Taxation of employee offerings

This is an English translation. The original in-depth guide (record no. VH/6352/00.01.00/2023) is available in Finnish and Swedish. In case of divergence of interpretation, the versions in the two official languages, Finnish and Swedish, will prevail.

The contents of this memorandum discuss the taxation of employee offerings, covering especially the present law that provided detailed rules on the matter, in subsection 1 of § 66, and in § 66a of the act on income tax (Tuloverolaki (1535/1992, TVL)).  

The discussion on tax treatment covers the employee´s income taxes, the tax‑preassessment of the employer company that issues the shares, the perspective of taxation of business income, and transfer taxes. Updates were made to this memorandum based on the new case-law emanating from the Supreme Administrative Court’s rulings KHO 2023:65 and KHO 2023:66. In addition, several smaller updates were made for improved clarity.

The in-depth guide that provides instructions on employee stock options, which are referred to in § 66, subsection 3 of the act on income tax is ”Taxation of employee stock options”. This memorandum only adopts the perspective of stock issues and the legislation that controls them when stock option programs are addressed, also mentioning the importance of differentiation between employee stock options, on the one hand, and issues of corporate stock to company employees for subscription, on the other hand.

1 Introduction

This memorandum discusses the tax treatment of share issues to employees. The Finnish act on income tax (Tuloverolaki 1535/1992, (“TVL”)) has the following 2 sets of legal provisions: in § 66.1, applicable to all kinds of companies that offer shares to employees; and in § 66a, which only apply if the employer is a non-listed company.

In accordance with § 66.1, any financial benefits arising from a right to subscribe shares or similar securities for a reduced price on the basis of employment are treated as part of the individual employee’s earned income. The benefit is taxable for the part that reflects more than 10% of discount from the share’s market price. If the benefit is not available to the majority of company employees, the entire discount becomes subject to tax. From this, it follows that the tax-exempt 10% of the discount is only allowable if the benefit is available to the majority. The provision in § 66, subsection 2 lays down how the fair market value, FMV, must be calculated when company shares are listed on a stock exchange when a share issue within the meaning of § 66.1 is offered. Chapter 3.1 – “Offerings to employees within the meaning of § 66.1” of this memorandum contains further information on the circumstances where the rules set out by subsection 1 can be applied.

The provisions of § 66a set out detailed rules on share issues when the employer company is not listed on a stock exchange. In the circumstances referred to in § 66a, share issues can only give rise to taxable income for the participating employees if the price is below the “mathematical value” of the company’s stock. In addition, the provisions in § 66a also lay down a set of calculation rules for the mathematical value. Further information on the circumstances where § 66a can be applied is found in chapter 3.2 – “Offerings to employees of a non-listed company as referred to in § 66a” below.

However, no discussion of the tax treatment of employee stock options within the meaning of the provisions in § 66, subsection 3 is included in this memorandum. For more information on ESO programs, see the Tax Administration’s guide Taxation of employee stock options. International situations are discussed in the Tax Administration guidance Taxation of employee stock options and employee offerings in cross-border circumstances.

2 The rules provided by present law on issues of corporate stock

Share issues conducted by limited liability companies are controlled by the legal provisions laid down in Chapter 9 of the Companies Act (624/2006). Accordingly, pursuant to Chapter 9, § 1.1 of the Act, companies may issue new shares or transfer treasury shares (i.e. carry out an issue of shares). Pursuant to § 1.2, share issues can be against payment (a share issue against payment) or free of charge (a share issue without payment).

The provisions of Companies Act additionally set out rules on existing shareholders’ pre-emptive rights to the shares being issued. Pursuant to Chapter 9, § 3.1, the existing shareholders have a pre-emptive right, the extent of which is proportional to their current holdings of shares. When the pre-emptive right laid down in § 3 of the Act is ignored (as in a “directed” issue to a limited group of subscribers only), the reasons for the derogation must satisfy the requirements laid down in Companies Act. The requirements are found in the provisions of Chapter 9, § 4.

When a limited liability company issues shares in a pre-determined way, it “directs” the subscriptions only to a limited group of people. Under Companies Act, if the company has an important financial reason for it, pre-emptive rights do not have to be observed. To evaluate whether a “directed” issue is acceptable under law, we must pay special attention to the relation between the subscription price and the share’s FMV.

Directed share issues are sometimes arranged in the form of a share issue without payment. However, this requires that the issue must be justified by good financial reasons, both from the company’s perspective and with regard to the interests of all shareholders. Examples of good financial reasons include various incentive programs, which often involve an issuance of shares to company managers or employees.

The types of issues that the Companies Act refers to can be “directed” toward different groups of potential subscribers, such as customers, all employees or only a limited group of employees. In the case of issues directed to employees, it is typical that the issuing company reduces the subscription price, setting a price below the share’s fair market value.

Issues of corporate stock of shares can also be arranged by cooperative societies as provided in the Act governing cooperatives (Osuuskuntalaki 421/2013 (“OKL”)). The legal rules that control share issues are applicable, as appropriate, on the corresponding arrangements and programs effected by a cooperate society that issues stock to employees.

3 Employee offerings in the employee´s income taxation

3.1 Offerings to employees within the meaning of § 66.1

3.1.1 Basic approaches to taxing the income

Pursuant to § 66.1, the financial benefit in an employee’s hands that results from an employee offering is subject to tax and treated as earned income, unless the discount stays below the 10-percent limit laid down in the legal rules. Under § 13, subsection 3 of the act on tax prepayments (Ennakkoperintälaki 1118/1996), financial benefits arising from employee stock options are taxable in the same way as wages.

3.1.2 The requirements for applying the legal rules

3.1.2.1 Employment-based benefit

From the perspective of whether or not the legal rules can be applied that concern employee offerings, it is required that the share issue participation is based on the employment. In addition, when managing directors and board members have received corporate shares based on their contracts with the company, the practice of tax assessment has treated their share issues the same as those received by company employees. The same principle is applied to members of Administrative Councils. The amount of the taxable benefit, if it materializes, is seen as wage income also in the case of managing directors, board members, council members.

If an individual who does not have an employment contract or does not hold any of the above positions is allowed to participate in a “directed” issue, i.e. get access to a reduced subscription price, the arrangement is not an  employee offering referred to in § 66.1 of the income tax act. Accordingly, an arrangement offered to a subcontractor-entrepreneur who works in close cooperation with the company is not an employee offering. In the same way, an arrangement offered to a leased employee is not an employee offering, so the provisions that control employee offerings do not apply to these. Instead, the value of the financial benefit is part of the total remuneration for the entrepreneur or leased worker – i.e. linked to their work performance – and taxable as nonwage compensation for work.

Because the legal provisions on employee offeringss lay down that the right to subscribe shares at reduced prices expressly results from the participating employees’ employment, the rules also extend to situations where subsidiaries of the same group offer corporate stock to the employees of other subsidiaries. As noted above, this requires that the participants who subscribe the shares receive the right by virtue of their employment.

In contrast with the above, the provisions on employee offerings cannot be applied when the employer company carries out a share issue and one of the employees, who already is a shareholder, subscribes for some shares at a reduced price because a discount is available to existing shareholders.

