Taxation of employee stock options and employee offerings in cross-border circumstances

This is an unofficial translation. The official instruction (record no VH/8015/00.01.00/2024) is drafted in Finnish and Swedish languages.

This guidance discusses the tax treatment, under the Act on income taxation (Tuloverolaki (1535/1992)), of benefits of economic or financial nature, within the meaning of section 66 of the said Act when the recipient of the income is an employee who works outside of Finland.

What is meant by employee stock option or ESO is the right given to an employee under an employment contract to receive or buy stock for a price below fair market value, based on an agreement, scheme, plan, contract, etc. For tax purposes, the ESO term not only refers to the traditional stock option schemes but also to a number of other, modified variants of share-based incentive systems, and the tax rules on how income tax is imposed on the benefits arising from such schemes. In situations where the employer company has offered its stock to all of its employees or to the majority of its employees, there may be other, additional issues relating to international income taxation.

The latest updates to the guidance concern rules on health insurance contributions, and the taxpayer’s application for a decision on a tax-at-source.

1 Introduction

Under section 66, subsection 3 of the Act on income taxation, employee stock options mean the rights of an employee, by virtue of his or her employment contract, to receive or buy stock for a price below fair market value, based on an agreement, plan, scheme, contract, etc. For tax purposes, the concept of employee stock option is wide and there is an extensive range of different employee stock options (ESOs), and many incentive programs of various types are treated the same way as ESO schemes are treated for tax purposes, although some of the programs are greatly modified.

References to ESOs in this guidance mean all incentive schemes or programs that are treated as employee stock options for tax purposes. For more information and a further discussion of the ESO concept, see Tax treatment of employee stock options.

What is meant by an “employee offering”, on the other hand, is that wage earners (under an employment contract) receive the right, as referred to in section 66, subsection 1 of the Act on income taxation, to buy the employee company’s corporate stocks for a price below fair market value. The benefit arising from an employee offering is subject to Finnish tax for the part that reflects more than a 10% discount on the current stock-market quote. If the benefit is not available to the majority of employees, the entire discount received is regarded as income subject to tax.

In the same way as with wage income, it may be that the benefit arising from ESO and an employee offering is taxed by more than one country: this requires that the provisions of a relevant tax treaty be followed, and it also requires that the taxing rights of the countries be divided properly. Additionally, income taxation is affected by whether the beneficiary is a resident or non-resident taxpayer in Finland.

Under the provisions of the Act on income taxation, a Finnish resident individual must pay taxes to Finland from his or her income received from Finland or another country (section 9, subsection 1.1 of the Act on income taxation). Conversely, an individual who is a nonresident must pay taxes to Finland from his or her income received from Finland only (section 9, subsection 1.2 of the Act). For more information, see the Tax Administration’s guidance Tax residency, nonresidency and residency in accordance with a tax treaty – natural persons, Taxes on work abroad and Taxation of employees from other countries.

This guidance does not cover the tax treatment of employee share issues of unlisted companies, referred to in section 66a of the Act on income taxation. In international situations, the same principles that are applied to employee share issues under section 66, subsection 1 of the Act on income taxation may be applicable. However, the additional conditions under section 77, subsection 2 of the Act on income taxation are applied only in situations under section 66, subsection 1 of the Act, because the provision contains no reference to section 66a of the Act. For more information about situations where section 66 a is applicable, see Taxation of employee offerings.

2 The principle of accrual

In cross-border circumstances, the extent to which the different countries can impose tax on the benefit that arises from an ESO is determined by where the income has accrued. To apply the principle of accrual means that the periods when the wage earners have worked in various countries affect the way their ESO income is treated. Part of it will be subject to tax in Finland – the rest is exempt from tax in Finland. This principle is also applied on other incentive schemes that are stock-based and where a vesting period is agreed upon and the stage when the benefit is received is when it is fully vested; these schemes are treated the same way as ESO schemes for tax purposes.

Regarding income in the form of a benefit derived from an ESO scheme, the Finnish Supreme Administrative Court has stated (ruling no KHO 2013:93) that the period when the recipient earns the income is the period when he or she was expected to work in order to obtain the right to exercise the options.  This means that the period when the income is accrued is the period between the date when options were granted and the date when they are fully vested. If the employee has been a tax non-resident in Finland for part of the time and has not primarily worked in Finland for a Finnish employer, the ESO benefit that relates to this part of the time is not sourced to Finland.

The Supreme Administrative Court’s ruling referred to above (ruling number 2013:93) only addressed the question of how to define the period when income had accrued when applying the provisions of Finnish national legislation. However, the Court’s text explaining the reasoning for the ruling cited the OECD’s Commentary to the Model Tax Treaty. Bearing in mind the general requirement of consistency of tax systems, there are good reasons to apply the principles emanating from the Supreme Administrative Court’s ruling also if the provisions of a tax treaty restrict the country’s taxing rights with respect to a benefit received by a taxpayer from an ESO scheme.

To apply the principle of accrual, the first step is to define the start and end dates of the period of accrual, in other words, the period between when the ESO has been granted and when it is fully vested or when the employee’s employment contract has ended. The next step is to establish what part of the wages, received for the same period, is subject to Finnish tax under the provisions of the act on income tax and under relevant tax treaties.  The same portion of the value of the stock option benefit is taxable income in Finland. In other words, for purposes of Finnish taxation, income in the form of benefits from ESO schemes is taxable to the extent that the wages earned when the vesting period was ongoing are taxable.

3 Income received during a time when the employee-beneficiary is a Finnish resident

3.1 Benefits accrued during a period of residency

In general, the benefit arising from an ESO scheme is subject to tax in Finland when the benefit has accrued during the employee’s Finnish tax residency. In the same way, the benefit arising from an employee offering of corporate stock is also subject to tax in Finland when the benefit has accrued during Finnish residency. The benefit is subject to Finnish tax unless part of the benefit cannot be taxed due to the six-month rule or due to the provisions of tax treaties (for more information, see chapter 3.1.2 of this guidance).

When the beneficiary is a Finnish resident when exercising an ESO, income tax is imposed on his or her receipts, as provided in the tax rules governing resident taxpayers, regardless of whether the benefit had accrued during the beneficiary’s residency or during a period when he or she was a non-resident.

Example 1: Mrs. “C” is an employee working for Z Oyj, a Finnish business enterprise.  On 1 January 2019, she received ESOs from her employer, and the end date of the vesting period was 31 December 2020. For tax-treaty purposes, Mrs. “C’s” country of tax residence is Germany. During 2019, she worked in Finland for three months (90 days). Other than that, she was neither present in Finland nor performing work in Finland in 2019.

However, on 1 January 2020 she started working in Finland under an employment contract that is expected to continue for several years. She became a resident taxpayer, i.e. fully liable to pay tax in Finland. In 2021, when present in Finland, she exercises her options and buys stock. Her receipts of benefits that are subject to Finnish tax consist of the part she earned when she was a non-resident (during 2019), and during her residency as well. As a conclusion, the total part subject to tax of Mrs. “C’s” income is (90 + 365)/730 × the ESO value. Her receipts of this income are taxed under the rules governing the taxation of residents because she is a Finnish resident when she receives the income.

3.2 The six-month rule

3.2.1 Introduction to the requirements for exemption

The wages received for a period when an employee works abroad can be exempt from Finnish tax if the requirements of the six-month rule, referred to in section 77 of the Act on income taxation, are fulfilled. Subject to certain restrictions, the exemption also concerns the categories of income referred to in section 66 of the Act (ESO schemes, employee-offering schemes).

Under section 77, subsection 1 of the Act on income taxation, the wage income received for work performed outside of Finland is not subject to Finnish tax if the employee (being the taxpayer) is present in a foreign country for reasons relating to the work, and if the presence lasts for an uninterrupted period of at least six months. However, for purposes of the above provisions of the Act on income taxation, the kind of wages is excluded that the tax treaty (between the country of work and Finland) sets out as income on which the country of work cannot impose taxes primarily. Under section 77, subsection 2, tax-exempt income received for work done abroad includes the income derived from an employment-related financial benefit within the meaning of section 66, if:

1. There is a tax treaty between the country of work and Finland, and the income within the meaning of section 66 is taxed as wage income by the country of work; and
2. The employee presents the Finnish Tax Administration with sufficient evidence that the tax authorities in the country where he or she works have been notified of the existence of the benefit.

It may be that the employee is present and works outside of Finland in several foreign countries. When the total length of an employee’s period of work outside of Finland is determined, the times worked in different countries can be included. However, the six-month rule is applicable only on the periods of work in the countries for which both the general requirements of the six-month rule are fulfilled, and for which also the specific requirements that concern the exemption from taxes of the benefit arising from an ESO scheme or an employee offering scheme are fulfilled. All the above requirements must be fulfilled in order the income to be exemptible. A further discussion of these requirements is offered below.

