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.