On 16 May 2013, the Finnish Supreme Administrative Court ("SAC") rendered a ruling regarding taxation of employment options in cross border situations which changes established tax practice in Finland. The ruling was based on the OECD Guidelines regarding allocation of taxation right in circumstances where an employee works in various countries during the option program.
Employment option benefits are treated as the employee's earned income for the Finnish tax purposes. The option benefit is taxable at the time of exercising the option, i.e., when the employee exercises the option to acquire the underlying shares or the employee sells the options to a third party.
An employee may work in various countries during the option program. If the employee has worked in Finland and abroad during the option program, the taxation right is divided between Finland and the other country. The option benefit, or a part thereof, may be tax exempt in Finland either under the so called six-month rule regarding work performed abroad, if the employee is or becomes non-tax resident, or under the provisions of a tax treaty.
Ruling Changes Allocation Rule
Prior to the SAC ruling, it was established practice that taxation right in respect of the option benefit is allocated pro rata to the working days in the countries between the grant and exercise dates.
However, the new SAC ruling changes this approach. According to the ruling, the allocation shall be done pro rata to the working days in the countries between grant and vesting dates . This is in accordance with the approach adopted in the OECD Model Commentary but deviates from the earlier Finnish practice. Following the SAC ruling, the taxation right is allocated on the basis of the time period between grant and vesting days also for Finnish tax purposes.
Illustrative example
Person A has worked in Germany where he has been tax resident. A's employer company X has granted employment options on 1 January 2009. Vesting period of the options has begun on 1 January 2010 and lapsed on 31 December 2011.
A has moved to Finland on 1 April 2009 and became a tax resident. A has exercised the employment options on 1 October 2012.
For Finnish tax purposes the option benefit is allocated pro rata to the time A has worked in Germany and in Finland, respectively, up to the beginning of the vesting period.
A has worked 25% of the time between 1 January 2009 (grant) and 1 January 2010 (vesting) in Germany and 75% in Finland. Finland shall tax 75% of the option benefit.
Conclusion
In case an option holder has been subject to Finnish tax pursuant to the earlier applied allocation principle for the time period between vesting and exercise dates, and the option holder's taxation would have been more favorable had Finland computated the taxable income only on the basis of the time period between grant and vesting dates, the option holder may apply for an amendment to taxation. Tax years as from 2007 are still open for amendment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