3.2.2 Satisfaction of the general requirements of the six-month rule

First, it is required that the benefit (within the meaning of § 66 of the Act on income taxation) accrued during a time when the wage earner’s wage income was exempted by virtue of the six-month rule. In other words, the general requirements of the six-month rule must be fulfilled, otherwise the benefit arising from ESO or employee-offering schemes cannot be exempted (according to the State Finance Committee’s report (report of the Parliamentary committee on finance VaVM 38/2002)). For further information on the general conditions of the six-month rule, see the guidance on the six-month rule applied to wages earned abroad.

3.2.3 Employment and work in a Contracting State

The second general requirement for the exemption from taxes on a benefit within the meaning of section 66 of the Act on income taxation is that there must be a tax treaty in force between Finland and the country where the wage earner works. For purposes of this legal rule, a treaty between Finland and that country is not a tax treaty if it is a restricted convention on taxation, on inheritance and gift tax, an agreement on information exchange, or on taxes to be imposed on savings income in the form of interest payments. The Finnish Tax Administration’s website at www.tax.fi contains a list of Finland's tax treaties in force. Another website where they are posted is www.finlex.fi.

3.2.4 The country where work is done treats the income as wages subject to tax

The third requirement is that the country of work should impose tax on the benefit within the meaning of section 66, treating the benefit as wages (employment income). Referring to the travaux préparatoires of the Act on income taxation and to the established practice of tax assessment, it is enough if the country treats the income as earned income, not income from capital (report of the Parliamentary committee on finance VaVM 38/2000).

The majority of countries impose “payroll” taxes on the income resulting from ESO and employee-offering schemes, i.e. treating it the same way as wages are treated. For this reason, employees do not usually have to enclose specific documentation to their tax returns in order to prove that their benefits are subject to earned-income tax in the other contracting state. However, if necessary, the Tax Administration may ask the employee to provide the documentation. Examples of documentation: a statement issued by the tax authorities of the country of work, an excerpt of taxpayer guidance issued by the local tax authority, a statement written by a tax specialist or a photocopy of an assessment decision.

For the six-month rule to be applied it is not necessary that the country of work had actually imposed tax on the benefit within the meaning of section 66 of the Act on income taxation. This means that the requirements for exemption as explained above may be fulfilled even if the country of work had not imposed tax at all on the income consisting of the benefit, as long as the country of work generally treats the benefit as earned income subject to tax. If the country does not impose any tax on remuneration for work, the six-month rule cannot be applied on the employee’s income, including the income consisting of a benefit within the meaning of section 66 of the Act on income taxation.

3.2.5 Information on the benefit’s existence is given to the tax authorities of the country of work

The fourth requirement is that the taxpayer should present sufficient proof of having informed the tax authorities of the country where work has been done. This requirement can be fulfilled in several different ways. For example, the employer can send the tax authority a list of the people who receive the benefit, including a description of how the benefit is determined or calculated and information of the benefit’s value.  In this case, an individual employee can send the Tax Administration a written statement received from the employer on which the employer confirms that such a list was submitted to the tax authority of the country. Alternatively, a document prepared by an international audit firm that contains the same information may be an acceptable confirmation as well. Employees should enclose the document with their Finnish tax return.

The information given to the authorities of the other country must be sufficiently specific. If the taxpayer has worked in more than one foreign country, it is required that the information on the existence of the benefit be given to the authorities in every country where work is done. The taxpayer’s written statement to be submitted to the Tax Administration together with the taxpayer’s tax return should also contain photocopies (or other duplicates) of the documents sent to the tax authority of each relevant foreign country, in order to prove that those authorities were informed of the existence of the benefit. These documents should indicate the name and identity of the employee and the following details:

• Information on which ESO scheme they are based on;
• The date when the stock options were received;
• How many of them were exercised;
• The date when they were exercised; and
• Whether the employee bought the underlying shares or exercised the received benefit by selling the stock options to someone

In the case of an employee-offering scheme, the following information is required:

• The scheme on which the employee’s purchase of shares is based on (for example, X Plc, June 2018);
• The time when the employee bought them (the date of purchase);
• How many shares were bought, and the price per share
• The date and the time, and the fair market value of the share (for more information, see “Taxation of employee offerings”)

If necessary, the Tax Administration will require that some other method should be used in order to ascertain that the existence of the benefit has been communicated to the tax authorities of the country of work. An example of other methods is that the employee presents a document obtained from the country’s tax authority containing certification that the ESO benefit will be taxed in the country of work for a taxable period that matches with the employee’s working in the country. Another example is an assessment decision, issued by the country where the employee has worked, that indicates that the country has imposed taxes on the employee’s income arising from the ESO scheme.

The provision in section 77, subsection 2.2 of the Act on income taxation does not set a time limit for informing the tax authorities of the country of work on the existence of the benefit. For this reason, it is possible to inform them even after the completion of the tax assessment for the year when the employee had received the income. If an employee informs the tax authority of the other country afterwards, he or she can then submit a claim for adjustment to the Finnish Tax Administration to ask for reassessment in Finland, in such a way that the exemption based on the six-month rule be applied on the part of the received benefit that had accrued while the employee worked outside of Finland.

In order for the exemption under the six-month rule to become applicable, the authorities of the other country should be informed within a time frame that allows those authorities to review the information on the existence of the benefit in accordance with what the laws of that country provide.

If the authorities are not informed until such a time when it is too late for them to receive and review the information properly it is deemed that information on the existence of the benefit has not been given to the authorities within the meaning of section 77, subsection 2.2 of the Act on income taxation. Under the circumstances, the six-month rule cannot be applied on the benefit. The Finnish Tax Administration may ask the wage earner to present a document from the country’s authorities that certifies that the existence of the ESO benefit was reported to the local tax authority within a time frame that allows the information to be received and reviewed there.

3.2.6 How to divide the value of the benefit into appropriate parts

If the above requirements of exemption under the six-month rule are fulfilled, the value of the benefit within the meaning of section 66 of the Act on income taxation has to be divided into an exemptible part and a taxable part, in proportion to the periods worked in different countries.

Example 2: On 1 May 2019, a set of ESOs are granted to an employee. The end date of the vesting period is 30 June 2020. The employer sends the employee to work outside of Finland for a year. Work starts on 1 January 2020. The six-month rule is applicable to the period of work. On 1 September 2020, while working outside of Finland, the employee exercises the stock options. The part subject to Finnish tax is the benefit for the 1 July 2019–31 December 2019 period, in other words, the total value of the benefit multiplied by 184/365.

The exemption provided by the six-month rule can be applicable only partially, i.e. only to a part of the period when the employee worked outside of Finland. Typically, the reason is the employee’s presence in Finland for an excessive count of days, during the period of working in another country, which makes it impossible to apply the six-month rule on the wages received for the period. In these circumstances, the wages are subject to Finnish income tax. If employees receive wages for the same period as when the accrual of a benefit within the meaning of section 66 of the Act on income taxation is ongoing, and the six-month rule cannot be applied on the wages, it cannot be applied on the income arising from the benefit, either.

3.2.7 The employee moves on to work for another employer

The period of accrual of the ESO benefit ends at the time when the employee stops working for the employer that gave the ESO benefit to them. However, if the employee changes jobs from one group company to another, the accrual does not end (for example, the ruling of the Supreme Administrative Court 21 October 1999, record no 2836, and the Central Tax Board’s preliminary ruling 57/2001). The six-month rule may be applied on benefits arising from ESO schemes in cases where an employee – a Finnish resident taxpayer – has been awarded an ESO benefit when working for a Finnish employer in Finland, and has changed jobs while the period of accrual is ongoing, moving on to work outside Finland for a foreign subsidiary of the Finnish employer.

If the employee moves on to work for a new employer that does not belong to the same group of companies and the employee’s right to the benefits of the ESO scheme continue to be in force, the end date of the benefit’s period of accrual will be the end date of the employment contract. If during the accrual of the benefit, the employee has only worked for the Finnish company in Finland that provided the ESO scheme, the exemption under the six-month rule is not applicable to the benefit. In such a case, the benefit arising from the ESO scheme is taxable income in Finland in its entirety because the benefit never accrued during the employee’s work outside of Finland.

