Generally, in terms of an employee’s share issues, any discount given from the fair market value of the share is considered to be the employee’s wages, on which the employer company should withhold tax. If the benefit is available to the majority of the personnel, no additional social security contributions other than the insured person’s medical care contribution are paid from the value of the benefit.
The concept of the fair market value of shares has become a key issue in employees’ share subscriptions or share transactions. For example, an investment made by an external investor in a company has been considered a comparison share transaction, on the basis of which the fair market value of the share has been determined also in an employee’s share issue, provided that the transaction has taken place sufficiently close to the share issue. If there haven’t been investment rounds or other comparison transactions, the fair market value of the company’s share is determined mainly in accordance with the valuation guidelines issued by the Tax Administration.
According to the special provision on the employee’s share issues, the employer company (or group company) has been able to give its employees a 10 % discount on the fair market value of the share in an employees’ share issue if certain conditions are met. Especially in growth companies, the 10 % discount has not remedied the disadvantage caused by earned income taxation in terms of employee commitment.
New employee share issue legislation for non-listed companies
According to 66 a § of the Income Tax Act, employees of an unlisted limited liability company may subscribe for shares in the employer company at a mathematical value based on the company’s net assets in an employee’s share issue without any earned income tax consequences. Taxable earned income would accrue to the subscriber of the share only to the extent that the subscription price paid for the share is lower than the mathematical value calculated for the company’s share. In many cases, the mathematical value calculated for the share is lower than the fair market value of the share, especially where comparison transactions related to an investment round have taken place.
Conditions for the application – availability to the majority of personnel
The application of 66 a § of the Income Tax Act requires, among other things, that the benefit is available to the majority of the personnel of the employer company. In other words, the benefit must be available to over 50% of the employees of the company. The provision does not apply, for example, in situations where the employees of a subsidiary are offered the opportunity to subscribe shares in the parent company. However, despite of the aforementioned requirement, majority of employees are not obliged to actually participate in order for the provision to become applicable, as long as the possibility to participate is offered to the majority.
When determining the majority of the personnel, the members of the company’s Board of Directors or Supervisory Board who are not employed by the company are not taken into account. Similarly, those employees, whose ownership personally or jointly with family exceeds 10 % of the company’s shares or the number of votes conferred by all the company’s shares, are not taken into account. In accordance with the generally applicable interpretation in taxation, the company’s CEO is included in the determination of the majority of the personnel. However, it is worth noting that the above-mentioned ownership restriction is also applied to the CEO.
Possibility to offer differing amounts of shares to different employee groups – tax praxis
The applicability of the provision does not require, however, that all persons entitled to an employee’s share issue have the right to subscribe for the same number of shares. Thus, the employer can offer different number of shares to different employee groups. However, it is essential that the terms and conditions for subscribing for shares are objective and equal for all persons entitled to the benefit. While this provision provides some flexibility to employers in structuring an incentive suitable for the company’s needs, acceptable allocation criteria have become a subject of much debate and rulings from the tax authorities and administrative courts.
In its decision SAC:2023:65, the Supreme Administrative Court confirmed the decision of the Helsinki Administrative Court, in which the terms and conditions of the employee’s share issue were objectively and equally defined for all employees entitled to the share issue, when the number of shares to be offered for subscription was based solely on the duration of the employment relationship. In its decision, the Supreme Administrative Court also stated that no group of employees entitled to participate in the employee’s share issue was entitled to subscribe for only a nominal number of shares compared to the company’s other employee groups.
The decision SAC:2023:66 also concerned objectively and equally defined employee’s share issue terms and conditions and the nominal nature of the number of shares offered. In the employee’s share issue, the company planned to offer shares in proportion to the employees’ work input. The employees were divided into different employee groups according to their work input by the supervisor of each team based on the employee’s merits and influence. The supervisors had access to the feedback they had separately requested or received during the year from other employees and other supervisors. In addition, calibration meetings were held under the leadership of the company’s CFO, where the supervisors justified their assessment and where other supervisors could supplement the feedback or challenge the assignment of the grade. The final decision on the division of employee groups was made by the company’s management team and the Board of Directors. According to the Supreme Administrative Court, the division of the company’s employees into different categories in the employee’s share issue was based on equal and objective criteria, and the basis for the distribution of shares had not meant favoring or discriminating against a particular employee or group of employees. In its reasoning for the decision, the Supreme Administrative Court also stated that even though the difference in the number of shares offered to different employee groups was at maximum 26-fold, the allocation offered to the employees in the lowest employee group was not nominal.
The Supreme Administrative Court’s decision 2025:7 concerned a situation in which the company had an employee stock option scheme in place to reward and retain employees. The company’s intention was to offer shares for subscription to the entire personnel. The subscription price would be the mathematical value of the shares. If the employee decided to participate in the employee share issue, his or her employee stock options would be returned and cancelled. The Supreme Administrative Court ruling was related to whether the cancellation of employee stock options was considered to be the exercise of them against the benefit received in the employee share issue, in which case the benefit received would be considered income for the tax year in question.
The Supreme Administrative Court stated that employee stock options are a right granted by the employer to the employee, the exercise of which is decided by the employee, and that the non-use of such options does not constitute an economic benefit. The Supreme Administrative Court further confirmed that employee stock options and an employee share issue are two separate incentives and should be treated and taxes accordingly – as separate incentives. Thus, the cancellation of the stock options did not create taxable income to the employees.
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