Taxation of employee stock options

This is an unofficial English translation. The official instruction is available in Finnish and Swedish. In case of divergence of interpretation, the versions in the two national languages will prevail.

Employee stock options refer to a right based on an employment contract to receive or buy shares or stakes in a corporation below the market price based on an agreement or other commitment. This guidance concerns the treatment of employee stock options in the employee’s income taxation, in the employer’s preassessment, and in business income taxation, transfer taxation and inheritance and gift taxation. The guidance replaces the previous guidance by the same name.

Updates reflecting the recent amendments to the Health Insurance Act have been included in this version of the guidance. In addition, the point of time when taxable events relating to assignment-based option rights or corporate stocks occur has been  indicated more precisely. Description of circumstances where warrants and incentive programs that are based on various mutual funds, etc. may be considered a stock option scheme, has been added to chapters 2.3.5 and 2.3.9. Due to these additions also the numbering of other typical employee stock option schemes in the chapter 2.3 has been updated.

1 Introduction

Employee stock options refer to a right based on an employment contract to receive or buy shares or stakes in a corporation below the market price based on an agreement or other commitment. This guidance concerns the treatment of employee stock options in the employee’s income taxation, in the employer’s preassessment, and in business income taxation, transfer taxation and inheritance and gift taxation.

2 General remarks about employee stock options

2.1 Key concepts

An option means a right to receive or buy underlying securities on certain predefined conditions. Where stock options are concerned, the underlying security is a corporate share. Key conditions relating to options are the purchase time and purchase price. 

The basis of the benefit arising from the stock options is that the employee is entitled to buy the underlying security below the market value. If the stock options are transferable and a secondary market exists, the employee can also benefit from the employee stock option (ESO) scheme by selling the options.

Employee stock options refer to stock options received based on an employment contract. The definition in section 66, subsection 3 of the act on income tax (Tuloverolaki 1535/1992; hereafter the income tax act) determines whether the provisions of the act on the taxation of employee stock options will be applied. The definition of the employee stock option is discussed in greater detail in chapter 2.2 below.

The lifecycle of employee stock options typically includes the following stages:

• promise (that an option will be granted), 
• grant (receipt/subscription of options), 
• vesting period, 
• vesting, 
• exercise and 
• restriction period.

In limited liability companies, a decision on the grant of employee stock options is usually made by the Annual General Meeting. The AGM may also authorise the Board of Directors to decide on the grant of employee stock options. The terms and conditions of the ESO scheme may also include a vesting period. Certain requirements are set for the employee, and the number of options depends on how well they meet the requirements during the period. 

The terms and conditions also determine when the employee can start exercising their stock options. After this date, the employee can subscribe for underlying shares and maybe also sell or transfer their employee stock options to third parties. The shares subscribed for may be subject to a restriction period, during which the employee is not allowed to sell or transfer the shares. Depending on the terms and conditions of the scheme, the employee may also lose the shares they have subscribed for if their employment contract terminates during the restriction period.

2.2 Definition of employee stock option in the income tax act

Section 66, subsection 3 of the income tax act prescribes on the taxation of employee stock options as follows.

Taxable earned income also includes the benefit arising from an employment-based right to receive or buy shares or stakes in a corporation below the market price based on a convertible bond, bond with warrants, option right or other such agreement or other commitment (employee stock option). The value of the benefit is the fair market value of the shares or stakes when the employee stock options are exercised minus the price the taxpayer has paid for the shares or stakes and the employee stock options in total. The benefit is regarded as income for the tax year during which the stock options are exercised. The employee stock options are considered to be exercised when the taxpayer receives or buys the underlying shares or stakes. Transfer of employee stock options is comparable to their exercise. In this case, the value of the benefit is the sale price minus the price paid by the seller. A benefit arising from employee stock options is regarded as the original option recipient’s taxable earned income even if they have waived the right by donating the options to a third party or by otherwise transferring them to a party within their sphere of interest. Such transfers are not regarded as exercise of employee stock options.

Section 66, subsection 3 of the income tax act includes an independent tax-law definition of employee stock options. Based on the wording of the law, the definition is wide-ranging. Based on the legal provision, employee stock options are an employment-based benefit to receive or buy shares or stakes in a corporation below the market price on the basis of an agreement or commitment. The legislative materials also specifically state that when interpreting the provision, the concept of employee stock option must be understood in a wide sense (Government Proposal HE 175/1994 vp). Further, in legal and tax practise the provision has been interpreted in the wide sense (see e.g. Supreme Administrative Court rulings 2009:8 and 2014:66). Hereafter, ‘shares’ refers to the shares or stakes mentioned in the provision.

Examples of employee stock options mentioned in section 66, subsection 3 of the income tax  act include schemes relating to convertible bonds, bonds with warrants and stock options. In addition to these, various share award schemes and schemes based on restricted stock can be regarded as employee stock options. Examples of different ESO schemes are described in chapter 2.4 below.

A key condition for the application of section 66, subsection 3 of the income tax act is that the scheme allows the employee to receive or buy shares below the market value. If no such possibility exists, the provision does not apply. On account of this, synthetic options, for example, are beyond the scope of application of the provision. The employee need not receive shares from their employer, nor are the shares required to be of the company where the employee is employed. The provision on employee stock options can therefore be applied for example when employees employed by a subsidiary are granted a right to subscribe for the parent company shares  based on a stock option scheme.

Another key requirement for the application of the provision is that the benefit is based on an employment contract. The decisive factor is not whether the option or share has been granted by the taxpayer’s own employer but whether the taxpayer has received the benefit because they have worked for the employer in question. If the taxpayer has not received the benefit based on an employment contract, it is not treated as an employee stock option. An exception to this are benefits granted to a CEO and members of a Board of Directors or an Administrative Council: the provision is applied to them even though they do not have an employment relationship (see chapter 3.1 below).

The scope of application of section 66, subsection 3 of the income tax act is not limited to a scheme of a specific legal form. An ESO scheme referred to in the legal provision can thus be implemented not only by granting special right referred to in chapter 10, section 1 of the Limited Liability Companies Act (624/2006) but also in some other way. For example, subscription rights granted can be regarded as employee stock options if the share subscription period is notably long (Supreme Administrative Court ruling KHO 2009:8). Different holding company schemes are, as a rule, employee stock options referred to in the law (Supreme Administrative Court ruling KHO 2014:66).

In addition to the provisions on employee stock options, section 66 of the income tax act also includes provisions on the taxation of an employee share issue. Legal provisions on the employee share issue are provided in subsections 1 and 2. They are not applied to employee stock options. The employee share issue differs from the employee stock option for example as regards the employee’s benefit arising from the scheme. In the employee share issue, the employee’s benefit is based on the fact that they can subscribe for shares below the market price on the date of issue. In the employee stock option, on the hand, the benefit is based on the increase in value following the grant of the option. The employee share issue is explained in greater detail in the guidance Taxation of employee offerings.

In certain situations, however, it may not be clear whether legal provisions on the employee share issue or on the employee stock option should be applied. In the Supreme Administrative Court ruling KHO 2009:8 (KHO 26.1.2009 record 163), a benefit based on an employment contract was not granted as option right or other special right under chapter 10, section 1 of the Limited Liability Companies Act but in the form of a share issue. This was implemented by determining the share subscription price and period such that those entitled to share subscription could benefit from the increase in share value following the decision on the share issue. Because key employees could benefit from the increase in value by subscribing for the company’s shares in the future below the market price prevailing on the day of subscription, the scheme must be treated as employee stock option under section 66, subsection 3 of the income tax act and not as a right referred to in subsection 1 of the same legal provision.

Based on the decision, the benefit granted to the employee in the form of shares must be treated as employee stock options when the employee can benefit from the increase in share value. Typically, this may happen when the subscription price is the fair market value that was determined for the share when the compensation plan was launched, but the period between the launch of the plan (the date on which the subscription price is determined) and the termination of the subscription period lasts several months or even longer. The share issue and the effect of the subscription period are discussed in greater detail in chapter 3.7 of the Guidance for the taxation of a share issue based on an employment contract.

Typically, it is possible to benefit from the increase in share value when the terms and conditions of the compensation plan specify the number of shares that the employee receives or the grounds that determine the number of shares that the employee can receive under the scheme. Instead, it is not possible to benefit from the increase in share value for example in a performance bonus scheme where the employee is granted shares for a predefined amount of money (€) or for an amount of money (€) that will be determined based on predefined grounds. 

If the ESO scheme is implemented by the use of option right or other special right (e.g. share option, convertible bond and bond with warrants) referred to in chapter 10 of the Limited Liability Companies Act, the stock options are regarded in the tax assessment as having been received on the day the employee subscribed for the special right. The same principle also applies to corresponding foreign schemes. In share award schemes or in ESO schemes implemented by the use of restricted stock or other such arrangements, the stock options are regarded as having been received on the day the employee agreed to participate in the scheme.

2.3 Examples of employee stock options

The following examples are for schemes that can be regarded as concerning employee stock options referred to in section 66, subsection 3 of the income tax act. It is important to note, however, that the name of an individual compensation plan does not say anything about its tax treatment. The tax treatment of each compensation plan must be decided separately based on the terms and conditions of the plan in question.

2.3.1 Option right under chapter 10, section 1 of the Limited Liability Companies Act

Basically, employee stock options are implemented by granting the employee special rights under chapter 10, section 1 of the Limited Liability Companies Act that entitle them to receive new or treasury shares in exchange for payment. The holder of the right may be entitled to decide whether or not they subscribe for shares (option right).

The share subscription price may be equal to the fair market value of the share at the time the options are granted, or it may be lower or higher. The option right may be granted for free or in exchange for payment. The option right does not entitle to shareholder rights until after the share subscription. Option rights can be registered for public trading, which generates  a secondary market for them.

It should be noted that the term ‘option right’ may be used not only for the financial instrument referred to in chapter 10, section 1 of the Limited Liability Companies Act but also generally for the right to receive or buy underlying securities on predefined conditions (see chapter 2.1). In the present guidance, ‘option right’ is used in the general meaning, unless otherwise stated.

2.3.2 Share award

In a share award (stock award) scheme, the employee is granted a right to receive a certain number of shares for free after a predefined period. A usual requirement is that the employee must meet certain predefined requirements. Where the senior management is concerned, their performance can be measured for example based on the key figures of the financial statements.

The employees included in the scheme do not have shareholder rights until after the share subscription. The awarded shares may be subject to share transfer restrictions.

A share award scheme is often implemented such that some of the shares awarded to the employee under the scheme are sold immediately after receipt in order to cover the taxes payable on the share award. In such a case, both the shares received by the employee and the shares sold to cover the tax are treated as employee stock options. If the employer pays the employee a separate amount of cash to cover the tax or if the terms and conditions of the share award scheme state that the tax will be covered by a separate amount of cash paid by the employer, the amount in question is treated as cash wages.

