At its budget session, the Finnish Government agreed on changes to the proposed reform of employee stock option taxation. The Finnish Startup Community welcomes the Government’s decision to take consultation feedback into account. The changes will ensure that the reform better serves growth companies and their employees.
The most important change concerns situations where the value of shares falls after an employee exercises their options. The tax rules will be amended to ensure that employees do not have to pay tax on gains they have never received.
The minimum holding period for options will also be reduced from 24 months to 12 months. In addition, the tax treatment of options within corporate groups will become more predictable.
“The Government deserves credit for these changes. A well-functioning system should not require employees to pay tax on gains that never materialised. The Government listened to the consultation feedback and addressed the reform’s most serious flaw. The reform now responds far better to the needs of growth companies and their employees”, says Riikka Pakarinen, CEO of the Finnish Startup Community.
Employee stock options help growth companies attract and retain talent. Young companies are often unable to offer salaries as high as those paid by established businesses. Options allow employees to benefit from an increase in the company’s value while also becoming shareholders.
“Growth can also be supported through reforms that have only a limited impact on public finances. Fixing the taxation of employee stock options is a good example. The next step is to make decisions that will attract more private capital to Finnish growth companies”, Pakarinen says.
Too little Finnish wealth is still being invested in new, innovative growth companies. This could be addressed through a tax incentive encouraging investors to reinvest their returns in growth companies. Similar models are already in place in countries including the United States and Sweden.
“We can be very pleased that, for the first time, the Government decided at its budget session to address this issue and begin taking it forward”, Pakarinen states.
Investments made by non-profit organisations through private equity and venture capital funds should also receive the same tax treatment as their direct investments in startups.
At the same time, the decisions taken at the budget session show that Finland needs more concrete measures to drive growth. With the economy growing slowly, decisions are needed to improve the conditions for business growth and create new jobs.
“We must now explore every avenue for growth. Growth policy requires new solutions and cooperation across administrative and party-political divides. Finland’s growth must be the number-one priority. It is time to put the baseball-cap photo opportunities on hold”, Pakarinen says.