Finland’s stock option tax reform: Is it a step forward for growth companies?

Employee stock options can be a powerful tool for growth companies seeking to attract, motivate and retain key talent. In Finland, however, their use has often been limited by a practical challenge as employees have become liable to income tax when exercising options, even if the shares cannot yet be sold and no cash is available to fund the tax. 

The Finnish Government’s draft proposal aims to address this by introducing a more flexible taxation model for employee stock options. The main features of the planned reform include: 

• Employees could defer taxation of the option benefit until the shares acquired with the options are sold or otherwise transferred. 
• The option benefit would remain taxable as earned income. 
• Employees would need to confirm annually that the shares have not been transferred. 
• The deferral would require at least 24 months between the option grant and the start of the exercise period.
• Employers would still need to determine the fair value of the shares at exercise, meaning valuation challenges and related risks would remain, and the proposal is not intended to solve this issue. 

The reform would also amend the beneficial tax regime for employee share issues by allowing shares in the group’s parent company to be offered, provided the other existing conditions are met. 

The consultation round highlighted several issues that will determine how useful the new regime will be in practice. A key concern relates to situations where the value of the shares decreases after exercise. Under the draft proposal, deferred income tax would still become payable even if the eventual sale proceeds do not cover the tax. The same issue may arise if the company is liquidated or goes bankrupt, or if the shares are transferred by inheritance before an exit. The treatment of capital losses therefore remains central to the attractiveness of the reform. 

The proposed 24-month period between the grant of the option and the start of the exercise period is longer than the 12-month cliff period commonly used in the Finnish market and applied in the social security contribution relief rules. Further clarification would be needed on how the period is calculated and how the requirement applies to existing plans. In its consultation response, the Tax Administration also proposed a 10-year maximum deferral period, as the draft proposal currently contains no time limit for the deferral. 

Further guidance would also be helpful on the form and timing of the employee’s notification to the employer, as well as on whether the employer could face tax penalty risks if withholding is not applied and the conditions for deferral are later found not to have been met. In addition, the employee’s annual confirmation obligation may create unnecessary grief and disputes if the confirmation is missed. Practical questions also remain on how partial share transfers and corporate reorganisations should be tracked. Cross-border situations may also prove complex in practice. 

The proposed update to the employee share issue regime also calls for further clarification, particularly on how the “majority of employees” requirement should be assessed in group structures. 

Although the final rules are still subject to further preparation, growth companies should already assess how their current and planned option and share-based arrangements align with the proposed requirements. Key focus areas include reviewing plan terms and communication with employees on the upcoming changes. Administrative processes can already be designed to cater to the proposed changes. 

KPMG can help growth companies design and review equity-based incentive arrangements, model tax outcomes, support valuation work and prepare for the practical implementation of the new regime. With the right planning, you can be at the forefront and ready to take full advantage of the reform when it comes into force.