2.3.3 Restricted stock award

A restricted stock award (restricted stock) refers to a scheme where the employee is awarded shares that are subject to various restrictions or a return obligation. The restrictions are valid for a specified period. Typical restrictions include prohibition to sell or otherwise transfer the shares during the restriction period. The employee usually also loses the shares if their employment or service relationship terminates. During a certain period, the employee thus has a risk of losing the shares. The awarded shares usually entitle to some shareholder rights even when the transfer restrictions are in force, such as the right to vote in a general meeting and to receive dividends.

The employee may be required to meet some requirements in order to receive awarded shares; if so, the term ‘performance share’ may be used. The employee’s performance may be measured for example based on net sales, financial result or key figures, such as earnings per share (EPS).

A compensation plan implemented by the use of restricted stock is regarded as an ESO scheme, if the shares under the plan are registered in the employee’s book-entry account or otherwise assigned to the employee before these have actually earned the right to own the shares. On the other hand, the stock is not treated as employee stock options if the shares awarded to the employee are subject to a condition that the employee will lose the shares if their employment relationship to the employer that granted the shares terminates before the date mentioned in the terms and conditions of the scheme.

A compensation plan where asset-related rights (such as the shareholder’s right to receive dividends) and rights of possession (such as the right to vote in a general meeting) relating to the stock awarded to the employee are notably narrower before the end of the restriction period than what is prescribed in the assumption provisions of the Limited Liability Companies Act can also be regarded as an ESO scheme.

2.3.4 Restricted stock unit

A restricted stock unit (RSU) refers to a scheme similar to a restricted stock award, where the employee is not awarded shares at the very beginning of the scheme but only receives a commitment saying that shares will be awarded to them (‘share certificate’) on certain conditions at a later stage. A restricted stock unit is typically an employee stock option.

2.3.5 Warrant

The stock warrants made available to employees may be either call warrants or sell warrants. A “call” warrant gives the holder the right to buy a share of a company for a predetermined price at a given future date or dates. Warrants can be issued to employees either against payment or free of charge.

Employee stock option schemes may be implemented by issuing warrants.   For tax purposes, the difference between the warrant’s fair market value and the subscription price  is treated as wages subject to income taxation if the call warrant entitles the employee to buy shares below market price. The benefit in the employee’s hands is subject to tax even if he or she has paid a fair market price for the warrant when subscribing it (ruling KVL 29/2018 of the Central Tax Board (in reference to KHO 7.2.2020 record 2014 of the Supreme Administrative Court, where the cited ruling of the Central Tax Board remained unchanged)).

2.3.6 Convertible bond

A convertible bond usually refers to a bond loan where the lender is entitled to subscribe for the company’s shares in order to convert their receivable, partially or entirely, into corporate stock. Convertible bonds are thus a combination of debt, option right and set-off.

A convertible bond can be used in the implementation of a compensation plan such that the employee lends money to the employer and, on certain conditions, is then entitled to convert the loan capital into the employer’s shares. A convertible bond is governed by the provisions on special rights under chapter 10 of the Limited Liability Companies Act.

2.3.7 Bond with warrants

A bond with warrants typically refers to a loan arrangement where the lender not only gets a repayment of the loan capital but also receives warrants entitling them to subscribe for the borrower’s shares. The warrants can be  separated from the loan. Therefore, the subscription price debt for share subscription based on the exercise of warrants need not be set off with receivables that are based on the bond with warrants.

A bond with warrants can be used in the implementation of a compensation plan such that the employee lends money to the employer and the employer not only commits to paying back the loan but also grants the employee warrants. The bond with warrants is governed by the provisions on special rights under chapter 10 of the Limited Liability Companies Act.

2.3.8 Holding company scheme

Under the Supreme Administrative Court ruling KHO 2014:66, a share-entitling compensation plan implemented as a holding company scheme is treated as an ESO scheme when the purpose of the plan is to avoid taxation of earned income. At least the schemes meeting the following criteria fall within this category.

• A holding company directly or indirectly owned by the employee alone or together with other employees acquires shares of the employer company or another company within the same group.
• Inclusion in the scheme has required an employment relationship or the position of a CEO or a member of the Board of Directors.
• The employer company or another company within the same group finances the scheme or participates in organising the financing such that it can be considered beneficial to the employees.
• The shareholder agreement or any other agreement contains a set of terms and conditions characteristic of an ESO scheme, or it is otherwise obvious that the terms and conditions of the arrangement are comparable to those of an ESO scheme. An example of such a condition is a share transfer restriction.
• The purpose of the scheme is to motivate, engage or reward the employees included in the scheme, and the scheme allows them to benefit from the increase in share value.

A scheme that has similarities to the above scheme but differs from it to some extent may also be an ESO scheme.

If a holding company scheme meeting the above criteria does not include a possibility of receiving or buying shares but the benefit under the scheme is received in cash, it is not an ESO scheme referred to in section 66, subsection 3 of the income tax act. Under the Supreme Administrative Court ruling KHO 2014:66, a benefit arising from a holding company scheme is regarded as taxable earned income even in this case.

Under the Supreme Administrative Court ruling KHO 2019:26, if the scheme does not allow the individual to buy shares below the market price and does also not offer this opportunity at a later stage, an increase in share value during the employment relationship is not a benefit regarded as employee stock option and taxable as earned income under section 66 of the income tax act. Under section 61 of the income tax act, the increase in share value is not taxable as wages, either. As a rule, capital gain on shares bought and transferred at the market price is therefore taxable as capital income under section 45 of the income tax act.

2.3.9 Incentive program based on various mutual funds, etc.   

Frequently, member companies of a multinational enterprise group, as well as other companies that set up incentive programs can utilise various fund structures, as defined in the provisions of national law of their country of tax residence. Examples of fund entities in Europe include the fund types called “Fonds Commun de Placement, FCPE” and “Mitarbeiterbeteiligungs-Privatstiftung, MAB”. These programs are generally considered deferred compensation plans in which the employee will only receive the right to corporate stocks or to a corresponding cash payment when a predetermined waiting time has ended or when a legal restriction in the country of residence of the fund ceases to be in effect.

Under established practice of tax assessment, the schemes or programs discussed in this chapter are taxed similarly as  ESO schemes and synthetic option arrangements. The income in the employee’s hands is taxed when the waiting time is over or when the national legal restriction has ceased to be in effect. If the employee receives any dividend income during the program’s duration, the dividend income is taxed as wage income based on the employment contract.

2.3.10 Share issue under chapter 9, section 1 of the Limited Liability Companies Act

Under certain conditions, benefit derived from a share issue under chapter 9, section 1 of the Limited Liability Companies Act is also regarded as employee stock option.

3 Employee stock option in the employee’s taxation

3.1 Benefit arising from an option is taxable earned income

Under section 66, subsection 3 of the income tax act, benefit arising from employee stock options is taxable earned income. Under section 13, subsection 3 of the act on tax prepayments (Ennakkoperintälaki 1118/1996; hereafter tax prepayment act), benefit arising from employee stock options is regarded as wages. The benefit arising from employee stock options is treated as a fringe benefit.

Under section 66, subsection 3 of the income tax act, employee stock options are a benefit received on the basis of an employment contract. According to legal practice, however, the company’s CEO and members of the Board of Directors, can also receive a benefit taxable as employee stock option scheme (Supreme Administrative Court ruling KHO 20.5.1997 record 1221) even if they are not considered as employees of the company from the perspective of Finnish labour law. The same principle is applied to members of Administrative Councils. In these situations the value of the benefit is also wage income by nature.

If an individual who does not have an employment contract or does not hold any of the above positions is granted options free of charge or below the market price, they are not employee stock options referred to in section 66, subsection 3 of the income tax act. For example, a benefit awarded to an entrepreneur acting as the company’s subcontractor is not governed by the provisions on the employee stock option. If such a benefit is awarded as consideration in exchange for work performance, the value of the benefit is non-wage compensation for work. In other cases the benefit is treated as other earned income that is subject to tax. In the hands of the person receiving the options, taking account of the periodization rules in section 110 of the income tax act, the time when taxable event occurs is the point of time when the options are given to the person.

It is possible that employee stock options are not exercised until after the employment with the employer that granted the options has terminated. For example, the option may be exercised after the employee has retired. Based on legal practice, the benefit from employee stock options exercised after the termination of employment is wage income, because the employee stock options were agreed as part of the individual’s remuneration (Supreme Administrative Court ruling KHO 8.5.2001 record 1000). The same principle is also applied when the individual becomes unemployed or changes employer.

Employee stock options do not necessarily expire at the employee’s death. In that case, inheritors gain the benefit on the same conditions that applied to the deceased person. In the year of death, the same provisions of the income tax act are applied to the death estate that would have been applied to the deceased person (section 17, subsection 1 of the income tax act). If the option is exercised after the death of the original option recipient, the income received by the estate in the year of death is wage income. If the death estate exercises the stock option after the year of death, the income generated is the estate’s capital income (Supreme Administrative Court ruling KHO 4.7.2005 record 1710). Income generated by the exercise of a stock option received as a proportional share of the estate is also treated as capital income in the tax assessment of the year of death.

3.2 Exercising employee stock options

3.2.1 Share subscription or transfer of options

Under section 66, subsection 3 of the income tax act, employee stock options are considered to be exercised when the taxpayer receives or buys the underlying shares or stakes. The date of exercise is the date on which the shares are subscribed for, even if they are not registered in the buyer’s book-entry account until later. Further, the date when the company’s Board of Directors approves the subscription is here irrelevant.

Under section 66, subsection 3 of the income tax act, a transfer of employee stock options is comparable to their exercise. The date of exercise is here the date of trading, no matter when the trading price is paid.

3.2.2 Donating or otherwise transferring options to a party in one’s sphere of interest

Under section 66, subsection 3 of the income tax act, donation of employee stock options is not regarded as their exercise. Legislation does not set any limits to the identity of the donee. Donation is therefore not regarded as exercise of employee stock options, not even if the employee donates them to a person who is not within their sphere of interest. As a rule, donations include all situations where stock options are transferred in exchange for consideration that is lower than or equal to 3/4 of the fair market value of the underlying shares. The original option recipient will pay tax on the benefit arising from the stock option when the donee exercises the option (option recipients’ gift tax assessment is discussed in chapter 12.2 below).

Under section 66, subsection 3 of the income tax act, selling or otherwise transferring employee stock options to a party within the option-holder’s sphere of interest is not regarded as exercise. Such a party within the sphere of interest may be a natural or legal person. A natural person considered to be within the employee’s sphere of interest is, for example, the employee’s spouse, relative in a direct line of descent/ascent or other person close to the employee, such as their unmarried partner. A legal person within the employee’s sphere of interest is, for example, a limited liability company or a general or limited partnership owned by the employee or by a person within the employee’s sphere of interest.