Employees may receive employee stock options when they are working outside of Finland. The terms and conditions of the ESO scheme may indicate that the employee continues to have the right to the benefit even if the employee leaves the company or leaves the group. It may be that such an employee leaves the company during a period of work outside of Finland, and that the employee only exercises the stock options after returning to Finland. If the requirements listed in section 77, subsection 2 of the Act on income taxation are met, the benefit arising from the ESO scheme is not subject to Finnish tax because it accrues for a period when the employee works outside Finland and receives wages that are exempt from Finnish taxes under the six-month rule for that period (the preliminary ruling 55/2001 of the Central Tax Board).

Example 3: Mr. “A”, an employee, has worked for two years outside of Finland for his employer that had granted him ESOs. Under the provisions of section 77 of the Act on income taxation, the wages received for the work performed in a foreign country have been exempt from tax. In this example, the employee received the right to participate in the employer’s ESO scheme during a time when he was working outside Finland.

However, immediately when returning to Finland, Mr. “A” leaves the company and starts working for a competitor. If the requirements listed in section 77, subsection 2 of the Act on income taxation are fulfilled, the benefit arising from an employee stock option is tax-exempt income in its entirety.

Additionally, it may be that an employee has worked for the employer both in Finland and in another country, and the six-month rule applies to the period worked outside of Finland. If the employee were to exercise the stock options only after moving on to the new employer that is not a member of the same group of companies, the part of the ESO benefit subject to Finnish income tax must be calculated by dividing the time when he worked in Finland during this time by the total accrual period of the benefit. The length of the time when the employee, before exercising the option, worked for the new employer outside the group has no impact on the division.

Example 4: On 1 January 2020 an ESO scheme is granted to “B”, a wage earner who works for X Oyj. The end date of the vesting period is 31 December 2023. During that period, wage earner “B” works for X Oyj in Finland from 1 January 2020 to 31 December 2021, and in a foreign country from 1 January 2022 to 31 December 2023. The six-month rule applies to “B’s” benefit accrued during the period of working outside Finland. Starting 1 January 2024, “B” moves on to work for Y Plc.

During 2024 while already working for Y Plc., “B” exercises the stock options. The accrual period of the ESO benefit is deemed as having started 1 January 2020 and ended 31 December 2023 – so the count of days is 1461. The benefit’s taxable part is the part attributed to the days when the employee works in Finland: in this case, 730/1461 of its total value.

3.2.8 Amending the terms and conditions of the ESO scheme

If the terms and conditions of the stock option scheme are amended before the period for exercising the options begins, the value of the benefit regarded as wages will be determined in accordance with the new, amended terms. Amendments of the terms and conditions are not regarded as exercise of the stock options, and have no tax consequences to the employee. In circumstances where the six-month rule is applied, the days worked in various countries are relevant beginning from the original start date when the employee signed up for the ESO scheme.

3.2.9 To work in a non-tax-treaty country

Because employees must work in a country that has signed a tax treaty with Finland in order for the exemption under section 77 of the Act on income taxation to apply to their income, arising from a received benefit within the meaning of section 66 of the Act on income taxation, the six-month rule cannot be invoked if the employee gets an ESO benefit from a country that does not have a treaty. If the country where the employee works imposes taxes on the benefit, the resulting double taxation will be relieved by Finland as provided by the Act on the Elimination of International Double Taxation (Laki kansainvälisen kaksinkertaisen verotuksen poistamisesta1148/2005).

Read more about how double taxation is relieved in Taxation of work abroad.

3.2.10 Interrupted period of work abroad and the six-month rule

The tax exemption of section 66 of the Act on income taxation can only be applicable when the special requirements listed in section 77 of the Act are fulfilled. The six-month rule is applicable only if the wages paid to the employee for the corresponding period also are exemptible under the six-month rule.

It may be that the employee’s work outside Finland is interrupted e.g. due to a maternity leave or other comparable family-related leave, even though the employment contract is still valid. When such a leave is ongoing and wages are being paid, the six-month rule cannot be applicable to such a wage income. The reason is that under the circumstances, the individual is not present in a foreign country due to his or her work. For more information, see Six-month rule for wage income earned abroad, section 4.3 of the detailed guidance. 

If the employee’s contract is not terminated, the temporary interruption of work has no impact on the benefit’s period of accrual. From this follows that any periods of maternity leave or other comparable family leave cannot be left out of the count of days when determining the length of the accrual period.

Example 5: Mrs. “A”, a Finnish resident taxpayer, is posted by her employer to Sweden in order to work there as of 1 January 2019. When her period of work in Sweden begins, she is given ESOs.  Mrs. “A” stops working on 1 September 2019, due to her maternity leave. She comes back to work on 30 August 2020, continuing to work in Sweden. The exemption by virtue of the six-month rule is applicable to the wages paid to her for her work in Sweden.

Mrs. “A” exercises her stock options on 31 December 2020, the end date of the period of accrual. During one-half of that period, Mrs. “A” has worked outside of Finland, and she has been on maternity leave and other family-related leave during the remaining half. Provided that the other requirements of the six-month rule are satisfied, the exemption applies to one-half of the value of her ESO benefit. 

3.3 Working in countries that have signed a tax treaty with Finland

3.3.1 Treaty provisions on wage income

Even though a benefit within the meaning of section 66 of the Act on income taxation accrued during a time when the beneficiary has been a Finnish resident, it may be that a tax treaty restricts Finland’s taxing rights in respect of the income. From the perspective of tax treaties, the provisions applied on a benefit within the meaning of section 66 are the same as the provisions applied on wage income. According to what has been agreed by Finland in its tax treaties with other countries, employment income from work in the private sector is taxable only in the country where the individual beneficiary is resident for purposes of the treaty. Subject to certain preconditions, if he or she performed the work in another country, that country also has the taxing rights in respect of the employment income (Article 15, OECD).

There is great variation in the provisions on how employment income is taxed in different tax treaties. For this reason, the treaty with the country concerned must be studied carefully. Especially the provisions on individuals’ presence during 183 days may vary (this rule is known as "the mechanic's exception").

3.3.2 Finnish residents who are treaty residents of the other Contracting State

Generally, the provisions of tax treaties prevent Finland from taxing income within the meaning of section 66 of the Act on income taxation, if the period when the income accrued was a time when the beneficiary, a Finnish resident, worked outside Finland but the treaty defines him or her as a “treaty” resident of the other Contracting State.

Example 6: Mrs. “A”, a Finnish resident taxpayer, signed an employment contract with X Ltd, a Canadian company, and worked for the company from 1 July 2020 to 31 December 2022. She and her family members moved to Canada for this period. Mrs. “A” continues to keep an apartment in Finland, ready for her personal use. During her period of working outside Finland, Mrs. “A” frequently comes back to Finland on business trips, so often that the six-month rule cannot be applied on her wage income received for the work. Under the Act on income taxation, Mrs. “A” is a Finnish resident during her period of work outside Finland. However, her “treaty” country of residence is Canada.

At the start of the period in Canada in 2020, X Ltd granted Mrs. “A” an ESO scheme, and she exercised the stock options while still living in Canada in late 2022. Under Article 14 of the Canada-Finland Income Tax Convention, only the country of work has the taxing rights in respect of wages for work done there if the employer paying the wages is a resident of said country. This means that in this case, a tax treaty prevents Finland from imposing income tax on the benefit arising from her exercised stock options.

An exception from the general rule above is the situation where a benefit within the meaning of section 66 of the Act on income taxation accrued during a period when the employee worked in Finland. The income arising from a benefit received from a Finnish employer or from a Finnish-located permanent establishment of a foreign employer is subject to Finnish tax, if the employee is a Finnish resident during the accrual period. It does not matter if the individual employee is simultaneously a resident of another country.

Example 7: Mr. “B” worked in Finland for Y Plc., a Finnish company, from 1 January 2020 to 1 October 2020. Under the Act on income taxation, Mr. “B” was a Finnish resident taxpayer during his period of working in Finland. However, his treaty country of residence was the United States of America. Mr. “B” received stock options from Y Plc. under an ESO scheme.

Under Article 15 of the Tax Convention between the United States and Finland, the country of work has the taxing rights in respect of wages for work done there if the employer paying the wages is a resident of the country of work. This means that Mr. “B’s” benefit arising from the ESO scheme is subject to tax in Finland for the part of the period of accrual when he worked in Finland.

It is also treated as income subject to Finnish tax when the employee receives, during their tax residency in Finland, a benefit from a foreign employer in a situation where Finland has the taxing rights in respect of their wages due to the length of the employee’s work period in Finland (at least 183 days worked in Finland during a 12-month period or during a calendar year). It does not matter if the individual employee is simultaneously a resident of another country. 

Example 8: Mr. “C” worked in Finland for Z Ltd, an Indian employer company, from 1 January 2021 to 1 April 2023. He is present in Finland for the entire period. Mr. “C” is a Finnish resident taxpayer during his period of work in Finland. However, his country of tax residence for treaty purposes is Denmark. He has received an ESO scheme from Z Ltd.

