The Finnish Ministry of Finance has recently announced proposed changes to simplify the current employee share scheme framework to make it easier for small businesses (unlisted companies) to offer shares to their employees.
The current framework is quite restrictive and limit the ways in which companies (both listed and unlisted) can structure the offers to be made to their employees. At present, there is a particular rule for a “directed employee share issue”, constituting a right for employees to subscribe for shares in an employer company (or any group company) for a price less than the FMV, and where the benefit accrued based on the discount would not be taxable at all if (i) the majority of the employees would be entitled to subscribe for the shares, and (ii) assuming that the discount would not exceed 10% of the FMV of the subscribed shares. To the extent that these requirements are not met, the benefit is deemed as earned income (salary) for the employee and subject to progressive income tax.
Under the current framework, the FMV of the shares in an unlisted company shall be determined primarily by comparable sales transactions between independent parties and, in the absence of such transactions, in accordance with the guidelines issued by the tax authorities (which means, in practice, a valuation approach combining the substance and net present value of the shares). The comparable sales transactions method has created practical difficulties, for example, in circumstances where private equity investors have made equity investments into the company and where the employees have subscribed for shares either simultaneously or shortly thereafter. As the FMV of the shares may have increased significantly due to the investment, the tax burden of the employees has become unreasonably high if the rule for a “directed employee share issue” cannot be applied (which is quite often the case).
However, it is now proposed that if the subscription price in an employment-based share issue is at least equal to the mathematical value of the shares, there would be no taxable benefit at all. In Finnish taxation, the mathematical value of the shares largely corresponds to the company’s substance value. It is anticipated that by facilitating a substance value approach that more clearly reflects the minimum value of a company, it will both encourage and ease share issues in, for example, start-up companies.
The new regime would still only apply when the benefit is offered to the majority of the employees. However, shares must be subscribed for in the employee’s immediate and direct employer company (not, for example, in a group company, which is the possibility under the rule for a “directed employee share issue”). Nevertheless, the employer company can be established in another member state of the EEA, if it qualifies as a corporation whose shares are not subject to public trading. Further, the proposed regime would only apply to companies conducting business activities and any employees holding, either directly or indirectly, alone or jointly with other family members, more than 10% of the shares or votes in the company, would generally be carved out from the application.
The proposal is currently subject to public comments and is expected to enter into force on 1 July 2020. If the proposed rules and reliefs are accepted, they would apply to employment-based share issues that are carried out after the said date.
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