Insight 2/2023: The use of employment-based share issue for Finnish unlisted companies widens based on recent case law

The Finnish Supreme Administrative Court (SAC) has recently given two favourable decisions regarding non-listed companies’ share incentive plans in the form of employment-related share issue (ITA 66 a §; työsuhteeseen perustuva henkilöstöanti). Under the regime, non-listed companies may issue shares to their employees at a discounted subscription price (using the mathematical value of the shares as the subscription price) without triggering taxable income for the employees provided that certain criteria are met. For instance, the benefit must be available to the majority of the personnel (>50%) which means that the eligibility criteria must be set objectively and equally between the employees.

In the first case (SAC:2023:65), the SAC confirmed that the number of shares to be issued to employees could vary based on duration of employment as it did not constitute preference or discrimination against a particular employee or group of employees provided that no group of employees was entitled to subscribe only a nominal number of shares.

The second case (SAC:2023:66) concerned an employment-related share issue where employees were entitled to different numbers of shares based on their employee category determined by the company based on the employee’s role and contribution to the company. In the advance ruling phase, the Tax Administration had considered the share issue taxable to two leadership group members, but the company never appealed against this part of the decision to the Administrative Court and this part of the decision remained as final. In the final phase the SAC considered that the issued shares could be divided between the employees based on an assessment made by the company when no employee group could subscribe only a nominal number of shares. Although the share issue was considered as taxable to two leadership group members (because this part of the ruling was not appealed against), this did not “taint” the whole share issue, i.e., the share issue for the other employee groups was still tax free.

As there has not been much case law regarding employment-related share issues, these decisions provide welcome clarification on the permitted criteria for allocating shares between different groups of employees. Read together with previous case law and draft legislation, different number of shares can be issued to employees based on the employee’s role, gross salary, duration of employment or other assessment criteria determined by the company, provided that the criteria are not discriminatory in nature or lead to some groups receiving only nominal number of shares. This makes employment-related share issues a relevant alternative when considering share incentive plans for non-listed companies.

For more information, please contact Sebastian Kellas and Antti Leppänen.