Under Article 15 of the Nordic Tax Treaty, the country of work has the taxing rights in respect of wages for work done there if the employee stays longer than 183 days out of a 12-month period in the country and if the employer paying the wages is a resident of the country of work. This means that Mr. “C’s” benefit arising from the ESO scheme is subject to tax in Finland for the part of its days of accrual when he has performed work in Finland.

Some of Finland's tax treaties contain separate provisions that apply to employee leasing. These provisions may give Finland the taxing rights with respect to income in the form of a financial benefit referred to in section 66 of the Act on income taxation. In such a case, if the employee is a Finnish tax resident but a treaty resident of the other Contracting State during the period of accrual, Finland has taxing rights with respect to the part of the income that relates to the days when the employee was a leased employee performing work for a Finnish service recipient.

In addition to circumstances described above, a benefit that has accrued during a period of the employee’s residency in the other Contracting State can be subject to Finnish income taxation if the provisions of the tax treaty contain a three-year rule. Then Finland can impose income tax on the income of a Finnish citizen who is a resident taxpayer even for a period when he or she is a treaty resident of the other Contracting State. Income, in the form of a financial benefit, within the meaning of section 66 of the Act on income taxation, is subject to Finnish tax in these circumstances unless the six-month rule is applicable to the employee’s work.

3.3.3 Residents who also are Finnish residents for purposes of the treaty

Tax treaties may restrict Finland's taxing rights with respect to income within the meaning of section 66 of the Act on income taxation, even if the accrual period of an ESO benefit coincides with a period when the employee is a Finnish resident and also a treaty resident of Finland. Such a scenario is possible if the employee works for an employer resident in the other Contracting State and performs the work there, or stays there longer than 183 days, working for an employer resident in a third country or for a third-country employer that has a permanent establishment in the other Contracting State, where the employee works. In such a case, the other Contracting State, where work is done, has taxing rights in respect of the income arising from a benefit within the meaning of section 66 inasmuch that the income had accrued during the employee’s work in the country. Finland is the country having the obligation to relieve any double taxation.

3.4 Benefits accrued during a period of non-residency

The period of accrual of a benefit within the meaning of section 66 of the Act on income taxation may fully or partially coincide with a period when the employee is a nonresident taxpayer in Finland. A nonresident is liable to pay taxes only on income sourced to Finland. Under section 10.4 of the Act on income taxation, the pay earned in the service of a private-sector employer is regarded as Finnish-source income if the location where employee worked is in Finland (or mostly in Finland) and the employer is Finnish. Examples of what kind of employers are considered Finnish include Finnish limited-liability companies and Finnish-located permanent establishments of foreign corporate entities.

In general, the benefit arising from an ESO scheme to a nonresident taxpayer is subject to Finnish tax only inasmuch as the benefit accrued during a time when the nonresident employee mostly worked in Finland for a Finnish employer (rulings of the Supreme Administrative Court number KHO 1998:56 and KHO 14.10.1998, record no. 2199).

Example 9: Mrs. “C” is an employee working for Z Oyj, a Finnish business enterprise.  She has received ESOs from her employer. Mrs. “C’s” country of tax residence for treaty purposes was Germany at the date of granting. Germany is also the country where she works. Three months before the date when the stock options become available for exercise, Mrs. “C” moves to Finland for one year, works in Finland and becomes a Finnish resident.

As soon as exercise is possible, she exercises her stock options, being a Finnish resident taxpayer at this time. During the period when the benefit accrued she was both a non-resident taxpayer working in Germany for nine months, and a Finnish resident working in Finland for three months. The part of her income arising from the ESO scheme that accrued during the 3-month period of work in Finland is subject to tax in Finland.

3.5 An ESO scheme coinciding with the tax treatment offered to a “key employee”

Under certain restrictions, a wage earner who comes to Finland and becomes a Finnish resident can be deemed as a key employee, so that instead of having their income assessed as provided in the Act on assessment procedure (Verotusmenettelylaki 1558/1995), they pay a special tax at source. The Act on the taxation of key employees’ income (Avainhenkilölaki 1551/1995) contains detailed rules on the income-tax treatment of these foreign citizens. Wage earners who fall into this category do not pay the progressive income tax referred to in the Act on income taxation. Instead, they pay a tax at source at a rate of 32 percent (section 3 of the Act).

In its ruling no KHO 9.12.2011 record no. 3521, the Supreme Administrative Court took the view that if an ESO scheme was received from a Finnish employer, the taxable income derived from the ESO must be regarded as part of the key employee’s total wage income which is subject to taxation at source.

If the wage earner exercises the stock options – or if other financial benefits within the meaning of section 66 are received – during the period when the Act on the taxation of key employees is applicable, the part subject to Finnish tax of the ESO benefit must be taxed at source at 32% instead of being taxed in accordance with the progressive schedule of income taxation. If the key employee’s status is ended during the year when the benefit is received, and if, because of the high value of the received ESO benefit, no withholding of tax at source has been possible when the following wage payment occurs, the value must be spread out evenly, and the 32-percent tax should instead be withheld over the course of the months when the wage earner’s tax-at-source card continues to valid (section 8 of the Act on the taxation of key employees’ income and section 9 of the Decree on withholding tax).

If during the period of accrual of an ESO benefit the Act on the taxation of key employees has been applied on the wage earner’s tax assessment, and he or she only exercises the stock options or receives the other financial benefit at a later stage, when that Act is no longer applied, no taxation at source will be carried out with respect to the paid wage income nor the income resulting from the exercise of the benefit.

The Supreme Administrative Court’s ruling 9.12.2011, record 3521 did not concern the withholding of taxes or the withholding of taxes at source. For this reason, that ruling has no impact on the usual obligations of an employer. In situations where the wage earner had received the ESO or other financial benefit before starting to work for a Finnish employer, the Finnish employer will not have to withhold tax at source on the wages paid.

4 Benefits of a non-resident

4.1 Benefits accrued during the wage earner’s period of residency

If a wage earner is a nonresident, any received item of income within the meaning of section 66 of the Act on income taxation is subject to tax if its period of accrual relates to a time when the wage earner had been a resident, and for the part that such income is not exemptible by virtue of the six-month rule, and provided that the applicable tax treaty does not prevent Finland from imposing tax on the income (for more information, see chapter 3.1 above).

4.2 Benefits accrued during a period when the wage earner has been a nonresident

Nonresidents must pay tax on a financial benefit referred to in section 66 if the source of the income is Finland under section 10 of Act on income taxation.

Example 10: Mrs. “C” is an employee working for Z Oyj, a Finnish business enterprise.  She has received ESOs from her employer. Mrs. “C’s” country of tax residence for treaty purposes is Germany. After the ESO scheme was granted, Mrs. “C” starts working in Finland for a period of 3 months. Other than that, she is neither present in Finland nor working in Finland.

When her 3-month period of work in Finland is ongoing, she is non-resident. The part of her ESO income that accrued during the 3-month period of work in Finland is subject to tax in Finland.

Under section 10.4a of the Act on income taxation, a fee is income sourced to Finland if the fee is paid to an individual for being a member of the Board of Directors or of another governing body in a Finnish corporate entity. Such an item of income is sourced to Finland even if the beneficiary never physically worked or lived in Finland. Among the beneficiaries on whom this provision is applied on are members of a Board of Directors, etc., receiving income consisting of a benefit within the meaning of section 66 of Act on income taxation.

Example 11: One of the board members of the Finnish company N Oy is Mrs. “Å”, a foreign citizen living outside Finland on a permanent basis. She normally does not come to Finland to discharge her duties as a board member, because she can almost always attend to those duties while present in foreign countries.  Mrs. “Å” receives ESOs from N Oy. When she exercises the options she receives income fully sourced to Finland. Tax treaties do not usually prevent Finland from imposing tax on this kind of income.

Pursuant to section 10.4c of the Act on income taxation, Finnish-source income taxable by Finland includes wages paid by a foreign employer for work performed in Finland, if the foreign employer has leased the worker to a service recipient in Finland who uses the services of this employee to perform the work. However, the majority of the tax treaties Finland has signed will prevent Finland from imposing tax on income received by a leased employee resident in a foreign country. If the provisions of the applicable tax treaty do not prevent Finland from taxing the wages paid to a nonresident leased employee who works for a service recipient in Finland, any income they may receive from an ESO scheme is sourced to Finland during the time when the leased employee works in Finland.

4.3 Income taxes of a nonresident assessed in accordance with the Finnish Act on assessment procedure

Nonresident wage earners, who have income in the form of a benefit within the meaning of section 66 of Act on income taxation, can request tax treatment in accordance with the provisions of the Act on assessment procedure if certain conditions are fulfilled.