3.1.2.2 Transferral of treasury shares i.e. company-owned shares

The legal definition of “share issue” in Chapter 9, § 1 of Companies Act also includes the case where the company itself owns some of its own corporate shares, and it offers them to potential subscribers.  The reasons for having a holding of company-owned stocks include business restructurings that can result in the redeeming of the company’s own shares, various purchasing contracts, and the case where the company has carried out a directed share issue to itself.

The provision of the 1978 Companies Act that controlled share issues was only applied on situations where a new set of shares was offered for subscription. The tax-assessment practice of previous years followed the principle, which stayed in effect even after the amended Companies Act, that if a company transferred any of its own stocks (which the company had purchased, or redeemed) to its employees at reduced prices, the provisions of § 66.1 on employee offeringswould not become applicable (for more information, see the rulings of Finland’s Supreme Administrative Court no KHO 1994 B 523 and  a ruling concerning transfer tax KHO 2017:39). Previously, if employees were allowed to subscribe company-owned shares of their employer at a reduced price, the entire sum of the discount was taxed as part of the individual employee’s earned income. The only exception from this was the case that the company had carried out a directed share issue to itself, and then offered only this set of shares for subscription.

On 24 February 2021, the Supreme Administrative Court handed down a ruling (KHO 2021:25) that establishes that § 66.1 can also be applied on issues to employees in situations where the company itself owns the stocks that it offers for subscription. According to the reasoning of the above Court ruling, the scope of application of § 66.1 of the act on income tax must be seen as uniform with the way the “share issue” concept has been defined in Chapter 9, § 1 of Companies Act. From this, it follows that the exemption of 10%, set out by § 66.1 of the act on income tax, is always applicable when the issuance of shares is as referred to in Companies Act, and when the other relevant requirements of § 66.1 are satisfied. 

Now that a new interpretation of the law has emanated from the Court’s ruling no KHO 2021:25, requests to reassess previous tax decisions on a retroactive basis can become feasible. However, reference is made to the statutory limitations of appeal periods, as laid down in the act on assessment procedure (Verotusmenettelylaki 1558/1995).

However, in order to determine whether the recipient of the stocks must pay transfer tax, issues where the company offers new shares must be kept separate from the issues where company-owned shares are offered them for subscription. For more information on transfer taxes and share issues, please see this memorandum’s chapter 9 below.

3.1.2.3 The majority of employees

The tax-exemption of 10 percentage points set out by § 66.1 of the act on income tax is only available to the individual employee under the condition that the majority of company employees can participate in the employee offering.

However, no exact definition of “majority” is found in the act and in the government-proposal text regarding the act.  The practice of tax assessment has been that the criterion of majority is met if more than 50% of company employees can participate. From the perspective of whether § 66.1 can be applied, it is not necessary that every employee actually participate. The criterion is fulfilled if more than 50% of them are given the opportunity to participate.

The level of 50% can be considered reached at a subsidiary level (taking account of one single legal entity only) or at a higher level that encompasses the entire group enterprise. From this, it follows that the majority criterion can be fulfilled if a foreign parent company arranges an employee offering for its Finnish subsidiary’s employees. Correspondingly, the criterion can be fulfilled if a Finnish group’s Finnish parent arranges an employee offering only for parent-company employees.

However, if the share issue involves an issue of shares intended for a restricted group – for example, only for the “key employees” of the company – the entire amount of the discount becomes income subject to tax in the subscriber’s hands. The situations described above can additionally require that the arrangement must be examined further, in order to draw the line between a share issue and an offering of employee stock options (for more information, see chapter 3.7 below).

Not only the discount but also other terms and conditions may be associated with an employee offering. Examples of them include a clause setting out a minimum quantity of shares to subscribe, or correspondingly, a maximum quantity. Another example is a restriction clause that refers to pay grades as a way to establish the allowed quantity of shares that an individual employee can subscribe. If terms and conditions like the above are included in an employee offering, they must concern all the employees on equal grounds, covering everyone who can participate.

The terms and conditions like the above have no impact on the way the employee offering is evaluated from the tax perspective if it still satisfies the requirement to allow the majority of the employees to participate, and if it still is regarded as an issue of corporate stock, not an employee-stock-options program as referred to in § 66.3 of the act on income tax.

3.1.2.4 Reduced subscription price below the FMV

The legal provision of § 66.1 that controls employee offerings can only become applicable if the participating employees get to subscribe the stocks at a price below FMV. If the subscriptions are instead carried out at FMV, no financial benefit that would be subject to taxes arises for the employees.

If the majority of company employees can participate, only the part exceeding 10% of discount is treated as taxable income. If an employee offering is arranged in such a way that there are some subscriptions for which the price is reduced by more than 10%, and other subscriptions for which it is reduced by less than 10% (or 10% exactly), only the subscriptions with more than 10% discount give rise to taxable income. This requires that the share issue, including all categories of subscriptions in it, is available to the majority of company employees.

See the next chapter of this memorandum for more detailed rules on calculating the exact amount of related financial benefits.

3.1.3 The taxable benefit value

3.1.3.1 General remarks on the effect of price reductions

Only the part of the discount that goes over the 10-percent threshold is taxable (assuming that the majority of employees can participate). The 10% is calculated against the corporate stock’s FMV. However, if the arrangement is intended for a restricted group of employees only, the entire discount is taxable, i.e. the difference between FMV and paid subscription price.

3.1.3.2 Corporate stocks of listed companies, traded publicly in a stock market

The legal rule found in § 66.2 sets out the exact calculation rule that the FMV for listed-company stock means the previous calendar month’s average price; where the “previous calendar month” is the month that precedes the date when the employer company decided on the issue of its shares. If after the first public quote of the employer company’s stock, it turns out that the following calendar month’s average price is lower, the calculation must be based on this lower price, thus affecting the thresholds of when the financial benefit in the employee’s hands becomes taxable, and the euro amount of income subject to tax in the employee’s hands. The use of the average price of the calendar month following the first quote also applies to situations where a company is listing on the stock exchange.

When calculations are performed in order to ascertain the amount of the resulting financial benefit, the subscription price must be compared to the previous calendar month’s (the month before the date when the company decided to issue shares) average stock price. The way to calculate the FMV, on average, for a calendar month, is to first look up the total volume of closed transactions with the stock during the month and divide that total by the quantity of the (sold) stocks involved. This primarily refers to the transactions that were finalised during the opening hours of the stock exchange. However, if the taxpayer shows reliable proof of relevant stock transactions that were finalised outside of the hours, it can be permissible to include these transactions in the calculation of the average price. For calculation purposes, any corporate stocks traded on a multilateral trading facility such as NM, First North, and the Pre List are regarded as usual stock-exchange-quoted stocks. Correspondingly, any corporate stocks quoted and traded in markets outside Finland are regarded as usual stock-exchange-quoted stocks as referred to in § 66.2.

In the case of a new listed company that has no previous calendar month’s quotes for its stock price because the company’s initial public offering has just been made, the tax authority accepts that the discount is calculated based on the first listing. If after the first public quote it turns out that the following calendar month’s average price is lower, the calculation must be based on this lower price, thus affecting the thresholds of when the financial benefit in the employee’s hands becomes taxable, and the euro amount of income subject to tax in the employee’s hands.

