Major Shift in Employee Share Issue (ESI) Rules

The Supreme Administrative Court (KHO) has issued a significant decision affecting the taxation of employee share issues (ESIs) in Finland. This new ruling has major implications for growth companies with outstanding option plans.

The ruling states that when employees subscribe to shares in an ESI, they can simultaneously forfeit their existing stock options without the transaction being considered an exercise of those options. This allows companies to replace their option plans with ESI plans without incurring the tax costs previously associated with such transactions. Employees can receive shares more tax-efficiently, and companies can use ESIs as a replacement for option plans. 

ESI rules allow companies to issue shares to employees at a significant discount without creating a taxable benefit. For ESI rules to apply, shares must be offered to the majority of employees, with certain limitations on share allocation among participating employees. If the ESI rules apply, the subscription price can be set to equal the so-called mathematical value of the shares, which generally corresponds to the net asset value (NAV) per share. Any potential benefit would be taxed as capital gains in the future when the shares are sold.

The new ruling will emphasize the application requirements for ESI rules. We believe that tax authorities will scrutinize for instance share allocations more closely to determine whether ESI rules can be applied when replacing option plans. Nonetheless, the ruling brings clarity and predictability to the Finnish employee equity landscape, making ESIs a very attractive incentive model.

All Finnish growth companies with outstanding option plans should review their current position and assess whether switching to an ESI plan for Finnish resident employees would be beneficial. We predict that many companies will make the change, and employee equity structure could become a key factor in competing for top talent.

KPMG has been involved in planning and implementing ESIs from the beginning and we have an in-depth understanding of the requirements and structures that work with ESI rules. We are happy to discuss and help you plan your transition to a new ESI.