This tax scheme may be available to all nonresidents who live in a country belonging to the European Economic Area, or in a country or region that is covered by an agreement on executive assistance and sharing of information in tax matters; and to any nonresidents who are holders of a Finnish residence permit within the meaning of the EU Council Directive on Scientific Researchers (section 13, subsection 1.6, Act on the taxation of nonresidents' income (Laki rajoitetusti verovelvollisen tulon verottamisesta 627/1978).

The tax authorities can perform both pre-assessment and final assessment in accordance with the provisions of the Act on assessment procedure. For tax pre-assessment, it is required that the nonresident individual should first ask for a nonresident’s tax card at the Finnish Tax Administration and then deliver the card to the payor of the income (section 13, subsection 3 of the Act on the taxation of nonresidents' income). During the final assessment of taxes, the tax authority will apply the provisions of the Finnish Act on Assessment Procedure if these provisions had been applied during the pre-assessment of the taxpayer’s taxes, or if he or she makes a demand for tax assessment in accordance with the Act on Assessment Procedure (section 13, subsection 4, Act on the Taxation of Nonresidents' Income).

5 Relief for international double taxation

If, for a Finnish resident wage earner, Finland has also been the treaty country of residence during a period of working in a foreign country, and if the exemption provided by the six-month rule is not applicable on the wages earned abroad, a received financial benefit referred to in section 66 of Act on income taxation also for the accrual period relating to the time worked in a foreign country is income subject to Finnish tax. In this case, the received benefit is income subject to Finnish tax even if, at the stage when the employee exercises their stock options, or at the date when the options were granted to the employee, the employee is not a Finnish resident or a resident in Finland for treaty purposes.

This will result in double income taxation if not only Finland but also the country where the work was performed imposes tax on the income within the meaning of section 66 of the Act on income taxation for the period worked in that country. In this case, if Finland is the employee’s country of residence, the country having the obligation to relieve the resulting double taxation is Finland.

Example 12: Mrs. “A” is a Finnish resident taxpayer. She works for X Oyj, a Finnish company. She received options from X Oyj; the vesting period for the ESO scheme is 1 January 2021 – 31 December 2022.

X Oyj assigns Mrs. “A” to work in Sweden from 1 January 2022 to 31 December 2022. During this time, she is present in Sweden for nine months and present in Finland for 3 months.

When she works in Sweden she is a tax resident of Finland, and also a resident of Finland for purposes of the tax treaty. The six-month rule cannot be applied on receipts of income from work done in Sweden. As a result, the benefit arising from the ESO scheme is subject to Finnish tax in its entirety.

Under Article 15 of the Nordic tax treaty, Sweden, in addition to Finland, has the taxing rights with respect to a benefit arising from an ESO scheme when Mrs. “A” works in Sweden because her presence there is longer than 183 days during consecutive 12 months. If Sweden imposes tax on the received benefit, Finland as the country of Mrs. “A’s” tax residence will provide relief for any double taxation. This requires that Sweden should determine the part subject to Swedish taxation in accordance with the OECD Commentary to the Model Tax Convention.

Relief for double taxation is given either by the credit method or by the exemption method. The choice between the two methods depends on the relevant provisions of the tax treaty. For more information on how double taxation is relieved, see Relief for international double taxation.

It may be that the country of work defines the value of the benefit within the meaning of section 66 of the Act on Income Tax in a different way from how Finland defines it. It may also be that there are differences in determining the point of time when such a benefit is regarded as received taxable income. However, this does not remove the obligation of Finland to provide relief for double taxation if the assessment of taxes by the country of work has been carried out in accordance with that country’s internal legislation and the tax treaty.

However, if the country of work has instead imposed tax on a greater part of the benefit than the part accrued during the employee’s period of working there, Finland will not have an obligation to relieve that part of the double taxation. In such a case, the employee can turn to the authorities of the country of work to request adjustment to the assessment of taxes.

6 Employer obligations and the source taxes that may be imposed by the tax authority

6.1 The obligations of an employer during an employee’s work period abroad

In general, the right to participate in an ESO scheme or to receive other benefits within the meaning of section 66 of the Act on income taxation, presupposes the employee’s continuous employment. However, if the employer is a group corporation, and an employee has first worked for one of the group’s subsidiaries and moves on to work for another, the right to participate usually remains, because the employee is still an employee of the same group. In these circumstances, the benefit is deemed as received from the subsidiary for which the employee worked at the time of granting.

The above-mentioned means that if the employee’s employer was a foreign subsidiary at the time of granting, but at the time when the employee exercises the options – or receives corporate stock in a share-award scheme – the employer is a Finnish group company, the employee’s employer for tax purposes will continue to be the foreign subsidiary. In this case, the usual employer obligations under Finnish tax legislation do not concern the benefit granted by the foreign subsidiary. There is no need to withhold tax on the benefit and there is no need to submit an earnings payment report to the Incomes Register.

Example 13: In order to reward its key employees around the world, the Finnish company A Oyj offers them an ESO scheme. On 1 March 2022 as the grant date, Mrs. “C”, a Finnish tax resident employed by B Ltd, a foreign subsidiary of A Oyj, receives a set of stock options that she exercises on 2 April 2023, buying the underlying stocks. During her time with B Ltd, Mrs. “C” never worked in Finland. Her stock options are deemed as having been received from B Ltd. That foreign subsidiary is not under obligation to withhold Finnish taxes on them or to submit an earnings payment report to the Incomes Register, unless it has voluntarily applied for registration in the Finnish register of employers.

Example 14: Mrs. “C” received employee stock options from A Oyj, the group’s parent, during a time when she worked in Sweden for B AB, the subsidiary in Sweden. Later, Mrs. “C” moved on from that employment in order to start working for the parent company A Oyj. She exercises the options while working in Finland for A Oyj. Because the income arising from the options is deemed as having been received from B AB, there is no obligation for A Oyj to withhold taxes on it or to submit an earnings payment report to the Incomes Register.

In a reverse case, i.e. if the employee worked for a Finnish employer when the stock options or stock grants were granted, and worked for a foreign employer when exercising the options, the employer, being a Finnish employer for tax purposes, must abide by the usual employer obligations with regard to the employee’s income. For purposes of this rule, a foreign company’s permanent establishment in Finland is treated as a Finnish employer. However, the employer’s obligations do not apply to the part of the received benefit that had accrued when the employee was a nonresident, and the benefit is not deemed as being sourced to Finland.

It may be that when working outside of Finland in circumstances where the six-month rule is applied, employees will exercise their ESOs or receive other benefits referred to in section 66 of the Act on income taxation. The wages paid to an employee in these circumstances in cash are normally treated as tax-exempt income. For this reason, the Finnish employer cannot withhold tax (except for the minimum withholding in certain cases) even if the benefit arising from ESOs would partially be subject to Finnish income tax. However, the employer would in this case have to submit an earnings payment report to the Incomes Register.

6.2 Carrying out the withholding

Benefits referred to in section 66 of the Act on income taxation are wages (section 13, subsection 3, Act on Tax Prepayments (Ennakkoperintälaki 1118/1996). Unless the six-month rule is applicable on the employee’s working, the employer must withhold tax on a benefit that a Finnish resident individual receives (section 9, subsection 1, Act on Tax Prepayments).  For more information on how tax must be withheld, see the Tax Administration’s detailed guidance “Taxation of employee stock options” – Työsuhdeoptioiden verotus.

6.3 The six-month rule as applied on individual taxpayers’ pre-assessment

If certain prerequisites are met, the employer is allowed to apply the six-month rule already at the stage when wages are paid to the employee and tax is withheld, i.e. at the pre-assessment stage. This requires that the employer has a reliable and later-verifiable proof establishing the fact that the benefit referred to in section 66 of the Act on income taxation is reported to the tax authorities of the country where work is done, and it also requires that under the legal rules of that country, the local authorities can review the received report about the existence of the benefit.

Examples of circumstances where the employer has reliable proof: arrangements, made by the employer on behalf of the employees, to submit the necessary income tax returns to the authorities of the country of work; and circumstances where a foreign subsidiary of a group of companies provides a certificate that indicates that the subsidiary has the obligation to inform the local authorities of the existence of the benefit. In addition, it is required that the employer is aware of the other requirements of the six-month rule, and that these requirements are met.

In circumstances described above, the employer will need to keep track on the count of working days, and perform other checks as necessary in order to ascertain that the requirements for the exemption have been fulfilled, when preparing the employer’s reports for submittal to the Incomes Register. If it turns out that the requirements are not fulfilled, the employer must submit an earnings payment report to the Incomes Register that specifies the entire value of the ESO benefit as taxable wage income.