The result of applying the provisions in § 66.2 of the act on income tax is that the participating employees do not receive any taxable financial benefit even if the discount is above 10% and if the next calendar month’s average price has declined as described above. Under the provisions in § 66.2, the lower one of the average prices must be applied on the discount calculation, to ascertain the euro amount of the 10% discount.

3.1.3.3 Corporate stocks not publicly listed

The guideline for valuations of nonlisted-company stocks is the Tax Administration’s instruction “on how corporate assets and property is valuated for inheritance and gift tax purposes” – Yritysvarallisuuden arvostaminen perintö- ja lahjaverotuksessa in Finnish. The onus is on the individual employee, the taxpayer, to inform the Tax Administration of the FMV of the corporate stocks he or she receives, and also indicate how the FMV is calculated and indicate the price that he or she paid for the stocks if any price was paid.

3.2 Offerings to employees of a non-listed company as referred to in § 66a

3.2.1 Basic approaches to taxing the income

Pursuant to the provisions of § 66a of the act on income tax, the arrangement gives rise to income subject to tax in the participating employee’s hands only for the part that the subscription price is lower than the mathematical value with due adjustments, which is based on the previous balance sheet confirmed before the start date of subscriptions. These provisions only concern other employer companies than the publicly listed companies within the meaning of § 33a of the act on income tax. The provisions are applicable only if all the requirements listed in § 66a are fulfilled.

This memorandum’s later chapters address the circumstances where the provisions can be applied, and describe the calculation rules for the mathematical value including the adjustments that must be made.

3.2.2 Requirements listed in the legal provisions

3.2.2.1 Employment-based benefit

One of the requirements for § 66a to be applied is that the financial benefit is accorded to an individual employee because he or she is an employee on company payroll. This means that the provisions of § 66a can only apply when the employee is entitled to subscribe shares of the company they work for. This means the company with which the employee-taxpayer has signed a contract of employment.

In accordance with the government-proposal text (HE 73/2020 vp), if the company’s managing director, who is not an employee, is entitled to subscribe corporate stock, the provisions can be applicable as well. However, the provisions of § 66a are not applicable on the individuals who are Board members and Administrative Council members, unless they also have an employment contract with the company and receive wages within the meaning of § 13, subsection 1 of the act on tax prepayments. This restriction is different from the rules to be applied on employee offerings under § 66.1, where the same guidelines that apply on employees also apply on Board members and Administrative Council members even if the latter do not work for the company otherwise.

It is not possible to apply the provisions of § 66a when the parent company of an enterprise group offers its subsidiary’s stocks in an employee offering. In the same way, it is not possible to apply the provisions of § 66a in the reverse case, when a subsidiary arranges an employee share issue to offer parent-company stocks for subscription. However, sometimes in the circumstances described above, the provisions of § 66.1 will apply.

3.2.2.2 What is meant by “majority” in the provisions of § 66a 

As with § 66.1 of the income tax, it is a requirement under § 66a that the issue of employer-company stocks is available to the majority of employees. The requirement means that more than half of the employees must have an opportunity to subscribe. For this reason, the provisions of § 66.1 cannot be applied if a share issue is arranged for a restricted group of people, e.g. for key employees only. If the company has arranged an employee offering so that it is open for participation by more than half of the employees, it has no importance afterwards whether or not everyone who was entitled took the opportunity to participate.

When we calculate the number of people that constitutes the majority of company employees, we must exclude the persons who remain outside of the scope of the legal provisions that control employee offerings such as those employees who already own a considerable number, which exceeds the relevant limitation, of shares or votes. In the same way, the members of the company’s Board or Administrative Council must also be excluded.

For more information on existing ownership and possession of votes in the employer company, see 3.2.2.4 below.

The government-proposal text (HE 73/2020 vp) sets out the principle that it is permissible to have different employees receive a different quantity of shares, i.e. the sizes of individual entitlements to subscription do not have to be the same. In accordance with the text, the nature of an employeeoffering and the goals of the draft legal provisions do not make it imperative, from the perspective of satisfying the majority requirement, that all participating employees would have to subscribe for exactly the same quantity. However, it is required that in order to determine the different quantities, there are uniform, objectively defined conditions that concern everyone who has the right to participate in the subscriptions.

In accordance with the previous tax-assessment practice related to § 66.1, it used to be an “objectively defined” condition that the quantity of stocks was dependent on the individual employee’s gross wages. However, there are other methods for defining the size of someone’s subscription besides gross wages. Among acceptable methods in accordance to the report of the Finance Committee (VaVM 27/2020) would be the value of an individual employee’s contribution of labor from the employer’s perspective. This method is based on the view that the employees’ gross wage amounts are not always the optimal yardstick on which the quantity of employee´s shares would depend. According to the report, the complete package of various benefits offered to an individual employee is typically an indication of how highly his or her contribution is valued. Based on this view, it is not only the cash wages but also the total of fringe benefits that must be included.

The report also notes that the sizes of entitlements to subscribe employer-company stock may be different between different departments, units, groups of workers. For example, in the sector of software programming, there may be important differences in productivity between different groups or different units. Accordingly, good reasons exist for defending a division of employees’ entitlements to share subscriptions, not offering the same share quantity to everyone. However, the end result of the differences in quantities cannot be that the reward in the form of employer-company shares would only be given to the management or to one individual. In other words, the definition of the majority of employees must not be understood as characterising the management’s work as more valuable than other work, which in turn would justify that members of company management have the right to subscribe more shares than other participants.

In accordance with the government-proposal text, the guideline must be that an employee offering, not an ESO program within the meaning of § 66, subsection 3 is being arranged, and the share issue is intended for the majority of company employees, and this majority also has a realistic opportunity to subscribe. In addition, the terms and conditions of the issue must be defined in an objective, egalitarian way for all the participants.  For example, it is required that no participant would receive so few shares that his or her subscription would remain insignificant. If a variety of subscription prices has been defined for the share issue, the majority requirement is satisfied on the condition that the majority of company employees can subscribe at the same price.

The Supreme Administrative Court’s rulings KHO 2023:65 and KHO 2023:66 indicate the Court’s view on what kind of criteria can be deemed as “objective” and “egalitarian” within the meaning of the provisions of the Act.

It was ruled that the length of time an employee has worked for the company can objectively and uniformly determine how many shares the employee can get (KHO 2023:65), provided that a linear relationship exists between his or her years of employment and the shares, and provided that no one among the employees would be left with an insignificant quantity of shares. The ruling concerned a company relatively small in size, which experienced rapid growth of its business at the start-up stage. The Court’s ruling emphasized that if based on years worked, the criteria do not lead to discrimination against any individual worker or against any group of workers. On the other hand, the criteria does not lead to unjust favouritism either.