Transferring employee stock options to a natural or legal person within one’s sphere of interest does not involve any tax consequences at the time of transfer. The value of the benefit arising from employee stock options becomes the original recipient’s taxable earned income when a party within their sphere of interest subscribes for underlying shares or stakes or transfers the stock options in exchange for consideration to a party that is not within the employee’s sphere of interest.

If employee stock options have been transferred to a company within the employee’s sphere of interest, the employee may transfer shares or stakes of the company to a party beyond their sphere of interest before exercise. The employee stock options are considered to be exercised when so large a portion of the shares or stakes of a company within the employee’s sphere of interest has been transferred to a party beyond their sphere of interest that the company can no longer be regarded as being within the employee’s sphere of interest. The value of the benefit arising from the options is then taxable as the original recipient’s earned income. If the value of the shares or stakes transferred also comprises other components than employee stock options, the price received for the options, in so far as it corresponds to the market price, is regarded as the employee’s benefit arising from the options.

3.2.3 Transfer of options as an adjusting payment in a distribution of matrimonial assets

Depending of the terms and conditions of the ESO scheme, it may be possible to transfer stock options as an adjusting payment in the case of a distribution of matrimonial assets. If the employee transfers stock options as an adjusting payment, their tax treatment needs to be considered.

The government proposal for the provisions regarding donation and transfer of stock options to a party within one’s sphere of interest (act on amending section 66 of the income tax act 584/1997) states that the purpose of the provision is to prohibit the taxpayer from avoiding earned income tax by means of donations or in similar ways (Government Proposal HE 61/1997 vp).

When the purpose of the rules is taken into account, they must be interpreted to mean that an ex-spouse cannot be regarded as being within the sphere of interest referred to in the provision. The distribution of matrimonial assets cannot therefore be regarded as a transfer where tax liability would remain with the original option recipient and tax would not be imposed until after the stock options have been exercised. This interpretation is also supported by legal practice, according to which the employee’s death is not regarded as a transfer to a party within the sphere of interest, either (Supreme Administrative Court ruling KHO 4.7.2005 record 1710). Transfer of stock options in a distribution of matrimonial assets can thus be regarded as a normal transfer and exercise of stock options.

Transfer of stock options in a distribution of matrimonial assets as an adjusting payment under section 35 of the Marriage Act (234/1029) is therefore considered comparable to the exercise of stock options on the grounds stated above. When matrimonial assets are distributed, the fair market value of the stock options transferred as an adjusting payment is thus taxable earned income for the party transferring the options. If consideration has been paid for an option, the amount will be deducted from the value of the taxable benefit.

If the adjusting payment, transferred in the distribution of matrimonial assets, exceeds the amount of adjusting payment referred to in section 35 of the Marriage Act, the exceeding amount must be regarded as a gift. In such a case, some of the stock options transferred as an adjusting payment are regarded as a gift, while the rest are regarded as another type of transfer. The proportion of donated options in the part of adjusting payment exceeding the adjusting payment referred to in section 35 of the Marriage Act corresponds to the proportion of employee stock options in the total adjusting payment. The portion of donated options is governed by the provisions on transfer within one’s sphere of interest.

Section 46, subsection 2 of the income tax act includes a special provision on how the period of ownership and the date of acquisition are determined for assets received in a distribution of matrimonial assets. If the assets that are sold or transferred have been received in a distribution of matrimonial assets, the period of ownership and the acquisition cost are calculated based on the acquisition preceding the distribution. The ESO benefit on which the spouse who transferred the option as an adjusting payment has paid income tax can be treated as option acquisition cost in their tax assessment. This amount, together with the consideration paid in exchange for the stock options, forms the option acquisition cost in the tax assessment of the spouse who received the stock options as an adjusting payment. When the spouse who received the options in the distribution of matrimonial assets transfers them or subscribes for underlying shares, the option acquisition cost is the amount of benefit on which their ex-spouse paid income tax plus the subscription price, if any, that the ex-spouse paid for the option.

Under section 45, subsection 2 of the income tax act, converting a convertible bond referred to in chapter 5, section 1 of the Limited Liability Companies Act into shares is not a transfer, and neither is the exercise of a share subscription right relating to a bond with warrants referred to in the Act.  When such a share is transferred, the period of ownership is calculated from the receipt of the bond or subscription right. In tax practice, the above provision has also been applied to an option right that is not associated with a bond with warrants.

Shares received in a distribution of matrimonial assets are no longer regarded as employee stock options after the distribution. After the distribution of assets, the provisions on employee stock options therefore no longer apply to them. Instead, they are taxable in the same way as other options that are not based on an employment contract. When an ex-spouse subscribes for shares based on stock options received in a distribution of matrimonial assets, it is therefore not regarded as an exercise of stock options referred to in section 66, subsection 3 of the income tax act. Capital income tax will not be imposed on the ex-spouse until the shares are sold.

Under section 85 of the Marriage Act, matrimonial assets can be distributed immediately after the divorce process has started at the District Court. The matrimonial assets may thus be distributed before the divorce is final. The application for divorce may also be dropped after the matrimonial assets have already been distributed (sections 25 and 26 of the Marriage Act). Before the divorce is final, the spouses are considered to be within the same sphere of interest. Transferring an option as an adjusting payment in a distribution of matrimonial assets carried out before the divorce is final is treated as a transfer to a party within the employee’s sphere of interest referred to in section 66, subsection 3 of the income tax act. When the spouse exercises the options, the benefit is therefore taxable as the original option recipient’s earned income.

3.2.4 Transfer of stock options as an adjusting payment in a distribution of an estate

A distribution of assets may also have to be carried out after someone’s death (section 85, subsection 1 of the Marriage Act). Options received based on an employment contract cease to be regarded as employee stock options when the employee passes away. On account of this, when the estate is distributed and the estate gives the stock options to the surviving spouse as an adjusting payment, it is not regarded as exercise of employee stock options referred to in section 66, subsection 3 of the income tax act. However, if the surviving spouse transfers stock options they have received based on an employment contract to the deceased person’s inheritor, the transfer is regarded as a transfer to a party within the sphere of interest. The exercise of stock options after the employee’s death is described in greater detail in chapter 3.1.

3.2.5 Pledging employee stock options

Employee stock options are an asset that may be pledged. Pledging a stock option is not regarded as exercise because the right of ownership is not transferred when the option is pledged (Central Tax Board ruling KVL 147/1999).

3.2.6 Business restructuring

The employee may transfer their employee stock options in a merger under section 52 a of the act on the taxation of business income (Laki elinkeinotulon verottamisesta 360/1968), in a demerger under section 52 c, or in a share exchange under section 52 f. As a rule, such a transfer is regarded as exercise of stock options.

An exception to the above main rule is a situation where the employee transferring employee stock options receives, as consideration, options of the receiving company or the company that acquires the underlying shares. In accordance with the Central Tax Board ruling KVL 128/2000, transfer of employee stock options in the case of a merger is not regarded as an exercise of the options if the options are exchanged for the receiving company’s stock options governed by similar terms and conditions.

This principle also applies to share exchange, as stated in the Central Tax Board’s advance ruling KVL 29/2002. In the ruling, the Central Tax Board did not regard it as a transfer when stock options were exchanged for the purchasing company’s stock options governed by similar terms and conditions. The principles of the ruling can also be applied to stock options received in a demerger and governed by similar terms and conditions, because a demerger – just like a merger – is a general succession to which the principle of continuity is applied.

3.2.7 Amending the terms and conditions of the stock option 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. Amendment of the terms and conditions of the ESO scheme is not regarded as exercise of stock options,  and it has no tax consequences to the employee.

3.2.8 Income from a holding company scheme

As a rule, share-based compensation plans implemented as a holding company scheme are governed by provisions on the taxation of employee stock options if the plan allows the employee to receive or buy shares below the market price. If a benefit under the scheme is not granted as shares, it is regarded as taxable earned income under section 61, subsection 2 of the income tax act. A benefit derived from a holding company scheme is thus mainly taxable earned income, in whatever form the benefit is granted. However, if the scheme does not allow shares to be bought below the market price, the capital gain on shares bought at the fair market price is capital income. (Supreme Administrative Court rulings KHO 2014:66 and KHO 2019:26, and chapter 2.3.7 above.)

Employee stock options implemented through a holding company scheme are exercised when the employer company’s share is transferred from the holding company to the employee following a dissolution of a limited liability company under chapter 20 of the Limited Liability Companies Act, a merger under chapter 16 of the Act or some other restructuring arrangement. Cash dividends and other payments made to the employee on the basis of such a holding company scheme become taxable earned income as they are paid.

3.3 Valuation of benefit arising from a stock option

3.3.1 Share subscription

Valuation of benefit arising from employee stock options is prescribed in section 66, subsection 3 of the income tax act.  If the employee exercises the stock options by purchasing the underlying shares or stakes, the value of the benefit is considered to be the market price of the shares or stakes minus the price the employee has paid for the shares or stakes and the employee stock options in total. The benefit is valued at the price on the date of exercise.

The average rate on the date of subscription can be used as the fair market value of a share quoted on the stock exchange or on some other regulated market (publicly quoted shares). The average rate is obtained by dividing the share’s overall trading volume on the day in question by the number of transactions. If no other clarification is available, the fair market value of a share quoted on a non-regulated market (other than publicly quoted shares) is determined in accordance with the Tax Administration guidance Valuation of assets in inheritance and gift taxation (available in Finnish and Swedish, link to Finnish). As a rule, the taxpayer must therefore always provide the Tax Administration with a clarification of the fair market value of the shares they have received based on an ESO scheme and of how the value has been calculated.

Employee stock options may be exercised at a time when trading on the marketplace is interrupted. This may be the case, for example, if shares are subscribed for during the weekend or in the evening after the stock exchange has closed. In these cases, the market price of the share is determined based on the average rate on the date of subscription. If the share has not been traded at all during the date of subscription, the market price of the share is determined based on the average rate on the day when the share was traded last.

The shares can be subscribed for and then sold immediately (‘cashless exercise’). The fair market price of the share is then the price at which the share is sold immediately after the share subscription (Supreme Administrative Court ruling KHO 2004:80/KHO 27.8.2004 record 2012).

Employee stock options are wages paid by the employer. The value of the benefit arising from employee stock options is therefore not affected by any agreements the employee may have with third parties (Central Tax Board ruling KVL 147/1999).

