Regulations governing share exchanges in private limited companies
Regulations governing share exchanges in private limited companies will change at the beginning of 2026 – what will change and what does this mean in practice?
In recent years, there has been extensive media coverage of share exchange arrangements carried out by social media influencers, which have significantly increased the net asset value of private limited companies’ shares. Under the current dividend taxation system, this has resulted in significant tax relief for owners in terms of dividend taxation. In these arrangements, the share capital of the target company has been transferred through a share exchange to a holding company established by the same owners, which in many cases has resulted in a multiple valuation compared to the original company. The arrangement has even been implemented legally on the basis of the Tax Administration’s own regulations on the valuation of shares.
A share exchange is an arrangement in which a limited company acquires more than half of the shares in another limited company (the target company) by giving its own shares in return, or in which a limited company already owns more than half of the shares in the target company and increases its ownership. A share exchange is a neutral measure in terms of shareholder income taxation and does not give rise to capital gains tax consequences, which are deferred to the future and only realized when the shares acquired in the share exchange are disposed of.
Following media attention, a legislative project was launched in Finland in the summer of 2025, which will culminate when the new provisions on the taxation of share exchanges come into force. The bill is scheduled to be debated in Parliament on November 18, 2025, and is planned to come into force at the beginning of 2026. The amendment will remove the possibility of increasing the value of the target company in a way that reduces dividend taxation when the shareholders of the acquiring company and the target company are related to each other. A related party refers to shareholders who, prior to the share exchange, own more than half of the shares in the company that is the other party to the share exchange or who, after the share exchange, will own more than 75% of its shares. If the parties to the share exchange are related, the acquisition cost of the target company’s shares for the acquiring company’s taxation purposes is considered to be their so-called mathematical value prior to the share exchange, regardless of the terms agreed for the share exchange.
The mathematical value is calculated slightly differently than the net asset value. The calculation formula is simply assets minus liabilities. However, possible adjustments to assets and liabilities made in accordance with the Tax Administration’s guidelines may result in a difference from the net asset value. For example, a mandatory provision reduces the company’s equity on the balance sheet, but it is not taken into account as a liability when calculating the mathematical value, which means that the mathematical value is higher. In most cases, however, the equity on the balance sheet provides a good indication of the order of magnitude of the mathematical value.
Until now, the fair value of shares has also been applicable in share exchanges where the parties to the exchange have been related to each other. This has provided an effective tax planning channel for companies whose business is very profitable but whose balance sheet is light. The valuation model widely used in such share exchanges is based on the Tax Administration’s guidelines on calculating the fair value of shares for inheritance and gift tax purposes. However, these guidelines have also been widely used to determine the fair value of shares in other tax contexts.
The calculation formula according to the guidelines is quite simple. The starting point is the company’s net asset value, i.e., the equity according to the balance sheet with certain adjustments in accordance with the guidelines. In parallel with this, the company’s yield value is calculated based on the results of the last three years’ financial statements. Certain adjustments may also be made to the yield value, but these are generally insignificant. The average annual result for this three-year period is calculated and capitalized at an interest rate of 15%, unless there is a specific reason to use a higher (high-risk activity) or lower (low-risk activity) interest rate for the company in question. For example, if a company has made an annual profit of €120,000 over the previous three financial years, its yield value without adjustments is €800,000. If the same company has distributed its entire profit to its owners as dividends each year, its net asset value at the end of the financial year will again be very close to the profit for the most recent financial year, i.e., €120,000, which would also be the mathematical value of the shares.
According to the Tax Administration’s guidelines, the fair value of a company’s share capital is determined on the basis of its net asset value, unless the yield value leads to a higher value. In this case, the fair value is calculated as the average of the net asset value and the yield value. In the example described above, the fair value of the company’s share capital would be €460,000, which is almost four times the net asset value.
Dividends distributed by a private limited company are divided into capital income dividends and earned income dividends. Capital income dividends are taxed at a significantly lower rate and amount to 8% of the mathematical value of the shares. In the above example, according to the Tax Administration’s guidelines, the market value calculated for the shares of the holding company established in the share exchange would have been approximately €460,000, and the maximum amount of the 8% capital income dividend would have been €36,800. However, after the amendment to the law, the value of the same shares would be based on the mathematical value of the shares of the target company prior to the share exchange, which in the example would be €120,000, resulting in a capital income dividend of €9,600. The share exchange would thus have made it possible to almost quadruple the amount of lightly taxed dividends in the example case. This possibility remains, of course, if the parties to the share exchange are not related, as in that case the target shares can still be valued at their fair value in the share exchange, which may be significantly higher than their mathematical value.
The amendment to the law also includes a retroactive element, whereby the above-mentioned change in the valuation method will be applied in dividend taxation to all share exchanges carried out by private limited companies in 2017-2025 in which the parties to the share exchange have been related to each other. However, the change only applies to dividends distributed after December 31, 2025, meaning that the tax benefits already gained from completed arrangements will remain in place for dividends to be paid by the end of the current year. This is likely to cause a considerable rush of dividend payments in 2025.
In addition to regulations aimed at curbing tax planning, another significant change concerns the use of cash consideration in share exchanges. Under current law, the amount of cash consideration may not exceed 10% of the total consideration. If the amount of cash consideration exceeds this limit, no part of the arrangement is considered a neutral share exchange for capital gains tax purposes. Under the law that will come into force at the beginning of 2026, this amount will increase to 50%, which will significantly increase the usability of share exchanges in corporate restructuring situations where the ownership base is to be modified, for example, by buying out passive owners from the company. This change is welcome and will significantly increase the usefulness of share exchange arrangements. Capital gains tax is normally paid on shares sold for cash, while capital gains tax on shares transferred in a share exchange is deferred until the future sale of the buyer’s shares received as consideration.
In corporate acquisitions, sellers are sometimes required to reinvest in the acquiring company. However, some sellers, often shareholders who have already withdrawn from the company’s active operations, would prefer to sell their shares in connection with the arrangement. The current maximum cash consideration of 10% has in practice eliminated share exchange as an option when the cash consideration would have been higher than this. The new law will significantly improve the possibilities for implementing buy-back arrangements through share exchange, as, for example, in a €5 million company acquisition, €2.5 million of the consideration can be paid in shares of the acquiring company to implement the buy-back and €2.5 million in cash. This cash consideration of €2.5 million can be used, for example, to purchase all the shares from the sellers and to cover the capital gains tax of the sellers who are making the reinvestment through a share exchange, in addition to the net payment remaining to them from the cash consideration.
Although the Finnish Parliament has not yet finalized the legislative amendments related to share exchanges, the legislative project is at such an advanced stage that the amendments can be expected to come into force at the beginning of 2026. It is therefore advisable to take the upcoming change into account in arrangements that are already being planned. For example, in certain cases, it may be more advantageous to carry out a share exchange after December 31, 2025, if the mathematical value of the company’s shares exceeds their net asset value or the average of their net asset value and yield value. Similarly, in corporate acquisitions involving a reinvestment clause, the possibility of implementing at least 50% of the arrangement as a share exchange and a maximum of 50% as a cash consideration offers new opportunities for transaction planning.
If your company is considering matters related to share exchanges, our lawyers will be happy to help you review these matters and take advantage of the opportunities offered by the changing regulations.
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