The other ruling no KHO 2023:66 concerned a company conducting business on a regular, stable basis and having several hundred employees on its payroll. The company had a system of employee evaluation. The system focused on employee performance on the job, and the results of the conducted evaluations determined the category where each employee would belong to. The categorization was affected by employees’ job descriptions and every employee’s perceived worth as a contributor, including yardsticks such as “merits” and “impact”. Many similarities exist between the company’s evaluation system and generally accepted worker-assessment practices that are normally connected with pay rises. The Supreme Administrative Court points out that the criteria for evaluating employees’ work performance must be known to all. The results cannot be based on the opinions of certain individuals. There must be an open process aimed for creating a fair evaluation and unbiased results. The Court also requires that the criteria must apply to everyone who is eligible for the employee offering in the same way. The ruling additionally points out that corporate stocks cannot be allocated in such a way that only an insignificant number of shares would be available to a certain employee. The concept of “insignificant participation in an employee offering” needs to be evaluated by reference to a low value of the shares received. On the other hand, the Supreme Administrative Court directed no attention to the size of the difference between the smallest and the greatest quantities of subscribed corporate stocks.

Another conclusion derived from ruling no KHO 2023:66 is that although the shares available to someone among the employees would not fulfil the require­ments of § 66a of the act on income tax, and this employee would therefore receive a benefit on which the provisions of § 66a do not apply, the offering and the resulting benefit would still be deemed acceptable in accordance to § 66a for the company’s other participating employees if these employees are so many that they still make up the majority of employees.

If the criteria controlling the allocation of corporate stocks to company employees are unclear, or if the company uses criteria that are unacceptable in light of the Supreme Administrative Court’s ruling, so the criteria do not apply to everyone in the same way, the provisions of § 66a of the act on income tax cannot be applied on the employee offering.

3.2.2.3 Characterization of the shares that can be subscribed; the time period for subscriptions

The government-proposal text that outlines the reasoning for the § 66a provisions states that participating employees can subscribe either for newly issued shares or for company-owned shares. This interpretation is uniform with the provisions of Companies Act that control share issues (Chapter 9, § 1 of Companies Act).

However, it is important to distinguish between share issues where the company offers new shares and share issues where the company offers its own treasury shares for subscription because it determines whether the recipient must pay transfer tax or not. For more information on transfer taxes and share issues, please see this memorandum’s chapter 9 below.

In general, after a company decides to issue its shares, the subscriptions are made within a short time following the decision to carry out the issue. In line with the current tax-assessment practice, it is noted in the government proposal that in normal circumstances, three months is a length of time suitable for carrying out a share issue (cf. chapter 3.7 in this memorandum). In accordance with the report of the Finance Committee on the subject (VaVM 27/2020), if the employer company is not listed on a stock exchange, the mathematical value based on the company’s adjusted net worth does not necessarily change even if, for a special reason, the period for making subscriptions were longer than that.

Accordingly, in circumstances where § 66a is applicable, it may be allowed, due to a special reason, that the subscription period of a share issue exceeds the 3-month maximum limit laid down by current assessment practice. This means that although the maximum limit of 3 months is exceeded, it does not automatically change the arrangement into one on which the provisions of § 66.3 on employee stock option programs would apply. This requires in any case that a special reason exists for extending the period length, and that the adjusted mathematical value has not changed in the course of the period.

3.2.2.4 Limitations regarding stock ownership

The purpose of the provisions of § 66a is to make it possible to provide incentives to company employees, and to reward them. In line with the above, limitations apply to employee offering provisions. Accordingly, those who already are shareholders of the employer company having a considerable number of shares cannot participate: The provisions of § 66a cannot be applied if the shareholding of the individual taxpayer, his family members or that of the taxpayer together with family is directly or indirectly above 10% of corporate stock or correspondingly, above 10% of the votes of accorded to shareholders of the company’s all shares.

The meaning of “family members” under the act on income tax is wife, husband, spouse and minor children. The exact requirement is that the child has not turned 17 before the start of the tax year. Direct shareholding and indirect shareholding are equated for purposes of the above rule. Shares held through indirect holding are in question if the individual taxpayer, family members or the taxpayer together with family own some shares in other companies that in turn own shares in the company concerned, and this results in an indirect possession of shares or votes that reaches at least 10%.

The government-proposal text lays down that the guidelines for examining whether the 10-percent limits are exceeded are the same as the guidelines for shareholder borrowing, in reference to § 53a of the act on income tax. For more information on company-provided lending of money to shareholders, see “Tax consequences for individual taxpayers due to borrowing from a limited liability company – “Luonnollisen henkilön osakeyhtiöstä nostaman osakaslainan verotus”.

It is possible for an individual to first be a shareholder of less than 10% of their employer-company stock or related votes, and then, following an employee offering on which § 66a applies, the individual becomes a shareholder with more than 10% of the shares or votes. In this case, the mathematical value set out in § 66a can only be applied on the shares that yet do not exceed the limitations regarding stock ownership or related votes. The tax treatment of the shares subscribed that exceed the limitation is as provided in § 66.1 of the act on income tax.  If the requirements of the provisions in § 66.1 are fulfilled, the 10-percent discount rule can apply to the shares on which § 66a cannot be applied.

3.2.2.5 Company requirements

The provisions of § 66a of the act on income tax only apply to companies that are not listed on a stock exchange. The meaning of “listed company” is as defined in § 33a of the act on income tax. As a result, the way § 66a is applied is uniform with the current tax-assessment practice on dividends. The employer company must be “other than listed” at the time of share subscription.  The provisions that apply also extend to foreign companies referred to in § 9 of the act on income tax, as they are treated as comparable to Finnish companies because they are resident taxpayer entities in Finland by virtue of their place of effective management being located here.

It is the legislator’s intention to have the provisions of § 66a applied on companies that conduct business and hold corporate assets for that purpose, so that most of the company’s assets consists of items of property that serve the business. For this reason, § 66a can only apply if the company, at the point in time when it arranges the employee offering, conducts business within the meaning of the act on the taxation of business income (Laki elinkeinotulon verottamisesta 360/1968 (“EVL”)). Accordingly, § 66a is not applicable to companies that hold corporate assets mainly (more than 50%) consisting of property referred to in § 12a of the act on the taxation of business income. This property is not seen as being part of the financial assets, current assets, investment assets or fixed assets that serve the company’s business operation. Evaluation of the nature of corporate assets and property must be based on the company’s latest balance sheet. Correspondingly, the applied asset values must be based on the provisions of the act governing the valuation of assets for tax purposes (Arvostamislaki 1142/2005).

The company must be an “employer paying out wages on a regular basis”, and the company must have a prepayment registration. Companies are regarded as an “employer paying out wages on a regular basis” if wages or salaries are paid to at least two employees on a permanent basis, or to at least six employees at the same time, even if the contracts of the six employees are temporary or short.

3.2.2.6 Share issues by foreign companies

The issuance of shares within the meaning of § 66 a of the act on income tax does not have to be from a Finnish corporation; also a foreign company can issue the shares, provided that the company’s domicile is in the countries of the EEA or in a non-EEA country with which Finland has agreed on mutual administrative assistance in tax matters and with which the exchange of tax information works well.

The requirements relating to the nature of the issuing company, relating to the share issue, and relating to how shares are subscribed by the employees are the same for foreign companies as for domestic companies in Finland that arrange employee  offerings. Nevertheless, because foreign companies rarely have entered the prepayment register in Finland, it is necessary for the foreign company to present proof that it has no history of neglect as referred to in § 26 of the act on tax prepayments (Ennakkoperintälaki 1118/1996). The neglect referred to in § 26 includes non-payment of taxes, non-filing of tax returns, non-compliance with accounting requirements and the obligation to keep records.