The beneficiary may attempt to hedge against changes in share or option value by means of derivative contracts. A forward agreement between the beneficiary and a banking company has not been considered to affect the value of the benefit referred to in section 66, subsection 3 of the income tax act (Supreme Administrative Court ruling KHO 2003:35/KHO 19.6.2003 record 1504). Other kinds of derivative contracts are also not considered in the valuation of the benefit.

Sometimes several days may pass between the share subscription and receipt. Even when the share value drops considerably during this period, the taxable income is calculated based on the fair market value on the date of subscription.

3.3.2 Selling employee stock options

Depending on the terms and conditions of the ESO scheme, the employee may be entitled to sell their options. In this case, the option rights may be registered for public trading. They may also be sold outside public trading.

Selling of an option right to a party beyond the employee’s sphere of interest is comparable to the exercise of employee stock options (see chapter 3.2.1 above). Under section 66, subsection 3 of the income tax act, the value of the benefit arising from the sale is the sale price minus the price paid by the seller.

An assignment to sell stock options registered for public trading may be given at a time when trading in the marketplace is interrupted. This may be the case, for example, if the assignment is given during the weekend or in the evening after the stock exchange has closed. In these cases, the fair market price of the share is determined based on the average rate on the day when the assignment to sell is carried out.

The rules on capital gain are not applied to the exercise of employee stock options. When the value of a benefit arising from employee stock options is calculated, it is therefore not possible to deduct the acquisition cost assumption, for example. The rules on capital gain are applied when the employee sells the shares they have acquired in exchange for their employee stock options (see chapter 3.6 below).

3.3.3 Reduction for employee share issues is not applied

The benefit arising from employee stock options is taxable earned income in full. The 10% reduction for employee share issues referred to in section 66, subsection 1 of the income tax act is not applied, not even if employee stock options are granted to every employee.

3.3.4 Effects of share transfer restrictions

Shares acquired based on employee stock options may have transfer restrictions that prohibit the employee from transferring the shares during the restriction period following the subscription.

Despite potential transfer restrictions, the value of the benefit arising from the employee stock option is determined based on the time when the taxpayer receives or buys the shares. The benefit is thus valued at the value of the share on the share subscription day (Supreme Administrative Court ruling KHO 2011:91/KHO 9.11.2011 record 3256).

Before the above ruling, the value of the benefit arising from employee stock options could, under highly exceptional circumstances, be valuated at the value of the day when the transfer restrictions terminated (Supreme Administrative Court ruling KHO 27.8.2002 record 1959). In the case in question, the employees could on 14 February 2000 subscribe for shares that according to the terms and conditions of a bond with warrants had a transfer restriction terminating on 15 December 2000. The company had listed on the stock exchange, and in the IPO launched on 1 March 2000, the share price was €13. By the end of the year, the share value had dropped to €4–5. The value thus dropped more than 60% in a short period of time. The Supreme Administrative Court held that under those circumstances, the fair market value of the benefit arising from the employee stock option was the quoted price of the share at the time the transfer restriction terminated.

The legal rule of the Supreme Administrative Court ruling KHO 27.8.2002 record 1959 can be applied only in connection with IPOs and when the share value drops substantially before the transfer restrictions terminate.

3.3.5 Share-based compensation plans with suspensive conditions

The terms and conditions of a share-based compensation plan may include a suspensive condition, according to which the employer defers the transfer of the shares based on the scheme to the employee until after the vesting period (mandatory deferred compensation plan). Before entering a compensation plan, the employee may also have the right to request that the employer should defer the share transfer until after the vesting period (voluntary deferred compensation plan). Compensation plans with suspensive conditions include, for example, Restricted Stock Unit (RSU) schemes.

In a share-based compensation plan with a suspensive condition, the employee does not immediately gain the ownership of the shares they earn. They are therefore not entitled to dividends and cannot exercise other share-based rights, either. Depending on the terms and conditions of the plan, the employee may lose their right to shares if their employment relationship to the employer who granted the benefit terminates before the shares are transferred to them.

A share-based compensation plan with a suspensive condition is an ESO scheme under section 66, subsection 3 of the income tax act, if after the period specified in the terms and conditions of the plan the employee is entitled to a number of shares determined based on the grounds specified in the terms. If the employee has met the requirements set for the award but has not gained ownership of the shares, no tax will be imposed on the benefit arising from the employee stock option until after the employee receives the shares. In this case, the value of the employee’s taxable benefit is determined based on the day when the suspensive condition is met. This is not necessarily the same day as the one on which the shares are registered in the employee’s book-entry account.

3.3.6 Share-based compensation plans with a resolutory condition

3.3.6.1 Significance of the extent of a resolutory condition

The terms and conditions of a share-based compensation plan may include a resolutory condition, according to which the employee may, under certain conditions, lose the shares that were transferred to them on the basis of the compensation plan. The effect that such a resolutory condition has on tax assessment depends on the conditions on which the employee may lose the shares transferred to them.

3.3.6.2 Resolutory condition relating to termination of employment

A resolutory condition may concern only termination of employment. In such a compensation plan, shares are not transferred to the employee until after the employee has met the qualifying requirements set in the terms and conditions of the plan. The terms and conditions of the compensation plan state, however, that the employee will lose the shares they have qualified for if the employment relationship between the employee and the employer who awarded the shares is terminated before the date mentioned in the terms. A corresponding resolutory condition may also be included in a compensation plan implemented in the form of a stock option.

Such a compensation plan with a resolutory condition is regarded as an ESO scheme under section 66, subsection 3 of the income tax act if the share transfer is preceded by a vesting period enabling the employee to benefit from an increase in share value. In such a plan, employee stock options are exercised when the shares are transferred to the employee. The value of the benefit is determined at that time, and subsequent changes in share value are not taken into account (see chapter 3.3.4 above).

If the employee has to return the shares already transferred to them because of a resolutory condition relating to the termination of employment, the employee’s tax assessment will be adjusted upon their request with regard to the tax year when they were taxed for the benefit (section 61 and section 63 of the act on tax assessment procedure (Verotusmenettelylaki 1558/1995). The year is the tax year during which the employee received or bought the shares.

If the employee has received not only shares but also cash to pay the withholding tax and they have to return the cash payment as well, the cash payment is also deducted, at the employee’s request, from the employee’s taxable income for the year when they were taxed for the payment. If the employee is not required to return the cash payment, the tax assessment will not be adjusted in that respect.

If the employee has received dividend on the shares, they may have to pay back the dividend as well. In that case, the tax assessment of those tax years when dividend was taxed also has to be adjusted.

The effect that the share transfer restriction and the conditional return obligation have on health insurance contributions is discussed in greater detail in chapter 5.

3.3.6.3 Resolutory condition relating to vesting of shares

A resolutory condition can be formulated such that shares may be transferred to the employee with a restricted right of ownership even before the employee has actually qualified for the shares. A qualifying requirement may be, for example, a certain increase in share price or achievement of performance targets. Such schemes include, for example, a compensation plan implemented by the use of a Restricted Stock Award (RSA).

If in addition to a continued employment relationship to the employer who awarded the shares, the terms and conditions of the compensation plan also set other requirements for the employee’s final qualification for the shares, the shares are employee stock options under section 66, subsection 3 of the income tax act. In such a case, the employee is not regarded to have received the shares until after the requirements for the final qualification have been met. The time is the time when the stock options are exercised under section 66, subsection 3 of the income tax act.

A resolutory condition concerning only continued employment, a transfer restriction or share pledging does not alone defer tax assessment (see chapter 3.3.6.2 above). The effect that the share transfer restriction and the conditional return obligation have on health insurance contributions is discussed in greater detail in chapter 5.

3.3.7 Stock splitting

Stock splitting means increasing the number of shares by dividing the company’s existing shares into multiple shares without changing the share capital. In stock splitting, the number of shares that can be subscribed for based on employee stock options, and the share subscription price, are usually adjusted in the same proportion.

If the employee originally paid consideration in exchange for employee stock options, the part of the consideration relating to a single share will change in the same proportion as the number of shares.

3.3.8 Benefit arising from a holding company scheme

Earned income from a holding company scheme taxable as employee stock options under section 66, subsection 3 of the income tax act or as other income includes, for example, dividend and other distribution the employee receives from the holding company. Taxable earned income also includes the employee’s benefit arising from the dissolution of a holding company scheme.

A holding company scheme can be dissolved by the use of a company dissolution referred to in chapter 20 of the Limited Liability Companies Act, a merger referred to in chapter 16 of the Act, or some other restructuring arrangement. In the case of a dissolution, the fair market value of the part of the assets received minus the amount the employee has invested in the company is taxable earned income. In the case of a merger, the fair market value of the compensation for merger minus the amount the employee has invested in the company is taxable earned income. The same principles also apply to schemes dissolved in some other manner. For example, a consideration that the employee receives in share exchange minus the amount they have invested in the scheme is their taxable earned income.

The holding company or its shareholder can also redeem the holding company shares owned by the employee. In such a case, the amount received by the employee minus the amount the employee has invested in the scheme is taxable earned income. Other distribution of a fund for invested equity, capital income, or other invested equity is taxed in the same way.

Based on the Supreme Administrative Court ruling KHO 2014:66, the employee’s taxable benefit from a holding company scheme subject to income tax is always taxable earned income in full. Whether the employee has invested in the scheme has therefore no effect on the type of taxable income.

3.4 Deductions in the employee’s tax assessment

3.4.1 Costs arising from the exercise or hedging of employee stock options

Apart from the share subscription price, employee stock options may also involve other costs. When the exercise of employee stock options generates costs for the employee, they are costs for the production of income and are deducted in the tax assessment based on the employee’s report (section 29 and section 95 of the income tax act). Such costs arising from the exercise of employee stock options include, for example, a broker’s fee paid by the employee or a transfer tax. These costs for the production of income deducted in income taxation are not included in the acquisition cost for shares subscribed for based on employee stock options.

Other costs for employee stock options than those relating to the exercise of the options cannot be deducted as costs for the production of income. Non-deductible from earned income are, for example, costs relating to hedging of employee stock options. For example, loss from a forward agreement can be deducted only as capital loss (Supreme Administrative Court ruling KHO 2003:35). Non-deductible from earned income are also amounts paid on the basis of an option scheme of a credit institution that is independent of the employer. To such an arrangement, provisions on the taxation of capital gain have been applied (Central Tax Board ruling KVL 147/1999).

3.4.2 Loss from the sales or expiry of employee stock options

If the employee has received employee stock options in exchange for consideration and then sells the options at a price lower than the consideration or allows them to expire, the arrangement may generate a loss for the employee. The loss can then be deducted as costs for the production of income referred to in section 95 of the income tax act (Supreme Administrative Court ruling KHO 1997:33/KHO 24.4.1997 record 985). If the stock options have been sold, the amount deductible from the earned income is the difference between the selling price and the consideration paid for the options. If the stock options have expired worthless, the amount deductible from the earned income is the amount of the consideration paid for the options.