Example 15: On 1 May 2022, ESOs are granted to Mrs. “A”, a wage earner who works in Finland. The end date of the vesting period is 12 December 2023. Starting 17 November 2022, Mrs. “A” is transferred to an office of her employer company located outside of Finland. The six-month rule is applied to her wages, including the benefit arising from the ESO scheme.

On 1 April 2024, Mrs. “A” exercises her stock options. She receives a benefit amounting to €90,000. It must be divided, in proportion to the days worked in Finland and elsewhere, into two parts: one part is subject to Finnish tax, and the remaining part is exempted from Finnish tax. The part subject to Finnish tax is (200/600 × €90000) = €30000.

It is not possible for her employer to withhold any tax on the value of the received benefit if the employer does not simultaneously pay wages subject to tax to Mrs. “A” in cash. Cash wages under the six-month rule are not subject to a withholding obligation with respect to a taxable employee stock option.

The benefit arising from her ESO scheme must be reported to the Incomes Register. The employer must submit an earnings payment report for April 2024 regarding the €30,000, the benefit’s taxable part, specifying the income type as ‘Employee stock options’. When filling in the earnings payment report, the employer must additionally specify the income type of the €60,000 (the part concerned by the six-month rule) as ‘Employee stock options’, include the ‘Six-month rule is applicable: Yes’ entry, and enter the country code of the country of work as appropriate.

Example 16: Mr. “B” is an employee assigned to work in a foreign country by his employer. While there, he subscribes employee stock options. The six-month rule is applicable to any cash wages paid to Mr. “B” for the period when he works in the country. Later, he returns to Finland and exercises his options.

As in the previous example, the value of the benefit arising from the ESO scheme must be divided in proportion to the days worked in Finland and outside Finland. In this example, the employer pays cash wages subject to tax. For this reason, the employer must withhold tax not only on the wages but also on the taxable part of the income arising from the ESO scheme. Accordingly, the employer can either carry out the withholding relating to the ESO benefit on the next payday in full, or spread it over the remaining paydays during the current year.

The employer must submit an earnings payment report to the Incomes Register, specifying ‘Employee stock options’ as the income type of the part subject to Finnish tax. The employer must also specify the part concerned by the six-month rule as ‘Employee stock options’, include the ‘Six-month rule is applicable: Yes’ entry, and fill in the country code of the country of work.

If the requirements for applicability of the six-month rule are not met, the employer will need to withhold tax on the benefit arising from the ESOs, and submit an earnings payment report to the Incomes Register to report the benefit as income subject to Finnish tax. If the employer is not paying any cash wages to the employee, it is not possible to carry out any withholding. For more information, see section 6.1 above.

Example 17: The Finnish corporation X Oyj sends Ms. “C”, an employee, to work in a foreign country for a period longer than six months. X Oyj pays her wages for the period. She has agreed with X Oyj that she will take care of all her tax affairs herself when she works in the foreign country. In these circumstances, the employer cannot be certain that the employee will inform the tax authorities of the country of work about the existence of ESOs. As a result, X Oyj cannot refrain from withholding tax on Ms. “C’s” wages. X Oyj must submit an earnings payment report to the Incomes Register and indicate that the entire value of the benefit arising from the ESO scheme is taxable income. Ms. “C” may demand that the six-month rule be applied on her tax assessment when she files her tax return for the year.

For more information on the reports required from employers to be filed to the Incomes Register, see Reporting data to the Incomes Register: rewarding employees, payments made to an entrepreneur and other special circumstances and Reporting data to the Incomes Register: International situations.

6.4 Tax to be withheld at source and deductions to be made from the tax at source

Employers that are treated as Finnish employers for tax purposes must collect tax at source on any wages they pay to a nonresident individual taxpayer for work done in Finland (section 3, subsection 1 and section 9, Act on the Taxation of Non-residents’ Income). Benefits within the meaning of section 66 of the Act on income taxation are wages. For this reason, the income arising from the benefit is subject to tax at source. The rate of tax at source is 35% (section 7.1 of the Act on the Taxation of Non-residents’ Income). For purposes of this rule, a foreign company’s permanent establishment in Finland is treated as a Finnish employer.

If the employee received the right referred to in section 66 of the Act on income taxation at a time when they work for a foreign subsidiary or for another employer company that is foreign, the Finnish employer does not have an obligation to withhold tax at source at the time when the employee receives the benefit referred to in section 66 of the Act on income taxation. Conversely, if the employee had received ESOs from a Finnish employer, and later moves on to work outside of Finland for a foreign subsidiary of the group, the obligation to withhold tax at source and the employer obligations related to the ESO scheme continue to be the responsibility of the Finnish employer.

Before withholding the tax at source, the employer can deduct €510 per month as the ‘tax-at-source deduction’ (lähdeverovähennys; källskatteavdrag). For pay periods shorter than one month, the deduction is calculated as €17 per day. The deduction additionally requires that employee show a tax-at-source card to the employer. The card must contain an entry instructing the employer to carry out the deduction (section 6, Act on the Taxation of Non-residents’ Income).

If the employer was unable to withhold tax at source on the benefit at the time when the wage earner received it, it will make it necessary for the employee to turn to the Tax Administration to apply for an imposed tax at source. This makes it possible to deduct the tax-at-source deduction if the requirements for it are fulfilled. 

The tax-at-source deduction is allowed to be deducted all at once, for the entire period when the part subject to Finnish tax of the ESO income had accrued. If the reason for granting the ESO scheme is that the recipient is a member of the Board of Directors or other governing body of a Finnish corporate entity, no tax-at-source deduction can be made from the income.

Example 18: Mrs. “A” is a nonresident wage earner who lives outside of Finland. However, she has worked in Finland from 1 January 2023 to 31 December 2023 for X Oyj, a Finnish company. As soon as her period of work in Finland was over, she left her employment with X Oyj.

On 1 January 2023, she received 2000 stock options from X Oyj that entitle her to buy 2000 shares of X Oyj as of the end of the vesting period, 31 December 2023. During the entire time when she worked for X Oyj, she was a Finnish resident taxpayer. As a result, the benefit arising from the ESO scheme has entirely accrued from her work in Finland.

On 1 July 2024, she exercises 1000 stock options, and the income she gets is €10,000 in the form of an ESO benefit. She exercises the remaining 1000 on 1 December 2019 and correspondingly, gets €8,000 in income. The length of the options’ accrual time is one year, so she has the right to deduct (12 × €510) = €6,120 from the income she received from the exercise on 1 July 2019. This deduction can only be granted once. This means that she does not have a right to the claim a deduction for the income received from the remaining options exercised on 1 December 2019.

Because the tax at source is a final tax, it cannot be subject to other deductions than the deduction for tax at source discussed above. However, under the ruling of the Supreme Administrative Court (ruling number KHO 15.8.2006, record 1925), the tax at source to be imposed on an ESO benefit must be based on a net amount, i.e. an amount from which the expenses caused by the exercise are subtracted. The ruling of the Supreme Administrative Court contained the following reasoning:

Because the Act on income taxation contains no specific rules on how earned income, within the meaning of section 66, subsection 3, should be taxed when applying the provisions of the Act on the Taxation of Non-residents’ Income, it is not possible to conclude, referring to the list of deductions set out in section 6 of the said Act, that tax assessment would be different for nonresident taxpayers than for resident taxpayers who receive income arising from exercise of ESOs.

The ruling invokes the premise that the benefit that arises from exercise falls into the category of capital-gains income, but – due to a specific rule included in the Act on income taxation – the taxes to be imposed on this income are income taxes on wages.

6.5 Imposed amounts of tax at source

In some circumstances, it is not possible to withhold any tax at source. Reasons for this may include the fact that the employee left the company before exercise (he or she may have moved on to work for a foreign subsidiary within the same group of companies), or the fact that no cash wages are being paid to the particular employee on the payroll. However, Finnish employers must also in this case submit earnings payment reports to the Incomes Register.

In addition, the employee will need to turn to the Tax Administration and apply for an imposed tax at source, if at the time when the income was paid to the employee, the employer did not withhold tax at source. To do so, the employee can complete the Tax Administration’s application form for tax at source, or declare the received income when the employee submits the tax return for the year. It is required of the employee to include the entire amount of the received benefit, and to provide a written account on the matter if that amount is not income subject to tax in Finland. For more information about the deduction related to tax at source (lähdeverovähennys; källskatteavdrag), see the preceding section of this guidance.

