Supreme Administrative Court: Replacing options with a tax-exempt employee share issue is not taxable
Insights|March 18, 2025
The Finnish Supreme Administrative Court recently ruled on the tax treatment of a situation where a company partially replaces its employee stock option programs with a qualifying employee share issue subject to the tax regime in force since the beginning of 2021.
Published ruling KHO 2025:7
- The company planned an employee share issue in accordance with the tax regime, combined with partial annulment of previously existing employee stock option plans. An amount of ESOPs corresponding to the number of shares subscribed by an employee in the share issue would be annulled.
- According to the advance ruling of the Finnish Tax Administration, the arrangement constituted tax avoidance, and the employees exercised their options upon subscription of shares in the company, giving rise to a taxable benefit. The Administrative court came to the same conclusion, however, without application of the general anti avoidance provision.
- The Supreme Administrative Court, however, ruled that the planned employee share issue was an incentive system independent from the previously existing ESOP programs. Subscribing for shares in the company and subsequent annulment of the ESOPs did not constitute an exercise of the ESOPs. Further, the arrangement did not constitute tax avoidance.
Employee share issue tax regime can be highly beneficial but has limitations
Since 2021, a special tax regime has existed for qualifying employee share issues. Private companies can offer shares for subscription to their employees such that no taxable earned income (taxed in Finland at progressive rates of up to >50 %) arises for participating employees if the subscription price of a share is at minimum the so-called mathematical value, which effectively means the net book value of the company’s assets divided by number of outstanding shares. The share issue must be offered to a majority of the company’s personnel. Qualifying employee share issues are also exempt from social security contributions. We have described the regime at the time when it was introduced in this article.
The tax benefit from the employee share issue regime may be significant especially in growth companies whose value mainly derives from self-developed immaterial assets, as typically, their balance sheet is lean compared to their market valuation. There have been some challenges with applying the regime, however.
Firstly, the requirement that the allocation key in the employee share issue is objective and equal has been subject to litigation. However, via case law, it has been clarified that length of employment or the employee’s role and contribution in the company are acceptable allocation criteria for the employee share issue to qualify for the regime (Supreme Administrative Court rulings KHO 2023:65, KHO 2023:66). We have described these rulings in a previous article.
Secondly, the regime is restricted in that it only applies to shares subscribed in the legal employer company of the participating employees. This rules out applying the regime ingroup structures where the employees work for a subsidiary, and the shares would be issued by the group parent.
Takeaways
The ruling of the Supreme Administrative Court clears uncertainty which has surrounded utilization of the employee share issue tax regime. Based on the ruling, companies can now in principle replace their pre-existing employee stock option schemes with an employee share issue, if this is deemed desirable from a business perspective. However, some details still remain open, e.g. to what extent the old ESOP allocation can 1:1 be used in the employee share issue.
Roschier lawyers are happy to discuss the employee share issue tax regime and other employee incentive systems to help you choose the right kind of incentives for your company.