In the case of an employee offering involving a foreign company that issues the shares, the onus is on the individual taxpayer to provide sufficient information to satisfy the requirements listed in § 66a of the act on income tax. An example of sufficient information is a document, endorsed by the foreign company, stating that the issuing company fulfills the relevant requirements, and also the share issue and the arrangements made for employees to subscribe shares are in line of the requirements; combined with a written account that outlines the mathematical value of one corporate share as referred to in § 66a. 

The taxpayer must present a document issued by the tax authority of the company’s country of residence in order to prove that the foreign company has no history of non-filing and non-payment of taxes referred to in § 26 of the act on tax prepayments. In addition, the taxpayer can present an account indicating that the foreign company is entered in a register comparable to the Finnish prepayment register. An official register in the country concerned is regarded as comparable to the Finnish prepayment register if the foreign regulations on how companies can be registered and de-registered are generally similar to the Finnish regulations that govern the prepayment register. The act on tax pre­payments contains detailed rules on registration and de-registration in § 25 and § 26.

3.2.3 The value of the  taxable benefit and the mathematical value of one share

When an issue of shares is carried out as referred to in § 66a of the act on income tax, only the part is taxable that represents a discount of the subscription price in relation to a mathematical value determined according to the rules laid down in § 66a itself.  If the subscription price is lower than the value defined in § 66a, the difference is an item of earned income, subject to tax. If the employee offering involved no payment of a subscription price, the earned income subject to tax would be the mathematical value. If the share issue involved a subscription price that equals the mathematical value defined in § 66a or a higher price, it would not give rise to any benefit subject to earned-income taxation.

When determining the issuing company’s net worth, its latest balance sheet endorsed by the annual general meeting at a date prior to the start date of subscriptions, must be used. Alternatively, an interim balance sheet can be used in a calculation of the adjusted mathematical value in reference to the provisions of § 66a of the act on income tax.

Under § 9 of the act governing the valuation of assets for tax purposes, corporate net worth must be divided by the total quantity of shares held by all shareholders. This is the mathematical value of one share. The quantity to be entered in the above formula must be the total held by all shareholders at the start date of subscriptions, not the share quantity at the company’s balance-sheet date.

The rules contained by Chapter 2 of the act governing the valuation of assets for tax purposes are applicable to how corporate net worth, total assets, and total liabilities are valuated. Under § 2, subsection 2 of the act, assets and property of a company are divided into fixed, current, investment, financial and “other” assets plus any capitalized expenditure when it is regarded as having a value. However, corporate assets can include no accumulations of deferred taxes, referred to in Chapter 5, § 18 of the Accounting Act. Correspondingly, under § 2, subsection 3 of the Accounting Act, entries representing borrowed capital on the liabilities side of the balance sheet must be regarded as debt. In addition, a subordinated loan that resembles a capital-investment must also be regarded as debt if it falls under the category of “borrowed capital”. However, debt does not include any calculated tax debts as referred to in Chapter 5, § 18 of the Accounting Act.

The provisions of § 66a, subsection 2 of the act on income tax sets out rules on the  required adjustments to the calculation of net worth.  The net worth, within the meaning of § 66a, subsection 2, must be increased if an additional investment or an additional issue of stock has been made, so that the company’s equity has grown. Correspondingly, the net worth must be adjusted downward if the company has decided to pay out dividends for the financial year concerned, or decided to pay out a refund of capital to shareholders. This way, if an investor has recently made an additional investment in the issuing company, this is reflected in the calculation as it makes the net worth higher, and vice versa, if dividends are paid out for the financial year it must made the net worth lower.

Net worth is also adjusted, for example, if the company has acquired treasury shares after the closing of the accounts but before the beginning of the subscription period in the share issue. Typically, such a situation may arise, for example, when an employee leaves the company and the company redeems the shares owned by the employee.

If a merger or demerger has taken place between the end date of the financial year and the start date of subscriptions, an adjustment to net worth must be made under the detailed rules, as appropriate, of § 13 of the act governing the valuation of assets for tax purposes. This means that the latest approved balance sheets and net-worth totals of the merging companies must serve as the calculation bases for a receiving company’s net worth after a merger, or in the case of an equal-stakes merger, for the net worth of the new corporate entity that results from it.

If a demerger has been carried out between the financial year’s end date and the start date of subscriptions, a relevant part of the divided net worth of the company that divides itself, as based on its latest balance sheet, must be attributed to the receiving company. Correspondingly, if a partial division is carried out, the part of the net worth must be subtracted that represents the value that the receiving company obtains.

The rules found in § 10 of the act governing the valuation of assets for tax purposes are applied in order to determine the value of one corporate share for a newly established company, for which no approved balance sheet has yet been made. In this case, the value of one share would equal the nominal value or if no nominal value exists, the book value.  Accordingly, to arrive at the book value, we divide the company’s share capital by the total number of shares.

If the company was established as a limited liability company after the legal entity form of a previous activity was changed, the rules of § 10 of the act governing the valuation of assets for tax purposes determine the calculation of the mathematical value. This means that the latest balance sheet for the previous business operation is the base for corporate net worth. If after the change of the legal form, only some of the previously held assets and liabilities were assigned to the new limited liability company, only the part of them that actually is assigned can be included in the calculation of net worth.

To arrive at the mathematical value of one corporate share of a foreign company, we must apply the same calculation formula, with any adjustments that are necessary, as is applied on domestic Finnish companies.

The provisions in § 66a of the act on income tax contain no rules on how to determine the FMV per share for a limited liability company. For more information, see the Finnish Tax Administration's guide (in Finnish, in Swedish) on "Valuation of assets and property in inheritance and gift taxation" — Varojen arvostaminen perintö- ja lahjaverotuksessa.

3.2.4 Discussion of the provisions of § 66a in comparison with § 66.1 of the act on income tax

Subsection 4 of § 66a contains specific rules on how the regulations that concern non-listed companies’ issues of stock are interrelated with the rules governing stock issues in § 66.1.

If the circumstances do not allow the provisions of § 66a to be applied, it may be possible to apply the provisions of § 66.1.  This situation can arise when an employee offering involves parent-company stock, which the employees of a subsidiary company could subscribe, or vice versa, there is a share issue for employees of a parent company to subscribe for subsidiary’s shares. One reason for preventing the application of the § 66a provisions is that the requirements that relate to the issuing company are not fulfilled. This is caused by various circumstances, specifically, if the company does not conduct business within the meaning of the act on the taxation of business income, the major part of corporate assets consist of other property as referred to in § 12 of the act on the taxation of business income, the company is not an employer paying wages on a regular basis, or the company has no prepayment registration.

In addition, the provision of § 66.1 can also be applied if the requirements of § 66a would be satisfied in other respects but the mathematical value defined in § 66a is higher than 90% of the stock’s FMV. In such a case, it is more beneficial for the individual taxpayer that § 66.1 be applied instead.