If the reason for no tax having been withheld at source is negligence, or a mistake, on the payer’s part, the tax authority will impose the tax at source to the payer. In this case, the computation of the tax cannot include any tax-at-source deduction, either per month or per day, as provided in section 6 of the Act on the taxation of nonresidents income. A requirement for the tax-at-source deduction is that the recipient presented a tax-at-source card to the payer, and there should be a marking on the card allowing the recipient to be given the deduction.

7 Health insurance contributions

7.1 Applicable regulations

Under chapter 18, section 5, subsection 1 of the Health Insurance Act, an individual insured in Finland according to the Act is liable to pay the insured person’s health insurance contribution. A further requirement of the liability to pay the contribution is that at the time of exercising the options or receiving corporate stocks, the individual is insured in Finland. The insured person’s health insurance contribution consists of a health care contribution and a daily allowance contribution (chapter 18, section 4 of the Act). Further, the employer is liable to pay the employer's health insurance contribution in accordance with the act on the employer’s health insurance contribution (Laki työnantajan sairausvakuutusmaksusta 771/2016).

The health care contribution of health insurance is imposed based on the insured person’s income subject to municipal income tax, unless otherwise provided by the Health Insurance Act (chapter 18, section 14). The daily allowance contribution is imposed based on the insured person’s taxable wage income and work income, unless otherwise provided by the Health Insurance Act (chapter 18, section 15). Under chapter 11, section 3 of the Health Insurance Act, wages include, for example, pay, reward and compensation as referred to in section 13 of the act on tax prepayments (Ennakkoperintälaki 1118/1996), with the exceptions stated in chapter 11, section 3, subsection 3 of the Health Insurance Act.

Subject to certain requirements, the items that are not subject to the daily allowance contribution according to chapter 11, section 3, subsection 3 of the Health Insurance Act include the right to subscribe for shares based on an employment contract at a price below the fair market price, the ESO benefit and the stock grant in circumstances specified in the provision.

The amounts of the contributions are officially confirmed for every calendar year.  However, if the insured person receives income that is not earned income under chapter 18, sections 15–18 of the Health Insurance Act, a raised health care contribution of health insurance is withheld on the said income (section 1, subsection 2 of the Act governing the 2025 percentage rates (Laki sairausvakuutusmaksujen maksuprosenteista (694/2024)). So if the income is earned income as referred to in chapter 11, section 3, subsection 3 (3–5) of the Health Insurance Act, the insured person’s health care contribution is levied at an increased rate. For further information, see chapter 4.1 in Taxation of employee stock options.

The employer pays the employer's health insurance contribution based on the total payroll. Wages here include pay, reward and compensation subject to withholding tax, referred to in section 13 of the act on tax prepayments (Ennakkoperintälaki 1118/1996). However, the items mentioned in chapter 11, section 3, subsection 3 of the Health Insurance Act are not regarded as wages (section 5 of the act on the employer’s health insurance contribution). Therefore, if the insured person’s health care contribution is not payable on the benefit received, the employer’s health care contribution is usually not payable on the benefit, either. Read more in chapter 4 of Taxation of employee stock options, and chapter 5.2 of Taxation of employee offerings. 

7.2 Health insurance contribution on a benefit received by a Finnish resident individual

7.2.1 Wages for insurance purposes, and benefit under section 66 of the Act on income taxation

In general, all arrangements related to the pension contracts for a Finnish employee posted to work temporarily in another country are made in Finland. In this case, ‘wages for insurance purposes’ is determined for the employee for the duration of the work abroad. The wages for insurance purposes correspond to the wages paid for corresponding work in Finland (section 72 of the Employees Pensions Act).

If tax exemption under the six-month rule is applicable to the employee's work abroad, the wages for insurance purposes are used as the base for the health care contribution (instead of the income subject to municipal income tax) and as the base for the daily allowance contribution (instead of wages).  

In addition, the amount determined to be the employee’s wages for insurance purposes will replace the income subject to municipal tax, and also replace the actual wages, as the base for the employer's health insurance contribution (section 5, subsection 4 of the Act on the employer’s health insurance contribution).

In other words, the employer pays the employer's health insurance contribution based on the wages for insurance purposes if the six-month rule under section 77 of the Act on income taxation is applicable to the employee’s income. In this case, the insured person’s health insurance contribution withheld from the employee is also based on the wages for insurance purposes. If the six-month rule is not applicable, the actual amount of wages paid to the employee will serve as the base for the employer's health insurance contribution and for the insured person’s healthcare contribution withheld from the employee. For further information, see chapter 7.1 above.

Example 19: An employee who is insured in Finland and a Finnish resident receives a benefit referred to in section 66 of the Act on income taxation. The benefit accrued when the employee was working abroad. Wages for insurance purposes had been determined, and the six-month rule under section 77 of the Act on income taxation applied to the employee’s income.

When the six-month rule is applicable to income derived from an ESO scheme, this income is not included in the income subject to municipal income tax. Under chapter 18, section 18, subsection 1 of the Health Insurance Act, the base for the insured person’s health insurance contribution is the wages for insurance purposes, and a raised health care contribution is therefore not withheld on the ESO benefit.

7.2.2 Employee not insured during the accrual period, or wages for insurance purposes not determined

If during the benefit’s accrual period, a resident individual is not insured in Finland or if wages for insurance purposes have not been determined, it is not possible to use an amount reflecting the employee’s wages for insurance purposes as the base for the healthcare contribution.

In such a case, the base for the resident individual’s healthcare contribution is the income subject to municipal income tax (chapter 18, section 14 of the Health Insurance Act). If the benefit is as prescribed in chapter 11, section 3, subsection 3 of the Health Insurance Act, the rate of health care contribution withheld on the benefit is raised. However, if the six-month rule according to section 77 of the Act on income taxation applied to the employee’s income during the accrual period, the base for the health care contribution of health insurance is the wages for work abroad under section 77 of the Act on income taxation and subject to withholding under section 13 of the Prepayment Act.

Example 20: An employee exercising their ESOs is a Finnish resident and covered by the Finnish social insurance system at the time of the exercise. The employee worked abroad for the entire benefit accrual period but the six-month rule was not applicable. During that period, the employee was not insured in Finland and no wages for insurance purposes was determined. The employee was a resident taxpayer in Finland for the entire accrual period.

Section 77 of the Act on income taxation did not apply to the income earned abroad, and the income was subject to tax in Finland. In this case, the base for the health care contribution is the employee’s income subject to municipal income tax. The rate of health care contribution withheld on the employee stock option is raised, because the benefit is as referred to in chapter 11, section 3, subsection 3 of the Health Insurance Act. The employer will need to withhold a healthcare contribution on the benefit even if the applicable tax treaty prevented Finland from imposing tax on the employee’s income. 

Example 21: An employee exercising their ESOs is a Finnish resident and covered by the Finnish social insurance system at the time of the exercise. They worked abroad for the entire benefit accrual period. However, during the period of accrual, the employee was not insured in Finland and no wage amount for insurance purposes was determined for the period worked abroad.  In addition, for the entire accrual period, the employee was a Finnish resident.

The six-month rule according to section 77 of the Act on income taxation was applicable to the employee’s income earned abroad. The employee provided proof that the conditions of section 77, subsection 2 of the Act are also met and the income is exempt from tax in Finland and therefore not included in the employee’s income subject to municipal income tax. In this case, the health care contribution is withheld at an increased rate on the employee’s wage income subject to tax withholding in accordance with chapter 18, section 17, subsection 1 of the Health Insurance Act. A raised health care contribution is withheld on the employee stock option because the ESO is part of the employee’s wage income subject to withholding.

7.2.3 Benefits accrued during a period when the wage earner has been a nonresident

A Finnish resident individual may become a recipient of a benefit referred to in section 66 of the Act on income taxation, that, however, accrued for a period during which he or she was a nonresident taxpayer in Finland. According to section 10, subsection 1, paragraph 4 of the Act on income taxation, a nonresident is only liable to pay tax on income for work carried out mainly in Finland (For further information, see chapter 2.1 of the guidance Taxation of employees from other countries). Such income is included in the income subject to municipal income tax referred to in chapter 18, section 14, subsection 1 of the Health Insurance Act, which serves as the base for the health care contribution. Where wages under chapter 11, section 3, subsection 3 of the Health Insurance Act are concerned, the health care contribution is levied at an increased rate.

If the benefit’s accrual is based on a work period, for which a nonresident is paid wages not regarded as income earned in Finland, the ESO benefit accrued for the said period of work will not be deemed as income sourced to Finland, in reference to the general principles governing the accrual of income. When the income is not included in the income subject to municipal income tax and it cannot serve as the base for the contribution under chapter 18, section 17, subsection 1 or section 18 of the Health Insurance Act, then no health care contribution is withheld on the benefit.

