The Supreme Administrative Court (“SAC”) has issued two precedents regarding equity based incentive schemes. The most recent ruling (2019:36) concerns a listed company and its right to deduct expenses accrued on a share based incentive scheme in full as salary expenses under the main rule in Finnish Business Tax Act (360/1968, “BTA”) as opposed to being able to deduct them only partially. The other ruling (2019:26) concerns a scheme in which key employees were offered an opportunity to invest into the equity of a privately held employer company. Both cases were ruled in favor of the taxpayer, i.e. resulting in full deductibility of expenses for the listed company and taxation as capital gains for the employee of the privately held company.
Right to Deduct Expenses from Equity Incentive Scheme
The incentive scheme was offered to the company’s key personnel and the administration of the scheme was outsourced to an unrelated service company. The service company had established a holding company to acquire listed shares of the employer company to be given to the participants of the scheme. Acquiring of the shares was financed by a line of credit granted by the employer company to the holding company. The loan capital was then set off as shares were given to the employees. The company justified the chosen structure by, for instance, outsourcing of administrative burden, protection against share price decline and making sure the delivery of the shares. Certain requirements of the Finnish Company Law as well as the Security Markets Law also favored the use of an outside service provider in the share purchases.
Deductibility of expenses on acquisition of the company’s own shares is limited in the BTA. Under the main rule, such expenses are not deductible at all. However, expenses on shares acquired from a stock exchange to be given to employees are deductible under certain limitations. In this case, the SAC stated that the listed employer company did not acquire its own shares as referred to in the BTA and thus the expenses accrued to it were deductible in full.
Both the Central Tax Board and the SAC ruled the case in favor of the taxpayer. The Tax Recipients’ Legal Services Unit, i.e. state representative, argued primarily that the expenses should have been only partially deductible as expenses on shares acquired from a stock exchange to be given to employees under the special provision of the BTA. Secondarily, the state representative argued that the general anti-avoidance provision should be applied.
Capital Gain or Earned Income
The other case concerned a family owned company where key personnel were granted an opportunity to invest in the employer company’s equity. Investments were made via holding company and were financed by the employer’s group company. A shareholder agreement, which included certain limitations regarding the transferability of the shares, as well as provisions on valuation and realizing of the shares, was entered between the parties. The structure, i.e. the use of a holding company as well as certain provisions of the shareholder agreement, was chosen to secure the concentrated family-ownership of the company.
The profit accrued on the sale of the shares, which was reported by the employee on his tax return as capital gains, was reassessed by the tax authorities and taxed as employment income. The Administrative Court agreed with the tax authorities’ view but the SAC ruled that the profit should be treated according to its legal form, i.e. capital gains.
In both cases the state representative argued that the general anti-avoidance provision should be applied and in both cases their claims were unsuccessful. The cases continue the recent line of precedents issued by the SAC where the provision of the anti-avoidance clause has been denied. Common in these cases was the fact that the structure chosen by the taxpayer was relatively complex. Accordingly, besides demonstrating the taxpayer’s freedom in selecting a structure, the cases underline the concept and importance of sufficient business reasons, e.g. economical, administrative or reasons welling out of other than mere tax laws, behind a chosen structure.
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