If the provisions of § 66a cannot be applied and the reason for this is that the share issue is not offered to the employees’ majority, the entire euro amount of the discount, i.e. the shares’ FMV minus the reduced price, is fully taxed as being an item of earned income in the employee’s hands. In the same way, the exemption of 10%, set out by § 66.1 of the act on income tax, would not be applicable.

No impact is caused by the provisions of § 66a on the tax treatment of ESOs, employee stock options, which is referred to in § 66, subsection 3 of the act.

3.3 The tax year

The benefit that an employee offering brings about for an employee is treated as received, for tax purposes, when the employee effects his or her subscription of an offered share of stock. This means that the date of subscription determines the year when income is taxed. Accordingly, no importance is attached to the start date of subscriptions, to approvals of subscriptions or to the dates when book-entry accounts are updated.

3.4 Declined value of the corporate stocks; and restrictions on transferral

Shares acquired by virtue of an employee offering may have transfer restrictions that prohibit the employee from transferring the shares to another party following the subscription. The case-law emanating from court rulings sets out the view that no deviation from the actual market value, valid at subscription date, can be accounted for even if restrictions on share transferral are in force, and even if the values on the stock exchange have declined (KHO 2011:91). If the shareholder’s rights (the voting right and the right to receive dividends) were fully granted to the shareholder-employee, the mere fact that a restriction on further transferrals is imposed is not an adequate reason for changing the valuation of the share at its subscription date.

Correspondingly, if employees must give back the received corporate stocks if they do not continue working for the company for a specified duration, it is a condition with no impact on the valuation of the share, and with no impact on the point in time when the taxable benefit is regarded as having materialized for the employee. If the employee has to return the shares already transferred to them because of a resolutory condition relating to the termination of employment, the employee’s tax assessment will be adjusted upon their request (§ 61 and § 63 of the act on tax assessment procedure (Verotusmenettelylaki 1558/1995). This reassessment relates to the tax year when the taxable benefit, arisen by virtue of the subscription, was taxed.

3.5 Deductions in the individual employee’s income taxation

When an individual employee receives financial benefits arising from a share issue, it is wages (under § 13.3 of the act on tax prepayments) unless the said benefits are not exempt from tax by virtue of the legal provisions in § 66.1 and § 66a of the act on income tax. Based on the benefit, a deduction for the production of income, an earned income deduction (from municipal income taxes) and an employment income deduction (state taxation) are thus made in the employee’s tax assessment (§ 95, § 105a and § 125 of act on income tax).

3.6 Transferral of the shares to another party

After an employee has sold their shares, subscribed in an employee offering, provisions on the taxation of capital gains are applied (§ 45, § 46, § 47 and § 50 of the act on income tax).

Capital gains, if any, are then treated as taxable capital income. The amount of the gains is calculated by subtracting the share’s acquisition cost from selling price. The acquisition cost is the sum of the price paid for the shares and the amount that was taxed as wages. When the employee sells shares, the calculation of capital gains must not include the tax-exempt discount in the tax-deductible acquisition cost (under the Central Tax Board’s ruling no KVL 59/2004). Another way to perform the calculation of capital gains is to apply the method based on a presumed acquisition cost.

In general, if the employee- sells the shares at a price below their acquisition cost, a capital loss is generated. For more information on the taxation of capital gains and capital losses, see the Tax Administration’s guidance on “conveyances of securities” – Arvopaperien luovutusten verotus.

3.7 Share issue or Employee stock option

3.7.1 The impact of the time when employees can make subscriptions

To draw the line between share issues and ESO programs can be difficult. Under § 66, subsection 3, employee stock options mean the rights of an employee, by virtue of his or her employment, to receive or buy stock for a price below fair market value, based on a convertible loan, agreement, plan, scheme, contract, etc. It is characteristics for ESOs that the time when he or she subscribes the corporate stock is in the future, and the terms, conditions, and the price have been agreed in advance.

However, it may not always be clear whether the legal provisions on share issues or on ESOs should be applied. The Supreme Administrative Court’s ruling no KHO 2009:8 (KHO 26.1.2009 record 163) addressed a share issue in a company. The case involved a benefit, based on an employment contract, which was not granted as option right or other special right under chapter 10, section 1 of the Limited Liability Companies Act. Instead, the employees could get the benefit by subscribing the issued shares. This was implemented by determining the subscription price and period in such a way that those entitled to subscriptions could reap benefits from an increase in share value following the decision on the share issue. Because key employees could benefit from the value appreciation by subscribing the company’s shares at a future date, paying for them below the market price at that date, the scheme must be treated as employee stock option under § 66.3 and not as a share issue referred to in § 66.1.

Based on the decision, the benefit granted to the employee in the form of share issues must be treated as employee stock options if the employee gets the opportunity to enjoy an increase in share value. Typically, this may happen when the subscription price is the fair market value that was determined for the share when the incentive plan was launched, but the period between the plan’s start date (the date when subscription price is determined) and the end of the subscription period lasts several months or even longer.

In general, after a company decides to conduct an issue of shares, the subscriptions are made within shorter time frame following the decision to issue shares. In light of the provisions of § 66.1 and § 66.2 of the act on income tax, which set out calculation rules for the FMV, the Tax Administration states that a 3-month subscription period is considered a normal length of a period for subscriptions, because the provisions refer to the monthly averages of company-stock values, for the preceding or for the following calendar months. These values must be accounted for when FMV is determined, in addition to the value that prevails on subscription date. If the period when subscriptions can be made is longer than 3 months, the legal provisions that must be applied on the plan may have to change from § 66.1 to § 66.3.

However, there would not necessarily be any changes to stock values in non-listed employer companies even if the period were longer than 3 months. The report no 27/2020 issued by the Finance Committee of the State (VaVM) discusses the circumstances where § 66a of the act on income tax is applied. The report expressly states (see 3.2.2.3 above) that when special reasons exist, the period when the employees can make subscriptions can be longer than 3 months if the mathematical value of one corporate share remains constant. The above principle can also be applied on non-listed companies’ share issues on which the provisions of § 66.1 apply, on the condition that the share’s FMV has not changed during the subscription period.

Many companies have included a clause in key employees’ or directors’ contracts that addresses the terms and conditions of future share subscriptions. If the employer company signs a contract with a key employee and the contract sets out the subscription price, the number of shares that he or she can subscribe, which are among the important terms and conditions of subscription, the contract’s clauses can be treated as an employee-stock-option program within the meaning of § 66.3 of the act on income tax. In contrast, if the employer company only gives a general statement pointing out that some time in the future, it will carry out an issue of shares for the employees as referred to in § 66.1 or in § 66a, it is not automatically mean that employee stock options are going to be offered.

3.7.2 The impact on valuation

The way the line is drawn between a share issue and an ESO program is important from the perspective of how the resulting financial benefit in the employee’s hands should be valuated. After the decision of a listed company to carry out an issue controlled by § 66.1, valuation is based on the average price during the calendar month before the decision (and in some cases, it is based on the next month’s average stock price following the stock’s first quote). Benefit valuation in the case of employee stock options, instead, is based on the date when the individual employee has “exercised the option” i.e. subscribed the underlying stocks.

