A personnel fund (in Finnish
"henkilöstörahasto") is often a functional and
tax efficient way to reward employees. The use of personnel funds
in Finland has been encouraged inter alia by the introduction of a
new Personnel Funds Act which entered into force in 2011. At the
moment there are approx. 50 registered personnel funds operating in
Finland. The number of personnel funds established has increased
after the new act came into
There are certain tax advantages in connection with personnel funds when compared e.g. to traditional bonus plans. The employer may deduct the whole amount of the profit-sharing compensation payments transferred into the personnel fund when the payment has been made, whereas only 80 % of the the payments from the personnel fund are taxable earned income for the employees. The personnel fund payments are also exempt from social security contribution, health insurance premium, pension insurance premium and other social insurance contributions.
According to the wording of the Personnel Funds Act, the exemptions regarding aforementioned payments and contributions apply only to personnel funds registered in Finland. For example, when a Finnish subsidiary of a Nordic group has employees that are part of a foreign personnel fund, the prevailing practice has been that said payments and contributions are not exempted. Case law has been incoherent despite the fact that a personnel fund registered in another EU Member State could be comparable by its essential characteristics to a Finnish personnel fund.
Helsinki Administrative Court Decision 12/0561/6
The legally final decision of Helsinki Administrative Court
issued on June 11, 2012, concerned a Finnish subsidiary whose
employees were part of the groups' personnel fund. The
personnel fund was registered in Sweden. According to the decision,
the application of a specific provision of the Finnish Health
Insurance Act in a way that it concerns payments made to personnel
funds operating only in Finland is placing the comparable Swedish
personnel funds at a disadvantage on the basis of its state of
origin. Therefore, levying employers' social security
contribution payments made to a Swedish profit-sharing fund was
against the freedom of establishment and the free movement of
capital enshrined by EU law, when the social security contribution
was not levied if the payment was made to a corresponding Finnish
personnel fund. Because no justifying grounds were at hand, the
Administrative Court overruled the preliminary ruling issued by the
Large Taxpayers' Office and gave a new preliminary ruling
stating that employers' social security contribution must not
be paid when making profit-sharing compensation payments to a
Swedish profit-sharing fund.
Although the decision concerns only the employers' social
security contribution, it should be also applicable to health
insurance premium and other social insurance contributions such as
pension insurance premium, unemployment insurance premium, accident
insurance premium and group life insurance premium.
The Significance of the Ruling
According to the Administrative Court decision, personnel funds residing in other Member States are to be treated in a similar manner than those residing in Finland. Respectively, personnel funds residing in tax treaty countries should not to be discriminated because the tax treaties normally include an article of non-discrimination. It can also be case-specifically possible to apply for refund if a company has previously paid social security contributions as regards to foreign personnel funds. Attorneys at law Borenius Ltd is happy to assist in legal questions relating to personnel funds and other incentive schemes.
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.