As of 1 July 2020, unlisted limited liability companies should be able exploit the benefits served by the proposed addition to the Finnish Income Tax Act’s provision on the share issues directed to personnel. The proposed new provision provides an alternative calculation method to determine the value of the shares for tax purposes. In many cases the new valuation method is advantageous.
The Government has recently submitted a Government Proposal on the amendment to the Finnish Income Tax Act introducing a new provision relating to employee share issues. We expect the legislative process in the Parliament to be completed in June.
Once the new provision enters into force, if the conditions for the application are met, the value of the shares in an employee share issue may be calculated based on the share’s mathematical value i.e. generally by dividing the net assets of the company by the total amount of the company’s shares. As long as the subscription price of a share is equivalent, or higher, than the share’s mathematical value, the benefit received by the employee is tax exempt.
On the contrary, currently in an employee share issue a company may provide only up to 10% discount from the fair market value of the share as a tax exempt benefit when the shares are offered to the majority of the personnel. However, this provision applies to both listed and unlisted companies and, in practice, listed companies have more commonly utilised this possibility. The current provision will remain in force after the introduction of the proposed new provision. The new provision should make the employee share issue more attractive alternative for unlisted companies than before.
Key conditions for the application
The proposed provision has stricter conditions for the application than the current one. The key conditions set out in the new provision are as follows:
- The issuer must be an unlisted limited liability company;
- the employee (or their family members) may own no more than 10% in aggregate of the total shares/votes in the company;
- the issued shares must be shares in the employer company; and
- similarly to the current provision, the shares should be offered to the majority of the personnel.
In addition, some merely technical conditions are to be satisfied.
The additional valuation method provides companies whose fair market value is higher than their book value a tax efficient way to incentivise their employees. In any case, the new provision simplifies planning of an employee share issue since determining the mathematical value is much more straight forward than determining the fair market value.
Since the new provision, as opposed to the current one, requires that the company issuing the shares employs the employees subscribing for the shares, reviewing the possibilities to utilize the new provision in a specific group structure is needed. New single company based approach may also bring possibilities to use the employee share issue in new ways in certain group structures and transactions.
When planning an employee share issue, also company law and employment law aspects need to be considered, in addition to the above discussed tax aspects. We are happy to discuss these topics further.