In the case of non-listed employer companies, valuations are normally based on the latest approved balance sheet before the start date of subscriptions. The valuation of options depends on when the option is exercised. Nevertheless, if the employer company is nonlisted, the above principle of valuation does not necessarily affect the outcome because the FMV of the employer company’s stock is the same when § 66.1 is applied as when § 66.3 is applied. In this case, the choice between the two legal provisions mostly only affects the question whether the exemption of 10%, set out by § 66.1 would be applicable.

However, if the line must be drawn between application of § 66a and § 66, subsection 3, then the choice between the two legal provisions has an important impact on valuation. If § 66.3 is applied, valuation of the employee’s taxable financial benefit is based on how much FMV and subscription price differ from one another. But if § 66a is applied, the employee’s taxable financial benefit does not materialize unless the subscription price is lower than the mathematical value.

3.7.3 Associated special rights or special terms and conditions

The report of the Finance Committee (VaVM 27/2020), issued at the time when the provisions of § 66a were drafted, contains a statement that also addresses the rights associated with the subscribed shares, which has an impact on the differentiation between share issues and ESOs. One of the requirements for making § 66a applicable is that the employee-subscribed share comes with the right to receive dividends, the right to receive a proportional part of the company’s assets if it ever gets liquidated, and the right to vote in the company’s annual general meeting. If an issuance of shares is arranged and an employee comes forward to subscribe shares but does not receive the above rights, which are among the basic shareholder rights, the arrangement is not an employee offering referred to in § 66a of the act on income tax. Instead, the arrangement may fall under the category of ESO programs within the meaning of § 66, subsection 3 of the act, on the condition that the requirements for applying that provision are fulfilled.

3.8 Employee stock savings and stock purchase plans

Some employers offer an employee stock savings or stock purchase plan linked to a time schedule for setting aside a sum of money as “savings”. This means that the terms and conditions include a period when savings are made: the employee regularly sets aside a certain amount subtracted from net wages. After the savings period is over, the purchase is made. He or she can purchase – or subscribe for – the employer company’s stock for a price below market. The time frame in these stock savingsor stock purchase plans is either restricted to a defined period for accumulating savings or extended to an ongoing or long-term plan where stock purchases are repeated on a once-a-year basis or at other intervals.

After the participating employees’ savings period has ended, the stock purchase can be arranged as an issuance of company shares. Either the provisions of § 66.1 or the provisions § 66a will apply, depending on the stock savings plan’s terms and conditions. If a share issue is arranged, and the stock savings plan is available for participation for all company employees, or as a minimum, for the majority, the discount compared to the stock’s FMV will only be taxed for the part that goes over the 10-percent threshold, assuming that § 66.1 is applicable. If, instead, the employer company carries out the issue as referred to in § 66a of the act on income tax, it only gives rise to taxable income if the subscription price is lower than the stock’s mathematical value under the rules laid down in § 66a itself.

Shares may also be acquired in such a way that the employer pays part of the share purchase price. This part is treated as the employee’s taxable benefit.

4 Preassessment of income tax in the case of an employee offering

4.1 Tax withholding

The financial benefit that results from an employee offering is treated as wages (under § 13.3 of the act on tax prepayments) unless the maximum discount within the meaning of § 66.1 of the act on income tax does not go above 10%; and in the case of an employee offering on which § 66a is applied, the subscription price is equal to – or higher than – the stock’s mathematical value. Accordingly, the employer must withhold tax on the value of the financial benefit (§ 9.1. of the act on tax prepayments). Withholding is required even if the employee has asked the Tax Administration to provide a prepayment calculation for their income.

For more information on how tax must be withheld, see the Tax Administration’s guides on “Taxation of employee stock options” – Työsuhdeoptioiden verotus and “Withholding taxes” – Ennakonpidätyksen toimittaminen.

4.2 Pension insurance and unemployment insurance contributions, paid by employee

Pension and unemployment insurance contributions are normally collected on the wages paid to employees. The base for both contributions is the employee’s total remuneration, consisting of cash wages plus usual fringe benefits (the gross wages). The resulting payable contribution amount is subtracted from net after-tax wages.

However, any financial benefits arising from a right to buy stock or similar securities for a reduced price on the basis of employment are not part of the base for the contributions, if the benefits are available to the majority of company employees (under § 70, subsection 3.3 of the Employees Pensions Act 395/2006 and § 19, subsection 2.3 of the act on financing the relief payments to the unemployed (Laki työttömyysetuuksien rahoituksesta 555/1998)). The above rule is applied both on employee offeringss under § 66.1 and on employee offeringss under 66a of the act on income tax. In the reverse case, if the majority cannot participate in the share issue, the entire sum of the resulting financial benefit is wages, so both of the contributions must be paid.

If the size of the taxable financial benefit is so large that all of the employee’s cash wages must be withheld in order to cover the withholding obligation, after which there is no money left for subtracting the two contributions from net after-tax wages, the guidelines explained in the “Taxation of employee stock options” – Työsuhdeoptioiden verotus must be applied (chapter 6.2 of the text).

4.3 Action required of participating employees during the tax year

After the employee- has received the benefit that arises from an employee offering, it may be advisable for him or her to ask for a revised tax card. The percentage rate on the card that employees normally have is based on a standard withholding calculation that does not include the impact of the extra income in the form of the share issue benefit. This can lead to a situation where the employee’s all cash wages must be withheld, or to a low, insufficient amount withheld. If not enough tax is withheld upon wage payment, the employee ends up having to pay back taxes and late payment interest.

The benefit arising from share issues is treated as wage income. Accordingly, the employer must withhold tax on it. The Tax Administration can also perform a tax-prepayment calculation for the employee, i.e. impose an amount to pay in advance (§ 23, act on tax prepayments). If the amount withheld is low compared to the size of the financial benefit in the employee’s hands, and his or her actual tax liability for the year is by far not covered, they still have an opportunity to avoid having to pay back taxes: either ask for a prepayment calculation during the tax year, or request a calculation for an additional prepayment during the year following the tax year. After the employee has paid the additional prepayment that had been imposed, its amount counts towards his or her total tax payments for the year (§ 34 of the act on assessment procedure).

Even if the employee has requested prepayment calculations from the Tax Administration, the employer company must follow the instructions on the employee’s tax card in order to withhold tax on the share issue benefit. The above must be accounted for when income ceilings are calculated for the employee’s tax card.

5 Required contribution payments from the employer and from the employee

5.1 The health insurance premium of the insured party

Under Chapter 18, § 5, subsection 1 of the Health Insurance Act (1224/2004), an individual insured in Finland is obliged to pay the insured person’s health insurance which consists of a portion relating to daily allowances and a portion relating to medical expenses. While daily allowance contributions are based on the individual’s employment income subject to tax, the healthcare contribution is based on the individual’s annual taxable income for purposes of municipal income taxation (Chapter 18, § 14, subsection and Chapter 15, § 15 subsection 1 of Health Insurance Act).

Wages that coincide with the definition set out in Chapter 11, § 3 of the Health Insurance Act are included in the base for the daily allowance contribution of health insurance. The definition (in Chapter 11, § 3 of the Act) lists pay, rewards and compensation as being subject to withholding, referred to in § 13 of the tax prepayment act, along with other items.