7.3 Health insurance contribution on a benefit received by a nonresident

If an individual is covered by the Finnish social insurance system, they must pay the insured person’s health insurance contribution to Finland. In this case, the employer must pay the employer's health insurance contribution based on the amount of wages paid to such an individual (for more information, see chapter 4.1 in Taxation of employee stock options, and chapter 5.2 in Taxation of employee offerings).

The healthcare contribution must be paid if a nonresident employee is covered by the Finnish social insurance system when they exercise their ESOs or when receiving another benefit under section 66 of the Act on income taxation. This means that the circumstances that prevail during the accrual period have no impact on the liability to pay although they do have an impact on the base of payment. Subject to the provisions, if the employee still works for the same employer when exercising their ESOs or when receiving another benefit under section 66 of the Act, the employer will need to withhold the health insurance contribution on cash wages paid to the employee, unless other relevant tax rules provide otherwise. If the employee no longer works for the employer that granted the benefit, the Tax Administration will impose the healthcare contribution simultaneously with the tax at source to be imposed.

The health insurance contribution is based on the wages referred to in section 4 of the Act on the taxation of nonresidents' income. However, the items listed in chapter 11, section 3, subsection 3 of the Health Insurance Act are not included in the wages. They include income in the form of a right to subscribe corporate stocks based on an employment contract at a price below market, an ESO benefit, and a stock grant in circumstances specified in the provisions.  For this reason, no daily allowance contribution but only the health care contribution is usually payable on the ESO benefit (chapter 18, sections 16 and 20 of the Health Insurance Act).

If during a period of working in a foreign country, a nonresident taxpayer’s pension insurance is arranged under the earnings-related pensions acts, either voluntarily or under obligation, the base for the healthcare contribution is the wages for insurance purposes in accordance with chapter 18, section 18, subsection 2 of the Health Insurance Act. The provisions of a tax treaty have no impact on the liability to pay the health care contribution.

Example 22: An individual received stock options when they worked and were a resident taxpayer in Finland. They then resigned from the company and moved permanently abroad. When they exercised their stock options, they were a non-resident taxpayer in Finland but still covered by the Finnish social insurance system.

The ESO benefit is income earned in Finland, and therefore the entire benefit amount is treated as the individual’s wages subject to tax at source. In accordance with chapter 18, section 16, subsection 1 of the Health Insurance Act, the base for the nonresident taxpayer’s health care contribution is the wages under section 4 of the Act on the taxation of nonresidents' income. In addition to imposing the tax at source, the tax authority will also impose a raised healthcare contribution based on the amount subject to tax at source of the received ESO benefit.

Example 23: An individual moved away from Finland and became a nonresident. The individual was granted participation in an ESO scheme, based on work done abroad several years ago. The individual decides to exercise the ESOs. When exercising, the individual continues to be covered by the Finnish social insurance system. The entire accrual of the ESO benefit was based on work done abroad. Half of the benefit accrued when the individual was a Finnish resident, and the six-month rule applied to their wage income. The second half accrued when the individual had already become a nonresident. The individual was covered by the Finnish social insurance system for the entire accrual period, and wages for insurance purposes had been determined. 

The six-month rule applied to the ESO benefit accrued during the tax residency, and the benefit was therefore tax-exempt income in Finland. The benefit that accrued during the nonresidency is income not sourced to Finland and therefore exempt from tax in Finland. In accordance with chapter 18, section 18, subsection 2 of the Health Insurance Act, the base for the nonresident’s healthcare contribution is wages for insurance purposes. The contribution was therefore paid annually, based on the wages for insurance purposes, and the healthcare contribution will not have to be withheld when the ESO benefit is exercised and received. 

As it is officially marked on a nonresident taxpayer’s tax-at-source card, the percentage rate of tax to be withheld at source contains no insured person’s health insurance contribution. If a nonresident individual is covered by the Finnish social insurance system, an application can be submitted for a tax-at-source card with an instruction to the employer to withhold the insured person’s health insurance contribution.

If an individual is a nonresident both at the time when the benefit is granted, and during its accrual period, and if the income received during the accrual period is income sourced to Finland under section 10 of the Act on income taxation, then under chapter 18, section 16, subsection 1 of the Health Insurance Act, the base for the nonresident’s healthcare contribution will be the wages as referred to in section 4 of the Act on the taxation of non-residents' income. However, the items of chapter 11, section 3, subsection 3 of the Health Insurance Act are not included in the wages. The health care contribution withheld on the insured person’s ESO benefit is raised.  

If the benefit is based on work for which a nonresident is paid wages that are not regarded as income sourced to Finland, the ESO benefit accrued for the said period of work will not be income sourced to Finland. Consequently, the benefit would not be subject to the healthcare contribution.

8 Synthetic options and the employee’s work period in a foreign country

8.1 The synthetic option and the principle of accrual of income

The benefit arising from a synthetic option is treated in the same way as the benefit from an ESO scheme, i.e. it is wage income accrued to the employee during a period of time. From this, it follows that the principle of income accrual will determine what part of the income should be subjected to Finnish tax.

The terms and conditions of the synthetic option define the vesting period. For tax purposes, the related benefit is deemed as being accrued during that period. Even if the payment of money would take place later than on the end date of vesting period, due to a delay at the employer’s payroll office, for example, the tax authorities will still regard the end date stated by the terms and conditions as the end date of accrual.

Example 24: Mrs. “A” is a Finnish resident working for X Oyj, a Finnish company. She received a set of synthetic options from X Oyj. The vesting period is 1 January 2023 – 31 December 2024.

X Oyj assigns Mrs. “A” to work in Sweden from 1 January 2024 to 31 December 2025. The Finnish taxes on the wages received by Mrs. “A” during this time are governed by the six-month rule, i.e. exempted. 

When the vesting period is over, Mrs. “A” will, according to the terms and conditions, receive an amount of money the size of which will depend on the net change in X Oyj’s stock price between 1 January 2023 and 31 December 2024. At that time, X Oyj’s payroll office will perform a calculation to determine how much money should be paid to Mrs. “A”. She will get that amount of money on 15 January 2025 which is the normal payday for January 2025. The conclusion is that the start date of the accrual period for tax purposes for her synthetic options is 1 January 2023 and correspondingly, the end date is 31 December 2024. The exemption under the six-month rule is applicable on the part of the income that accrued during work in Sweden, i.e. from 1 January 2024 to 31 December 2024. 

8.2 The six-month rule

The provision on ESO schemes found in section 77, subsection 2 of the Act on income taxation is not applied on synthetic options because an employment-related synthetic option is not a stock option within the meaning of section 66, subsection 3. For tax purposes, the benefit arising from a synthetic option is wages, which means that it is income exempted from tax if the general requirements of the six-month rule, defined in section 77, subsection 1 of the Act are fulfilled. As a result, the benefit arising from a synthetic option is exempted income if its period of accrual is a period for which receipts of income are exempted, based on the general requirements relevant to the six-month rule.

8.3 Effect of tax treaties

It may be that not only the exemption due to the six-month rule but also a tax treaty prevents Finland from imposing taxes on the benefit arising from synthetic options. From the perspective of tax treaties, the provisions applied on a benefit arising from synthetic options are the same as the provisions applied on wage income (under Article 15 of the OECD Model treaty). The majority of the cases where the provisions of an applicable tax treaty prevent Finland from imposing taxes involves employees who have been residents of the other Contracting State during the vesting period, and Finland has not been the country where work was done.

8.4 Benefits accrued during a period of non-residency

If the employee being the beneficiary has been a nonresident for some of the time, the synthetic option attributable to that period is treated as income subject to Finnish tax if any wage income, accrued for that period, had been subject to Finnish tax.

9 Employee share issue under section 66a of the Act on income taxation

If the employer company gives an employee the right to buy stocks in the company and the terms and conditions fulfil the requirements of section 66a of the Act on income taxation, and the price equals the mathematical tax value of the share referred to in the Act, or the price is higher than the mathematical tax value, no taxable benefit for the employee will arise.

However, if the employee receives corporate stocks free-of-charge, or is given the right to buy them at a price below the mathematical tax value, a taxable benefit may arise. In general, the received benefit will then be regarded as taxable income in Finland, on similar conditions as the benefit referred to in section 66, subsection 1 of the Act on income taxation. The conditions of section 77, subsection 2 of the Act are not applied, however, because section 77, subsection 2 is only applicable to income referred to in section 66 of the Act. Because of this, it would have no impact on income referred to in section 66a of the Act. Consequently, the six-month rule can be applied to a benefit given to an employee, with no regard to the additional conditions of section 77, subsection 2 of the Act.