard working hours might qualify if they clearly relate to the employment.
No obvious unlawfulness: It must not have been evident to the employee at the time that their actions were unlawful. This exemption is meant to be broadly accessible for situations stemming from work duties, barring exceptional cases where the employee clearly knew they were acting unlawfully.
No double compensation: The employee must not have received reimbursement for these costs from any other source and must agree to repay the employer if they later receive such reimbursement from elsewhere. This prevents situations where the employee could benefit twice for the same costs.

Under the draft bill, coverage would extend to litigation expenses and other legal assistance costs, including those incurred during pre-trial investigations, settlement negotiations, or prosecution. These rules would also apply to former employees if the matter relates to duties carried out in their previous role. However, the rules would cover only employees and thus, e.g., subcontractors would not be included in the scope.

Further clarifications to the bill required

The planned new rules would bring necessary changes by allowing the employers to compensate the employees’ legal expenses without additional tax charge when the proceedings result from the employees’ work. However, in our view, the conditions for the tax exemption as defined in the draft bill would require further clarification to enable effective application of the provisions and to increase legal certainty.

For example, the condition of the employer’s interest seems irrelevant because the fact that the employer covers the legal expenses on behalf of the employee should already demonstrate this. This is also admitted in the draft bill but only as a starting point which leaves the door open to other, unnecessarily strict, interpretation.

Furthermore, assessing which acts the employee may have considered to be “obviously unlawful” would in many cases be subject to a high level of interpretation. It should also be noted that under the draft bill, the outcome of the court proceedings is irrelevant, and thus, in practice, the employees’ actions may be deemed obviously unlawful in the tax assessment even if the court later releases the employee from the charges.

Although it is stated in the draft bill that the tax exemption should be applied widely, the ambiguity left by the draft bill may cause surprising interpretations by the tax authorities, and hopefully the rules are further clarified based on public consultation.

The draft bill is open for public consultation until late June and the final bill is expected to be issued to Parliament in late September. The rules are aimed to be in force from 1 January 2026.

If you have any questions about this Legal Alert, please feel free to contact the undersigned or your regular Borenius contact.