3.4.3 Automatic deductions

Benefit arising from employee stock options is treated as wage income (section 13, subsection 3 of the tax prepayment act). Based on the said benefit, a deduction for the production of income, an earned income deduction (local taxation) and an employment income deduction (national taxation) are thus made in the employee’s tax assessment (section 95, section 105 a and section 125 of the income tax act).

3.4.4 Loss from a holding company scheme

A holding company scheme treated as employee stock option scheme referred to in section 66, subsection 3 of the income tax act, or taxed as other earned income may finally result in a loss for the employee. This is the case, for example, when the scheme is terminated and it turns out that the employee has invested in the scheme  more money than what he or she has gained during the scheme’s entire duration. The employee can declare such a loss as costs for the production of income on their tax return and deduct it from their earned income, provided that any profit generated by the scheme would have been treated and taxed as earned income.

3.5 Income spreading

Under section 66, subsection 3 of the income tax act, benefit arising from employee stock options is income for the tax year during which the option is exercised. The value of the benefit is determined based on the fair market value of the share at the time the employee stock option is exercised. The benefit from the exercise of the option is determined based on share price variation. The benefit can thus not be regarded as one-off income accumulated over two or more years as referred to in section 128 of the income tax act, and so the requirements for income spreading are not met (Supreme Administrative Court ruling KHO 2002:59/KHO 26.9.2002 record 2288).

3.6 Sales of shares subscribed for based on employee stock options

When the employee sells shares they have subscribed for based on employee stock options, provisions on the taxation of capital gain are applied (section 45–47 and section 50 of the income tax act. Capital gain from the sales of shares is taxable capital income. The capital gain is calculated by deducting the share acquisition cost from the sale price. The acquisition cost is the sum of the price paid for the shares and stock options and the amount taxed as wages. The part of option benefit that has been treated as tax-exempt income by virtue of section 77 of the income tax act is also included in the share acquisition cost (Supreme Administrative Court ruling KHO 18.3.2003 record 575). 

The transfer tax is not included in the acquisition cost of shares subscribed for based on employee stock options, so it is not deducted as part of the share acquisition cost, either (see chapter 3.4.1 above). In the calculation of capital gain, the acquisition cost assumption can be applied.

If the employee sells the shares at a price below their acquisition cost, a capital loss is generated. The loss can be deducted as described in section 50 of the income tax act.

3.7 Compensation for dividend payments

The terms and conditions of the ESO scheme may state that the employee will be compensated for dividends that the employer distributes after the employee has entered the scheme. The subscription price for the shares received based on the scheme can be lowered by the amount of dividend distributed by the employer company or the employee may be paid a monetary compensation.

A compensation granted as a reduced share subscription price affects the amount of taxable wage income generated for the employee when the employee stock option is exercised. A cash compensation, on the other hand, is the employee’s taxable cash wages.

4 Synthetic options

Synthetic options (Stock/Share Appreciation Right, SAR, Phantom Option) refer to an arrangement where the employee receives an entitlement to a cash amount that is determined based on the employer company’s share price. The employee is granted an option right, but the right does not entitle them to subscribe for underlying shares at the option exercise price. Instead, the difference between the exercise price and the share value at the time of exercise is paid to the employee in cash (net value settlement). An arrangement like this may also be referred to as a share-based bonus or a compensation plan, for example.

In practice, synthetic options are thus a cash payment determined based on the employer company’s share price development. For example, two years after the grant of synthetic options the employer may pay the employee included in the scheme a cash amount corresponding to the increase in share value. In this respect, the principle behind synthetic options is different from that of bonuses and percentages of profits, because the amount of bonuses and percentages depends on the company’s profits.

Synthetic options do not entitle to share subscription. On account of this, the provisions under section 66, subsection 3 of the income tax act on employee stock options are not applied. The income tax act does not contain special provisions on the tax assessment of synthetic options. Synthetic options are therefore governed by the general provisions on taxation of cash wages of the income tax act and the general provision on prepayments of the tax prepayment act. Benefit arising from synthetic options is thus taxable earned income and regarded as wages paid by the employer (section 61, subsection 1 of the income tax act and section 13, subsection 1 of the tax prepayment act). The benefit is regarded as wage income received at the time the cash payment is made.

Benefit arising from synthetic options is the employee’s cash wages, so it is subject to tax withholding and must be reported to the Incomes Register on an earnings payment report.  However, the employer’s and employee’s contributions payable on synthetic options differ from those usually paid on cash wages (see chapter 5.1.5 below).

Synthetic options may be transferrable. Even if the employee sells their rights, the benefit is still regarded as an employment-based benefit received from the employer. The sale price for the synthetic options is thus the employee’s taxable wages, on which the employer must withhold tax and submit an earnings payment report to the Incomes Register.

For more details, see the guidance: Reporting data to the Incomes Register: rewarding employees, payments made to an entrepreneur and other special circumstances.

The employee may be granted both synthetic options and ‘normal’ stock options entitling to receive or subscribe for shares. The two types of options may be granted simultaneously, either within the same scheme or within two separate schemes, and the exercise of one type of option will cancel the other. If the employee subscribes for shares, the scheme is regarded as an ESO scheme under section 66, subsection 3 of the income tax act. Otherwise the scheme is a synthetic option scheme.

5 Health insurance contributions

5.1 Applicable regulations

Under chapter 18, section 5, subsection 1 of the Health Insurance Act (1224/2004), an individual insured in Finland is obliged to pay the insured person’s health insurance contribution. The contribution consists of a health care contribution and a daily allowance contribution (chapter 18, section 4 of the Act). Further, the act on the employer’s health insurance contribution (Laki työnantajan sairausvakuutusmaksusta 771/2016) requires employers to pay the employer’s contribution.

The health care contribution is calculated 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 calculated based on the insured person’s taxable wage income and employment 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 referred to in section 13 of the tax prepayment act, with the exceptions specified in chapter 11, section 3, subsection 4 of the Health Insurance Act.

The health insurance contribution amounts are confirmed annually by a Government Decree (chapter 18, section 23 and section 24 a of the Health Insurance Act). In 2022, the health care contribution withheld from wage income under the Health Insurance Act is 0.53% of the earned income taxable in municipal taxation and of any other basis for payment under chapter 18, sections 14, 16–19 and 19 a of the Health Insurance Act (Gov. Decree, section 1, subsection 1). However, if the insured person receives income other than the earned income under chapter 18, section 15–18 of the Health Insurance Act, the health care contribution payable on the said income is 1.50% (Gov. Decree, section 1, subsection 2). If the income is earned income referred to in chapter 11, section 3, subsection 3 (3–5) of the Health Insurance Act, 1.50 % insured person’s health care contribution will be withheld.

The employer will pay the employer's health insurance contribution based on the total payroll. Wages here refer for example to pay, reward and compensation subject to withholding tax, referred to in section 13 of the tax prepayment act. However, the items mentioned in chapter 11, section 3, subsection 3 of the Health Insurance Act are not regarded as wages (section 5, act on the employer’s health insurance contribution (Laki työnantajan sairausvakuutusmaksusta 771/2016).

Payments treated as wages in tax assessment but not included in the employment income under the Health Insurance Act are prescribed in chapter 11, section 3, subsection 3 of the Health Insurance Act. According to subsection 3 (4), a benefit arising from the exercise of employee stock options under section 66, subsection 3 of the income tax act or an employment-based payment that is determined based on changes in the value of the company’s share is not regarded as wages. An exception to this are stock options where the subscription price of the underlying share is substantially lower than the share’s fair market value at the time the option was granted, and the option is exercised within one year of the grant date. These stock options are treated as employment income under the Health Insurance Act and all the employer’s and employee’s health insurance contributions must therefore be paid on them. The subscription price is substantially lower than the fair market value if it is less than 50% of the market value of the share. For more information on undervalued stock options, see chapter 5.2.2 of this guidance.

According to chapter 11, section 3, subsection 3 (5) of the Health Insurance Act, a reward given in the form of shares of the employer company or another company within the same group or within another such financial consortium and quoted on a regulated market or in a multilateral trading system controlled by authorities is not treated as wage income. Further, a reward given as an investment deposit or the like or a reward given partly or fully in cash rather than as shares is not treated as wage income. A further condition is that the benefit arising from such a reward depends on the share value development over a period of no less than 12 months between the award promise and grant.

Chapter 11, section 3, subsection 3 (5) of the Health Insurance Act is a special provision in relation to subsection 3 (4). Subsection 3 (5) is also applied in cases where the compensation plan is regarded in tax assessment as an employee stock option under section 66, subsection 3 of the income tax act and to which subsection 3 (4) would otherwise be applied.

The insured person’s health insurance contribution is included in the withholding rate indicated on the tax card. As regards the health insurance contribution in international situations, see the guidance Taxation of employee stock options and employee offerings in cross-border circumstances.

5.2 Employee stock options (chapter 11, section 3, subsection 3 (4) of the Health Insurance Act

5.2.1 Main rule relating to employee stock options

In the light of the above regulations, no daily allowance contribution or employer's health insurance contribution is paid, as a rule, in the case of a benefit arising from employee stock options under section 66 of the income tax act. Only the insured person’s health care contribution is withheld.

Exceptions to the above main rule may include situations such as those described below, where the special provision of chapter 11, section 3, subsection 3 (5) of the Health Insurance Act applies to a benefit taxable as an employee stock option or where the stock option is as referred to in chapter 11, section 3, subsection 3 (4) of the Health Insurance Act and its subscription price is substantially lower than the market value of the underlying share at the time the option was granted.

5.2.2 Exception related to undervalued stock options

According to the amendment of chapter 11, section 3, subsection 3 (4) of the Health Insurance Act that entered into effect at the beginning of 2021, stock options are in some situations regarded as employment income. In such cases, the employer’s and employee’s health insurance contributions must be paid on them in the same way as on normal wage income.

The stock options referred to in the provision are such that their subscription price is substantially lower than the fair market value of the share at the time the option was granted. The subscription price is substantially lower than the share’s fair market value if it is less than 50% of market value of the underlying share at the time the option was granted. The substantially lower subscription price alone does not mean that the option would be employment income as referred to in the Health Insurance Act. A further requirement is that the stock option is exercised within one year of the grant date. However, if more than one year has passed since the stock option was granted, the benefit is not regarded as wages and the employer's health insurance contribution or the employee’s daily allowance contribution do not have to be paid.

Undervalued stock option benefit is taken into account when the option is exercised. When the option is exercised, the employer must examine whether the share subscription price was substantially lower (less than 50%) than the fair market value of the share at the time the option was granted and whether the option was exercised within one year. If both conditions are met, the employee has gained a benefit as referred to in the Health Insurance Act and both the employer’s and the employee’s health insurance contributions must be paid.

