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Revised Guidance Regarding Equity Incentive Schemes
18 Feb 2016 The Finnish Tax Administration has recently issued a revised guidance regarding the taxation of employment based stock options. The guidance addresses also various other types of equity incentive schemes. The main changes in the guidance relate to social security charges and transfer tax implications. New Instructions Regarding Social Security Charges The guidance provides new instructions regarding social security charges in connection with equity incentive schemes where the employees receive for free listed shares of the employer or its group company, e.g., RSUs. The applicable rules regarding such share awards and employment based stock options are partly overlapping. The revised guidance states that to the extent the awards vest earlier than the first anniversary of the grant date, and the amount of benefit is not viewed as being dependent on the development of the share value, all employee and employer social security charges are payable similar to normal salary. If the value of the benefit is dependent on the development of the share value in a period of at least one year, the award may be provided partly or wholly in cash instead of shares without being subject to all social security charges. Part of the award may be provided in cash for instance to cover taxes, or where shares cannot be provided to all employees participating in the incentive scheme. The cash award does not qualify as a stock option as it does not entitle to shares. However, the cash award is not subject to employee and employer social security charges (apart from the larger part of employee’s health insurance premium) as long as the cash award is given in lieu of shares, i.e., the original nature of the award remains unchanged. The guidance issued by the Finnish tax authorities seems erroneous in respect of the transfer tax treatment of the issuance of new stock options. Transfer Tax Aspects Transfer tax is generally due on transfers of ownership in Finnish securities. The Tax Administration is of the opinion that transfer tax is generally due on transfers and also on the issuance of stock options. However, it has been an established interpretation in Finnish case law that no transfer tax is payable on the issuance of new securities. Therefore, the guidance seems erroneous in respect of the transfer tax treatment of the issuance of new stock options. It is necessary to analyse the details of the incentive scheme since the tax treatment may vary even within similar types of schemes based on their individual characteristics. Transfers of listed shares are generally exempted from transfer tax. However, the exemption does not apply where the remuneration for the shares is in the form of work. The Supreme Administrative Court of Finland (“SAC”) has issued a ruling (KHO 2015:32) in which transfer tax was due on shares acquired on the stock exchange under an equity incentive scheme. In that case, part of the award was provided in cash, and the employees were obliged to acquire shares with the cash award. The SAC ruled that the consideration for the shares consisted partly or wholly of the employees’ work contribution and, therefore, the transfer tax exemption regarding listed shares did not apply. Key Aspects in Considering Different Kinds of Incentive Schemes When planning an incentive scheme, at least the following tax aspects should be considered: income tax implications for the employees, social security charges, the deductibility of the award for corporate income tax purposes, and transfer tax treatment. It is necessary to analyse the details of the incentive scheme since the tax treatment may vary even within similar types of schemes based on their individual characteristics. Finally, it may be noted that various types of synthetic equity incentive schemes are increasingly popular on the Finnish market. Besides their flexibility, synthetic equity incentive schemes may also entail tax advantages. The deductibility of payments under a synthetic equity incentive scheme as well as transfer tax aspects, for instance, may facilitate the use of such schemes over more traditional equity incentive schemes. Besides their flexibility, synthetic equity incentive schemes may also entail tax advantages.
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Recent Rulings from the Supreme Administrative Court
3 Nov 2015 The Supreme Administrative Court Ruling confirms the interpretation of the equity ratio exemption under the Finnish interest limitation rules. Under the equity ratio exemption, the interest limitation rule does not apply if the equity ratio of the debtor is equal to or higher than the equity ratio of the consolidated group. The Supreme Administrative Court confirmed the advance ruling (24.6.2015/1784) by the Central Tax Board according to which the equity ratio of the debtor was to be compared to the equity ratio in the consolidated financial statements of the foreign parent company as opposed to the Finnish subgroup parent company. This was the case even in a situation where the foreign parent company is not obligated to prepare consolidated financial statements pursuant to an exception under local law. The comparison of equity ratios should primarily be made based on financial statements pursuant to IFRS. However, Finnish unlisted subsidiaries often prepare their financial statements pursuant to Finnish GAAP as opposed to IFRS. The financial statements of the foreign parent company may be drafted pursuant to IFRS or local GAAP. The differences in methods to determine the equity and the balance between Finnish and local GAAPs or IFRS may prove beneficial for equity ratio exemption purposes. Two rulings from the Supreme Administrative Court clarify the right to deduct VAT for services related to the acquisition of shares In the case KHO:2015:134 the holding company acquiring a new subsidiary was allowed to deduct VAT paid for e.g. due diligence services as general expences, due to the fact that the holding company itself carried out economic activities subject to VAT by providing management and IT-services to the group companies at the time of aqcuisition. In the case KHO:2015:135 the holding company acquiring a new subsidiary was not allowed to deduct VAT paid for costs relating to the aqcuisition since the holding company did not carry out economic activities at the time of aqcuisition but rather acted merely as a passive owner. The fact that the holding company started to provide management services subject to VAT approximately one year after the aqcuisition was not deemed relevant. The Supreme Administrative Court also stated, in accordance with CJEU legal praxis, that dividends and group contributions received by the holding company are not of relevance when calculating the amount of VAT deductible as general expences. CJEU has stated that VAT applies only to payments regarded as compensation for business transactions or economic activities and not to payments resulting from ownership, such as dividends and other proceeds from owned shares. Certain proposed changes to tax rules The government has proposed that the following amendments would be introduced as of 2016. Capital losses would be deductible from all capital income, as now they are deductible only from capital gains on the year of sale and five following years. Tax rates for capital income would be 30 % up to EUR 30.000 and 34 % on any exceeding amount. The provisions regarding voluntary disclosure of evaded taxes will be adopted temporarily. Individuals and decedent's estates may avoid criminal sanctions for tax fraud under certain conditions by reporting evaded income on their own initiative during the year 2016.

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