However, the items mentioned in Chapter 11, § 3, subsection 3 are not regarded as part of the daily allowance contribution’s base. In accordance with Chapter 11, § 3, subsection 3, any financial benefits arising from a right to buy stock or similar securities for a reduced price on the basis of employment are not “wages” if the benefits are available to the majority of company employees.

No daily allowance contribution is to be collected on the benefits within the meaning of § 66.1 and § 66a of the act on income tax provided that these benefits are available to the majority of employees. Only the insured party’s health insurance premium must be paid, and the standard amount of this premium is raised (Chapter 18, § 14, subsection 1 and Chapter 18, § 20 of Health Insurance Act). However, if a share issue is offered but it is not available to the employees’ majority, the daily allowance contribution is imposed.

The insured person’s health insurance contribution is included in the withholding rate indicated on the tax card. If the withholding rate is determined for taxation at source, i.e. to be paid by a nonresident individual taxpayer, the calculation does not include the insured person’s health insurance at all.

5.2 Employer’s health insurance contribution

Under § 4 of the act on employers' health insurance contributions (Laki työnantajan sairausvakuutusmaksusta 771/2016), employers must pay health insurance contributions if the employee concerned is covered by the Finnish social security system under the Health Insurance Act. The employer will pay the employer's health insurance contribution based on the total payroll. The concept of “wages” includes pay, rewards and compensation subject to withholding, referred to in § 13 of the tax prepayment act, and other items. However, the items mentioned in chapter 11, section 3, subsection 3 of the Health Insurance Act are not regarded as wages (§ 5, act on the employer’s health insurance contribution).

If the benefit arising from an employee offering is available to the majority of company employees, no employer's health insurance contribution has to be paid. In the reverse case, if the majority cannot participate in the share issue, the employer's health insurance contribution must be paid.

6 The employer's reporting requirement

6.1 Employer’s reports to the Incomes Register

The employer company must submit reports to the Incomes Register in order to give details on the wages, fringe benefits and other taxable payments they pay to the employee.

After the company has carried out an employee offering within the meaning of § 66 of the act on income tax and financial benefits have ensued, it is required to include information on the benefits in the reports to be submitted to the Incomes Register if the employee offering has been available to the majority and if the discount is more than 10% of the FMV of the share. However, if subscriptions by participating employees are made at FMV or if the discount does not exceed 10% of FMV, the employer company does not have to inform the Incomes Register of the share issue at all.

The employer has to include the benefit amount in its reports to the Incomes Register if the subscription price, in an employee offering on which § 66a is applied, is lower than the mathematical value under the rules laid down in § 66a itself.  If subscription price and the mathematical value are the same, or if the subscription price is higher, no financial benefit that would be subject to taxes arises for the employees, so the company does not have to inform the Incomes Register of the employee offering.

If the company has arranged an employee offering but it is not available for participation for the majority of company employees, the entire amount of the benefit is an item of income in the employee’s hands, subject to earned-income tax. The Incomes Register’s instructions for employer companies contain specific rules on how reports must be drawn up in the case of this type of benefits.

For more information on the reports to the Incomes Register, see: Reporting data to the Incomes Register: rewarding employees, payments made to an entrepreneur and other special circumstances.

6.2 Information-reporting requirements in the case of an employee offering under § 66a

Employer companies carrying out a share issue on which § 66a applies must give the details listed in § 17, act on assessment procedure. The company must submit an annual information return to give those details to the Tax Administration. Among the details are a list of the employees who subscribed, information on the share issue including the quantity of subsections, the start date, the date(s) when subscriptions were actually made, prices paid, the applicable mathematical value and whether after the subscription, any subscriber’s ownership and votes become greater than what has been laid down in § 66 a, subsection 1 of the act on income tax.

For share issues within the meaning of § 66a of the income tax, the above information return must always be submitted if the provisions of § 66a on share issue have been applied on at least one employee. In addition, the details must also cover the participating employees that have subscribed, but § 66a is not applicable because the upper limit for ownership has been exceeded, or for other similar reasons.

The annual information return must be filed by its statutory deadline date. For more information on how to complete the annual information return, see appropriate instructions.

7 The individual employee’s tax return for the year

Normally, the taxable benefit that has arisen from the individual employee’s participation in an employee offering, arranged by a Finnish employer, is pre-filled on the employee’s pre-completed tax return. The amount and other details are based on the employer’s annual information return that the Tax Administration has received and processed. It is the responsibility of the employee- to check the amount and other details. If any errors and omissions are found, the employee must take action to have the errors put right.

If the benefit is received from a foreign employer, the employee must add the benefit to the tax return (§ 7 of the act on tax assessment procedure). The same requirement is in effect in the case of a Finnish employer that has neglected to submit the information.

For more information on employees’ responsibilities to report information to the Tax Administration, see “Taxation of employee stock options” – Työsuhdeoptioiden verotus.

8 Deductibility of costs in the employer’s tax assessment

The guidelines that apply to employee stock options also apply to share issue arrangements regarding the tax-deductibility of expenses, which affects the employer company’s taxation. For more information, see “Taxation of employee stock options” – Työsuhdeoptioiden verotus.

9 Transfer taxes relating to shares received in an employee offering

Under § 15, subsection 1 of the act on transfer tax (Varainsiirtoverolaki 931/1996), the beneficiary who becomes a security’s, new owner must pay transfer tax. The act on transfer tax refers to securities including corporate shares, subscription rights, and others. To own a security in the form of a book-entry share is treated the same way as direct ownership of securities (§ 17 of the act on transfer tax). No transfer tax has to be paid on a conveyance of a security issued by a foreign corporation (§ 18, subsection 1 of the act on transfer tax).

According to the scope of application of the act (the text of the Government’s proposal no HE 121/1996), subscription of shares or stock options is not regarded as a conveyance i.e. transfer. When an employee receives newly issued shares of their employer company in an employee offering, it is not a conveyance within the meaning of the act on transfer tax. As a result, the employee is not required to pay transfer tax. The same also applies in situations where the company decides on a share issue without payment, directed to the company itself, in accordance with Chapter 9, § 20 of Companies Act. The case-law based on the Supreme Administrative Court’s rulings contains a reasoning that the above is an issuance of shares that have not been subscribed for by anyone outside the company, so the event is comparable to share subscription.

If employees subscribe for treasury shares in a share issue based on employment relationship, the share transfer is subject to transfer tax. If no taxable benefit is generated in a share issue based on employment relationship, the consideration on which the transfer tax is based includes only the consideration the employee pays for the share as its subscription price.

Transfer tax must also be paid if the consideration consists partly or wholly of work input. If, in a share issue based on employment relationship, an employee subscribes for treasury shares and a taxable benefit is generated for them, the share purchase price on which the transfer tax is based comprises the sum of the subscription price paid for the share and of the portion based on the employee’s work input. As a rule, the portion based on the employee’s work input refers to the amount that has been regarded as the person’s taxable benefit in income taxation.  

For a further discussion of the case-law that emanates from the Supreme Administrative Court’s ruling (KHO 2017:39), see the Tax Administration’s guidance Taxation of employee stock options.