The amount of the benefit under the Health Insurance Act is the difference between the fair market value of the share at the time the option was granted and the subscription price of the share. The benefit amount calculated in the above manner is treated as a benefit subject to the health insurance contribution when the stock option is exercised. The amount of the benefit under the Health Insurance Act is thus different from the amount of taxable benefit, which is calculated on the basis of the fair market value at the time the option is exercised.

When submitting reports to the Incomes Register, the employer must indicate both the taxable benefit and the benefit amount subject to the health insurance contribution. More information about the employer’s obligation to report information is available in the Incomes Register’s guidance Reporting data to the Incomes Register: rewarding employees, payments made to an entrepreneur and other special circumstances.

5.3 Share awards (chapter 11, section 3, subsection 3 (5) of the Health Insurance Act)

5.4 Regulation on share award systems

No daily allowance contribution or employer's health insurance contribution is paid on a benefit referred to in chapter 11, section 3, subsection 3 (5) of the Health Insurance Act if the requirements stated in the provision are met (chapter 18, section 14, subsection 1 and chapter 18, section 20 of the Health Insurance Act). However, the health care contribution is withheld from the employee.

Chapter 11, section 3, subsection 3 (5) of the Health Insurance Act is applied to such share-based compensation plans where the employee is awarded shares of the employer company or another company within the same group or within some other such financial consortium, and the shares are subject to trading on a regulated market or in a multilateral trading system under the Act on Trading on Financial Instruments (1070/2017). The provision is also applied to rewards given as an investment deposit or the like, the amount of which depends of the price development of the share of the employer company or another company within the same group traded on a regulated market.

Application of chapter 11, section 3, subsection 3 (5) of the Health Insurance Act does not depend on the legal form of the compensation plan. The provision is meant to be applied especially to share award schemes, but on account of the formulation, it can also be applied to other compensation plans meeting the requirements set in the provision regardless of their legal form. The scope of application has been defined such that the provision is also applicable to a share-based compensation plan regarded in taxation as employee stock options under section 66, subsection 3 of the income tax act. A share award scheme is an example of such a compensation plan.

The only situation where a benefit arising from a compensation plan referred to in chapter 11, section 3, subsection 3 (5) of the Health Insurance Act is not subject to the daily allowance contribution and the employer's health insurance contribution is when the value of the benefit depends on the price development of the underlying shares over a period of no less than 12 months between the award promise and the actual grant. The provision can be applied even when the number of shares awarded to the employee depends on the financial statements or the key figures calculated on the basis of the share price, the employee’s performance or other such matters.

5.4.1 Defining the period between the award promise and the grant

If the period between the award promise and the actual grant, i.e. the period during which the award depends on the price development of the share, is a year or more, the share award is not regarded as employment income under the Health Insurance Act.

As a rule, ‘award promise’ refers to the time when the employee is informed that (1) the employer company launches a reward scheme with certain terms and conditions and that (2) the employee is included in the said scheme. The award promise must be specified in such a way that the promise can be allocated for a certain individual.

As a rule, the actual grant takes place when the employee receives the shares under the scheme (the ownership of the shares is transferred to the employee). The share award is regarded as having been received at that time even if the shares are burdened with a transfer restriction or a conditional return obligation if, for example, the employee’s employment is terminated.

If the value of the benefit depends on the price development of the underlying shares over a period of less than 12 months following the award promise, both the daily allowance contribution and the employer's health insurance contribution must be paid on the benefit.

Following the amendments to the Health Insurance Act that entered into effect at the beginning of 2021, the interpretation of the point in time when a share award is regarded as having been given in accordance with the Health Insurance Act has changed. The change relates to share award schemes where the share award is burdened with both a transfer restriction and a conditional return obligation after the grant. If after the grant the shares are burdened with both a transfer restriction and a conditional return obligation, the share award is not regarded as given until after these restrictions expire (Government Proposal HE 64/2019, p. 56 vp). The conditional return obligation may be tied to the duration of the employee’s employment contract or to the performance targets set by the company. 

As the shares are granted, the employer must assess whether the condition on the 1-year waiting period under the Health Insurance Act is fulfilled. If yes, the share award benefit is not subject to the employer's health insurance contribution nor to the employee’s daily allowance contribution.

Sometimes circumstances may change after shares have been granted, for example if the employee moves on to another employer while the transfer restriction and the conditional return obligation are still in force. Depending on the terms and conditions of the share award scheme, the employee may have to return some or all the shares granted to them. If the return obligation only applies to some of the shares and if the circumstances change before a minimum of one year has passed since the award promise, the employer's health insurance contribution and the daily allowance contribution must be paid on the remaining benefit as the circumstances change (for example, employment is terminated).

If the employee has to return the share award in part or in full, their tax assessment will be adjusted in the manner described in chapter 3.3.6.2. If the share award has to be returned in full, no benefit under the Health Insurance Act is generated.

More information about the employer’s obligation to report information and about the above obligations to correct a conditional share award is available in the Incomes Register’s guidance Reporting data to the Incomes Register: rewarding employees, payments made to an entrepreneur and other special circumstances.

5.4.2 Share award paid partly in cash

Chapter 11, section 3, subsection 3 (5) of the Health Insurance Act is also applied if the award is received not as shares but partly or fully in cash. Part of the share award may be paid as cash instead of shares for example to cover the related tax. Further, the award may also be paid partly or fully in cash if it is not after all possible to transfer the required number of shares to all the employees included in the target group (Government Proposal HE 68/2005 vp, p. 19). Insofar as the benefit has been given in cash, it is not treated as employee stock options under section 66, subsection 3 of the income tax act in the tax assessment process.

According to the formulation of the law, the daily allowance contribution and the employer's health insurance contribution need not be paid on awards paid in cash if and only if the employee receives cash instead of shares. The legislative materials also specifically state that the factual nature of the scheme may not change for the reason that the award is given in cash instead of shares.

If the award was never intended to be paid in shares, the daily allowance contribution and the employer's health insurance contribution must be paid on the cash amount (Government Proposal HE 68/2005 vp, p. 19). Further, if the cash amount payable based on the award scheme is not tied to share price development, the daily allowance contribution and the employer's health insurance contribution must be paid. Neither of the above cases can in any respect be regarded as employee stock options under section 66, subsection 3 of the income tax act.

The daily allowance contribution and the employer's health insurance contribution must also be paid on a cash award when the cash is paid as a separate payment that has not been agreed on in the terms and conditions of the share award scheme. For example, if a cash amount is agreed on afterwards, the daily allowance contribution and the employer's health insurance contribution must be paid.

If the cash award is not tied to the share price, the daily allowance contribution and the employer's health insurance contribution must be paid on the cash amount. For example, a cash award of a fixed amount relating to a share-based compensation plan is subject to the daily allowance contribution and the employer's health insurance contribution.

An exception to the above tax treatment of cash awards is a scheme implemented as an investment deposit or the like where the award, owing to the nature of the scheme, is always given in cash. In the case of an investment deposit, the employer promises to pay the employee a cash amount determined based on the value development of the deposit. Profit is paid on the investment deposit, and it is determined based on the share value development of the employer company or another company within the same group.

No daily allowance contribution or employer's health insurance contribution is paid on a cash amount awarded as an investment deposit, if the employer’s underlying shares are traded on a regulated market and the value of the benefit depends on their price development over a period of no less than 12 months following the award promise. An investment deposit is not regarded as employee stock options under section 66, subsection 3 of the income tax act in the tax assessment process.

5.4.3 Share award of a non-listed company

Chapter 11, section 3, subsection 3 (5) of the Health Insurance Act is applied only when the shares awarded to the employee are traded on a regulated market or in a multilateral trading system. The said provision is thus not applied if the employee receives shares of an unquoted company.

Whether or not the health insurance contribution and the employer's health insurance contribution must be paid on shares of an unquoted company is determined under chapter 11, section 3, subsection 3 (3 and 4) of the Health Insurance Act. The daily allowance contribution and the employer's health insurance contribution need not be paid in the case of an employment-based share issue, employee stock options or synthetic options. The above contributions must be paid, for example, on a fixed cash amount relating to an ESO scheme.

5.5 Compensation for dividend payments

The terms and conditions of the ESO scheme may state that the employee will be compensated for dividends that the employer distributes after the employee has entered the scheme. The subscription price for the shares received under the scheme can be lowered by the amount of dividend distributed by the employer company, or the employee may receive a cash payment as compensation.

A compensation granted as a reduced share subscription price affects the taxable wage income generated for the employee when the employee stock option is exercised, but the compensation has no other effect on the daily allowance contribution or the employer's health insurance contribution.

A cash compensation is not a payment under chapter 11, section 3, subsection 3 (4 or 5) of the Health Insurance Act but regular cash wages. The insured person’s health insurance contribution and the employer's health insurance contribution must be paid.

5.6 Synthetic options

Under chapter 11, section 3, subsection 3 (4), wages do not include an employment-based payment that is determined based on the company’s share price development. Such payments include, for example, the employee’s benefit arising from synthetic options (Government Proposal HE 68/2005 vp, p. 18). Synthetic options are thus not subject to the daily allowance contribution and the employer's health insurance contribution.

Chapter 11, section 3, subsection 3 (4) of the Health Insurance Act excludes from wages only such cash payments whose value is based on share price development. This is also stated in the government proposal. The part of a cash payment that is not based on share price development is subject to the daily allowance contribution and the employer's health insurance contribution. The above contributions must therefore be paid, for example, on the synthetic share award discussed in chapter 5.1 3 above.

6 Preassessment of employee stock options

6.1 Tax withholding

Benefit arising from employee stock options is treated as wage income (section 13, subsection 3 of the tax prepayment act). The employer must therefore withhold tax on the benefit (section 9, subsection 1 of the act). Tax must be withheld even if the employee has requested prepayments for the income arising from the options. The prepayments will be taken into account when the employee requests a new tax card and the withholding rate is therefore recalculated. In order that the withholding could be carried out, the employer must keep track of when the employee exercises the employee stock options. 

Under section 9 of the decree on tax prepayments (Ennakkoperintäasetus 1124/1996), withholding on an occasional non-cash payment is performed during the calendar year either by adding the value of the benefit to the wages of the next pay period or by dividing the value into equal instalments over the remaining months of the year. The first alternative is practical when the benefit is small and a sufficient amount can be withheld all at once. If the benefit is large (in €), it must be spread over the remaining months of the year because preassessment should be as close to the employee’s final tax assessment as possible.

Tax withholding is carried out by deducting the withheld amount, calculated on the basis of total remuneration, from the employee’s cash wages. Tax is withheld as the cash wages are paid or recorded in the recipient’s account. Regular fringe benefits are also taken into account in the withholding of each pay period (section 11 of the act on tax prepayments) and section 9 of the decree on tax prepayments.

Benefit arising from a holding company scheme taxable as employee stock options under section 66, subsection 3 of the income tax act or as other earned income is based on an employment relationship, so it is treated as the employee’s wages in tax assessment and preassessment (section 13, subsection 3 of the tax prepayment act also specifically states that benefit arising from employee stock options is wages). Income from a holding company scheme is thus taxable wage income, and the employer of a employee included in the scheme must withhold tax on the income. The obligation to withhold tax falls on the employer in whose employment the employee is when they are entered in the scheme.

6.2 Employer pays the employee’s pension insurance contribution and unemployment insurance contribution

As a rule, taxable wages paid to an employee are subject to the employee's earnings-related pension insurance contribution and unemployment insurance contribution. Both contributions consist of employer and the employee portions. As a rule, the employer withholds the employee’s portions in connection with wage payment and transfers them to the pension institution (earnings-related pension insurance contribution) and the unemployment insurance fund (unemployment insurance contribution) together with the employer’s portions.

The employer withholds tax from the employee’s wages before withholding the employee's earnings-related pension insurance contribution and unemployment insurance contribution. The employee’s taxable benefit arising from employee stock options may be so large that the employee’s entire cash wages must be withheld. In such a case, no cash wages remain from which the employee’s portion of the earnings-related pension insurance contribution and unemployment insurance contribution could be withheld. This is a problem when the employee not only has stock options but also receives wages from which the above contributions should be withheld.

In such a case, the employer can withhold the employee’s portion of the earnings-related pension insurance and unemployment insurance contribution retrospectively in connection with later instances of wage payment. The employee's earnings-related pension insurance contribution can be withheld in connection with later wage payments within one year and the unemployment insurance contribution within two years (section 154, subsection 2 of the Employees Pensions Act (TyEL) and section 20, subsection 3 of the act on financing unemployment benefits (Laki työttömyysetuuksien rahoituksesta 555/1998).

If the employer does not withhold the earnings-related pension insurance and unemployment insurance contributions retrospectively and does not collect them from the employee in any other way, either, the employee portions of the contributions are regarded as the employee’s taxable wages, because the employer is obliged to pay the contributions anyway (section 152, subsection 2 of the Employees Pensions Act (TyEL) and section 21 of the act on financing unemployment benefits). If regarded as wages, the employee can deduct the contributions on the tax return (section 96 of the income tax act).

If no other account has been given, it can be assumed in the tax assessment that the employer has paid the employee’s portion of the earnings-related pension insurance contribution and the unemployment insurance contribution if the withholding on the option benefit has been such that the portions cannot have been withheld from the cash wages.

6.3 Preassessment of costs for the exercise of employee stock options

Exercise of employee stock options may generate costs for the employee. Such costs include, for example, broker’s fees and transfer tax (see chapter 3.4.1 above).

Under section 15, subsection 1 of the tax prepayment act, the employer can, at the employee’s request, deduct direct work-related costs before tax withholding. Such costs include the expenses related to tools and materials, travel and entertainment expenses, and other direct expenses arising from the employee’s performance of their duties. The broker’s fee is not such a direct cost arising from the performance of work, so the employer may not deduct it before withholding.

The obligation to pay the transfer tax falls, in the first place, on the buyer. If the seller of employee stock options has to pay the tax, for example because of an agreement made with a foreign buyer, the amount of tax can be regarded as an adjustment to the sales price. It can thus be deducted from the option benefit before tax withholding.

Costs for hedging employee stock options and for other arrangements between the employee and a third party are not costs directly associated with the options (Supreme Administrative Court ruling KHO 2003:35 and Central Tax Board ruling KVL 147/1999). Therefore the employer cannot deduct them before carrying out the withholding.

6.4 Withholding obligation in a group of companies

The right to participate in an ESO scheme is usually tied to an ongoing employment relationship. However, if the employee moves from one company to another within the same group, the right is usually not lost. In such a case, the benefit is considered received from the company for which the employee worked when the options were granted (employer who granted the employee stock options). On account of this, the employer obligations relating to the employee stock option fall on the granting company, even though the employer has changed. The obligations include tax withholding and reporting on the employer's contributions (see chapters 3.1–3.3 above and chapter 6 below).

An ESO scheme may also be implemented such that the option is granted by another company within the same group. For example, the employees of a subsidiary may be allowed to subscribe for the parent company’s shares. In these circumstances, the benefit is considered received from the company for which the employee worked when the options were granted. The company for which the employee worked for has the normal employer obligations that are based on an ESO scheme.

6.5 Employee stock options in corporate acquisitions, mergers, etc.

In a corporate acquisition, merger or the like, an employee may be transferred to another company such that they retain seniority. In such cases, employer obligations relating to employee stock options also usually transfer to the new employer.

The employee may also transfer to the employ of a non-group company in some other way, for example in connection with the employer company’s share trading. If the employee is allowed to retain their old employee stock options, the employer obligations relating to them do not concern the new employer. Instead, the employer who granted the employee stock options carries the normal employer obligations even after the termination of the employee’s employment contract. If the previous employer does not pay cash wages to the employee, the employer only has to submit an earnings payment report to the Incomes Register.

In connection with share trading, the buyer may also buy the employees’ employee stock options. The employee then exercises their employee stock options, and the employer who granted the options is obliged to withhold tax on the benefit amount regarded as wages.

In situations where the buyer pays the transfer price for employee stock options directly to the employee, the employer cannot carry out the tax withholding in full. Even in this case, however, the employer must enter the sale price in their salary calculation as ESO benefit (see chapter 6.1). If the parties to the corporate acquisition have together agreed that the acquiring company acts as a substitute payer and takes care of the tax withholding and reporting of the benefit to the Incomes Register, the employer need not enter the benefit in their salary calculation nor report it to the Incomes Register.

6.6 Employee’s required actions during the tax year

When employee stock options are exercised, it may be advisable for the employee to request a revised tax card. Income arising from the employee stock option is not automatically taken into account in the withholding rate indicated on the tax card. This may lead to a situation where the whole cash wages are withheld or the amount withheld is too small. If the amount withheld is too small, back taxes or late-payment interest with relief may be imposed on the employee. To avoid back taxes or late-payment interest, the employee can request additional prepayments (section 24, subsection 4 of the tax prepayment act).

Benefit arising from employee stock options is treated as wage income, so as a rule, it is income subject to withholding tax. Prepayments cannot be imposed on employee stock options at the authority’s initiative, so the Tax Administration can impose prepayments on the option benefit only if so requested by the employee (section 23 of the tax prepayment act). This can be done even if the cash wages are enough to cover the withholding tax in full. If at the same time a revised tax card is prepared for the option beneficiary, it must be observed in the determination of income ceiling values that the employer is obliged to withhold tax on the full amount of wages they have paid, including the value of the option benefit. The income ceiling values for the tax card must be determined accordingly.

The employer withholds tax on the benefit arising from employee stock options in accordance with the tax card, even when the employee has requested prepayments (see chapter 6.1 above).

7 Employer’s reports to the Incomes Register

The employer must report the wages and other taxable payments they pay to the employee. The wages and fringe benefits are reported to the Incomes Register.

The benefit arising from employee stock options is submitted to the Incomes Register on an earnings payment report, using the income type Employee stock option. The employee stock option is reported in full on the report for the pay period during which the employee has exercised the employee stock option.

Share awards are reported to the Incomes Register on an earnings payment report using the income type Stock options and grants. The amount received as shares is reported using the income type Stock options and grants.

For more details, see the guidance: Reporting data to the Incomes Register: rewarding employees, payments made to an entrepreneur and other special circumstances.

More information on reporting: Reporting data to the Incomes Register: rewarding employees, payments made to an entrepreneur and other special circumstances.

8 Employee’s tax return

Benefit arising from employee stock options is usually entered on the employee’s pre-completed tax return based on information provided by the employer, if the employer granting the benefit is Finnish. If the benefit is received from a foreign employer, the employee must add the benefit arising from the employee stock option to the tax return (section 7 of the act on tax assessment procedure).

If the employee has worked abroad and the benefit from the employee stock option is therefore divided into a taxable and a tax-exempt part, it is recommended that the employee should provide a calculation of how the benefit is divided. Further, an account of the option benefit information submitted to the tax authority of the country of work should also be attached to the tax return. The following information must be given:

• the option scheme on which the employee stock options exercised are based on (for example, X Plc, June 2019);
• when the stock options were received (date on which the options were registered);
• the number of employee stock options exercised;
• when the employee stock options were exercised (date when shares were subscribed for or options sold); and
• whether the employee stock options were exercised by subscribing for shares or by selling the options.

The account attached to the tax return may also be a notice in English submitted to the foreign tax authority, provided that the above information is given therein.

9 Deductibility of costs relating to employee stock options in the employer’s tax assessment

9.1 Shares transferred to the employee

When a limited liability company transfers treasury shares, this does not, as a rule, generate taxable income or deductible costs. When the company transfers treasury shares to its employees based on employment relationship, deductible costs may be generated for the company on the conditions stated in section 18, subsection 3 of the act on the taxation of business income.

Under section 18, subsection 3 of the act on the taxation of business income, the price paid for the shares subsequently transferred to the company’s employees is deductible, if the company has purchased the shares on a regulated market referred to in the Act on Trading on Financial Instruments or on another regulated and authority-controlled market. The maximum deduction equals the fair market value of the shares at the time of grant or of subscription. If the fair market value of the shares drops before the grant in comparison to the acquisition cost, the decrease in value is not deductible. The subscription price paid by the share recipient will be deducted when the deductible cost is calculated.

Under section 27 f of the act on the taxation of business income, the above deductible amount is deducted in the tax year during which the shares are subscribed for or granted. Similarly, tax is imposed on the employee’s benefit arising from employee stock options when the employee receives the shares or exercises their options to subscribe for shares.

The amount paid by the company for the shares is also deductible when the employee has transferred their stock option to a third party (Supreme Administrative Court ruling KHO 16.1.2012 record 35). The deduction is made in the tax year when the shares are subscribed for.

Section18, subsection 3 of the act on the taxation of business income only concerns shares bought in public trading. Therefore other than publicly quoted companies cannot deduct the acquisition cost for the shares they transfer.

If employee stock options under section 66, subsection 3 of the income tax act are implemented by transferring the employer company’s new issued shares to the employee, no deductible costs are generated for the company (Central Tax Board ruling KVL 11/2008, no change Supreme Administrative Court ruling KHO 22.12.08 record 3462). Based on the provisions on tax avoidance, the share acquisition cost can also be regarded as undeductible when the employer company trades back and forth in its own shares to turn the amount paid for the shares deductible (Gov. Proposal HE 176/2008 vp, p. 32).

In a group, a share-based compensation plan may also be implemented such that the subsidiary transfers another group company’s shares (which the subsidiary owns) to the employee. For example, an employee employed by a subsidiary of a limited liability company quoted on the stock exchange may be granted shares of the quoted parent company. The acquisition cost for another group company’s shares is deductible for the employer under the general provisions of the act on the taxation of business income with the restrictions of section 6 b of the act (Gov. Proposal HE 176/2008 vp, p. 44).

9.2 Compensation paid to another group company

In a group, employee stock options may be implemented such that shares of a group company other than the employee’s employer company are granted as employee stock options. The company granting the benefit to its own employees may then pay compensation to the company whose shares are being granted.

In the Supreme Administrative Court ruling KHO 2007:29 (KHO 9.5.2007 record 1194), the difference between the fair market value of the share on the day the option is exercised, paid by a Finnish subsidiary to a foreign parent company, and the share subscription price paid by the employee was regarded as expense deductible from the subsidiary’s business income. The parent company had debited the amount from the subsidiary, so in the subsidiary’s tax assessment it was regarded as a usual generated expense, which was deductible under the general provisions of the act on the taxation of business income. Based on the ruling, compensation paid by a subsidiary to a parent company for the right of the subsidiary’s employees to participate in the group’s stock option scheme can be deductible expense for the subsidiary.

The Supreme Administrative Court ruling KHO 2007:29 concerned compensation paid for the transfer of new shares. A corresponding compensation paid by a company to compensate another company for their acquisition costs for existing shares was regarded as deductible in the Central Tax Board ruling KVL 66/2002 (no change KHO 5.6.2003 record 1398). According to the latter ruling, a compensation paid by a Finnish subsidiary, which the parent company debited from the subsidiary and which equalled the parent company’s costs for the exercise of the stock options granted to the subsidiary’s employees, was deductible business expense.

When the deductibility of a compensation paid to another company within the same group is assessed, the market price principle applied in business transactions between group companies must always be considered. Where a compensation paid to another group company is concerned, only the portion relating to the company’s own employees can be deducted.

9.3 Company founded to manage an award scheme

A company granting a share award can also outsource the management of the scheme to a company founded for this particular purpose. In ruling KHO 2019:36, the Supreme Administrative Court has taken a stand on the deductibility of the costs.

Supreme Administrative Court ruling KHO 2019:36 (KHO 8.3.2019 record 825)

Taxation of business income – Deductibility of expense – Share award scheme – Company founded for a share award scheme

A Plc intended to provide a share award scheme for its key employees and outsourced the management of the scheme to B Ltd. B Ltd had founded C Holding Ltd in order to buy A Plc’s shares. The parties had concluded a tripartite management agreement and an associated financing agreement. Based on the financing agreement, A Plc granted a limit loan to C Holding Ltd. C Holding Ltd used the loan to buy A Plc’s shares on the stock exchange in order to award them to key employees working in A Plc’s employ. The idea was that the capital of the limit loan would be offset by the share acquisition cost as and when C Holding Ltd transferred A Plc shares to A Plc’s key employees.

The question was whether A Plc was entitled to deduct the payments corresponding to the share acquisition cost and made to C Holding Ltd in full or only within the limits prescribed in section 18, subsection 3 of the act on the taxation of business income. The main rules applied were the provision of section 7 of the act on the taxation of business income and the specifying provision section 8, subsection 1 (4) of the same act, according to which for example wages of the individuals who have worked in the business are deductible. As A Plc did not acquire its own shares in the scheme, the provision of section 16, paragraph 9 of the act on the taxation of business income, which prescribes that an amount paid for the company’s own shares is not deductible, did not apply, and neither did the provision of section 18, subsection 3 of the same act, which is an exception to the above provision. A Plc was entitled to deduct the amounts corresponding to the share acquisition cost in full.

In a situation where the company granting a share award makes a cash payment for example to the party managing the scheme without itself acquiring any shares under the scheme, the costs can be deducted in full pursuant to section 7 and section 8, subsection 1 (4) of the act on the taxation of business income.

9.4 Costs for synthetic options

Synthetic options are implemented as a cash payment made to the employee. The amount paid based on synthetic options is thus the employer’s deductible wage cost (section 8, subsection 1 (4) of the act on the taxation of business income).

10 Employee stock option in transfer taxation

Under section 1 of the act on transfer tax (Varainsiirtoverolaki 931/1996), tax must be paid on transfer of a security as prescribed in the act. Under section 15, subsection 1, when the right of ownership to a security is transferred, the transferee must pay tax. Securities referred to in the act on transfer tax include shares and subscription rights. Book-entry shares corresponding to securities are also treated as securities (section 17 of the act on transfer tax). No transfer tax has to be paid on the transfer of a security issued by a foreign corporation (section 18, subsection 1 of the act on transfer tax).

According to the scope of application of the act, subscription of shares or stock options is not regarded as transfer. Grant of stock options is therefore not regarded as transfer of the right of ownership to a security (Supreme Administrative Court ruling KHO 2017:39).

When the employer grants stock options to an employee, it is therefore not considered a transfer of a security as referred to in section 15, subsection 1 of the act on transfer tax. If transferrable stock options are re-transferred, however, it is a transfer in exchange for consideration, on which the transferee must pay transfer tax.

When an employee who has received stock options exercises the options to subscribe for the company’s new issued shares, it is not comparable to a share transfer referred to in the act on transfer tax and the employee need not pay transfer tax. The same also applies in situations where the company decides on a free share issue directed to itself in accordance with chapter 9, section 20 of the Limited Liability Companies Act. As this concerns shares that have not been subscribed for by anyone outside the company, the transfer of these shares is comparable to share subscription.

If existing shares are subscribed for based on stock options, the consideration on which the transfer tax is based includes not only the value of the options but also the consideration paid as a share subscription price.

From the point of view of transfer tax liability, it is not relevant how the employee received the shares. For example, transfer tax must be paid on shares received from another company within the same group whose registered office is in Finland, if existing shares that were in the company’s possession are given in exchange for the employee’s work performance.

Under section 15 a, subsection 1 of the act on transfer tax, transfer tax need not be paid when securities registered for regular public trading on a marketplace referred to in the said provision are transferred in exchange for a fixed cash consideration. Tax exemption also requires that the conditions of subsections 2 and 3 are met. When the conditions of section 15 a, subsections 1–3 of the act are met, tax exemption applies to trading both on the market referred to in the legal provision and outside the market.

Under section 15 a, subsection 4 (3) of the transfer tax, the tax exemption based on the said provision does not, however, concern a transfer where the consideration in part or in full consists of the employee’s work performance. These situations are not regarded as trading in securities – neither economically nor legally – but as wage payment. Application of the provision does not require an employment relationship.

The Supreme Administrative Court ruling KHO 2015:32 discussed the duty to pay transfer tax in a share award scheme where the employees were obliged to spend their wages to buy their employer’s shares.

According to the ruling, shares were transferred to employees partly or fully as consideration in exchange for their work performance under section 15 a, subsection 4 (3) of the act on transfer tax. Particularly significant from the point of view of the ruling was that the key employees were obliged to buy their employer’s shares using the reward they had earned under the scheme and that the shares were subject to transfer restrictions.

Liability for the transfer tax falls on the employee exercising the option, if the employee exercises the option to buy the company’s treasury shares (section 15, subsection 1 of the act on transfer tax). However, the employer may pay the transfer tax on behalf of the employee. The transfer tax paid by the employer is regarded as wages. However, if the transfer tax is regarded as wages, the employee is entitled to deduct it as an expense for the production of income (see chapter 3.4.1 above).

11 Employee stock option in inheritance and gift taxation

11.1 Inheritance taxation

Depending on the terms and conditions of the ESO scheme, a right based on employee stock options may transfer to the original recipient’s inheritors. The inheritors then gain the stock option benefit on the same conditions that were applied to the deceased person. In inheritance taxation, employee stock options have an asset value only if the period for exercising the options is ongoing as the option holder dies or if the options are transferrable to a third party at the time of death.

11.1.1 Valuation of employee stock options transferring as inheritance

In inheritance taxation, employee stock options are valued at the fair market value at the time of death. The value is determined as described below.

Publicly quoted options are valued at the time of death. Publicly unquoted options that entitle to subscribe for publicly quoted shares are valued based on the price of the underlying share at the time of death. Unquoted options that entitle to subscribe for shares not quoted on the stock exchange are valued based on the fair market value of the underlying share at the time of death. If the terms and conditions of the option scheme determine a share subscription price for the options, the price decreases the value of the options.

The amount taxable as employee stock options is known and tax is imposed on the benefit only after the party who inherited the employee stock options has exercised the options. Income tax imposed when the employee stock option is exercised is thus payable by the estate or inheritor. The amount of tax payable by these parties is also known only after the change of ownership. Where inheritance is concerned, computational income tax debt relating to employee stock options is therefore not taken into account when the fair market value is being determined for purposes of inheritance taxation (Supreme Administrative Court ruling KHO 2017:195).

11.1.2 Exercise of employee stock options transferred as inheritance to a death estate

If stock options are exercised after the death of their original recipient during the year of death, the benefit generated for the estate is regarded as earned income. If the death estate has exercised the options after the year of death, the benefit generated for the estate is regarded as capital income (Supreme Administrative Court ruling KHO 4.7.2005 record 1710).

In the above situations, the taxable amount is obtained by deducting the fair market value of the stock options, confirmed in inheritance taxation, from the benefit arisen from the exercise.

11.2 Gift taxation

Donation of employee stock options is regarded as donation of a taxable gift, even though under the special provision of section 66, subsection 3 of the income tax act, income generated from the exercise of options is taxed as income of the employee who donated the options. The individual who received  the stock options as a gift must therefore pay gift tax (section 18 of the act on inheritance and gift tax (Perintö- ja lahjaverolaki 378/1940)).

When stock options have been donated (and are therefore transferrable to a third party), they are regarded as having an asset value. Options transferred as a gift are valued as described below.

Publicly quoted options are valued at the time of gift. Publicly unquoted options that entitle to subscribe for publicly quoted shares are valued based on the price of the underlying share at the time of gift. Unquoted options that entitle to subscribe for shares not quoted on the stock exchange are valued based on the fair market value of the underlying share at the time of gift. If the terms and conditions of the ESO scheme determine a share subscription price for the options, the price decreases the value of the options.

If options are donated, the benefit arising from their exercise is taxable income for the original recipient (donor). Income tax is therefore not imposed on the gift recipient. On account of this, computational income tax debt relating to options is not deducted in the gift recipient’s gift taxation.