Proposals for taxation of employee stock options
A proposal for a deferral of tax payment on employee stock options
The government is proposing a deferral of tax payments on employee stock options issued by unlisted corporations. According to the government’s proposal (HE 174/2026 vp), the income tax based on the value of the options could, provided certain conditions are met, be paid only in the tax year in which the shares acquired through the options are transferred. The benefit received from employee stock options would still be considered earned income, and the change would not make the options tax-exempt.
The aim of the reform is to make it easier for growth companies, in particular, to attract skilled employees. Currently, the taxable benefit derived from an employee stock option is counted as the employee’s earned income in the year the option is exercised, even if there is no buyer for the shares acquired through the option. The government’s proposal addresses the mismatch between tax payment and the conversion of shares into cash.
This article focuses on domestic situations. In international work situations, tax exemption provisions for foreign income and tax treaties may limit the taxability of stock option benefits in Finland. The proposed reform would not alter Finland’s right to tax.
Tax payment would be deferred, but the tax year for the income would remain unchanged
According to Section 66(3) of the Income Tax Act (1535/1992), a benefit based on an employee stock option is taxable earned income in the year the option is exercised. The amount of the benefit is the fair market value of the share at the time the option is exercised, minus the total price paid for the share and the option. An option is exercised when the employee receives or acquires the shares covered by the option. The sale of an option is also treated as an exercise.
The option benefit would continue to be taxed as income for the year of exercise, based on the tax criteria for that year. The deferred tax would be calculated as a proportional share of the tax payable on earned income for the year of exercise: this share would correspond to the proportion of the option benefit relative to the taxable gross earned income for the tax year. If, for example, the stock option benefit were one-quarter of the gross taxable earned income, the deferred tax would be one-quarter of the tax due on that earned income. If the conditions are met, this tax would be carried forward and paid in the taxation of the year in which the shares acquired through the option are transferred.
It is important for an employee to distinguish between the tax year in which income is earned and the time when tax is paid. The stock option benefit would still be considered earned income for the year of exercise, even if payment of the tax on it were deferred. The stock option benefit would thus be in the taxation for the year of exercise, and it could also increase the tax on the employee’s other earned income due to progressive taxation. The payment of tax on this other earned income would not be deferred, so residual tax could arise from it.
The deferral would not apply to all options
Deferral would be possible only when an employee stock option is used to receive or acquire shares in an unlisted corporation. It would not apply, for example, to shares in a publicly traded company or to a situation where an employee sells the option itself instead of subscribing for shares.
The deferral would require that all the following conditions are met:
- The taxpayer would have to request the deferral before the end of the tax year in which the options are exercised.
- The option would have to be exercised no earlier than one year after the employee stock option was granted. According to the government proposal, the period would be calculated from the date the option was granted until the date it is exercised.
- The target company of the option would have to, at the time the option is exercised, be engaged in business activities as defined in the Act on the Taxation of Business Income (360/1968).
- At the time the option is exercised, the target company’s assets would have to consist primarily of business assets, i.e., assets other than those referred to in Section 12a of the Act on the Taxation of Business Income. The assessment would be based on the most recently approved financial statements.
This asset requirement would exclude, for example, companies that passively manage investment assets solely in the interest of their owners. According to the government proposal, however, the restrictions would not prevent a deferral in a group structure typical of growth companies, where business operations are conducted within the group and the incentive plan for the group’s employees is based on shares in the parent company. Compliance with the requirements would need to be assessed on a case-by-case basis.
A sale would not be the only event to trigger the deferral
The deferred tax would become payable on a per-share basis as shares acquired through options are transferred. The transfer of shares as a gift, inheritance, or in a division of property would be treated as equivalent to a transfer. The end of the deferral would therefore not require the sale of shares or the receipt of cash consideration.
By contrast, an initial public offering (IPO), for example, would not in and of itself end the deferral if it did not result in capital gains tax on the shares. Nor would a corporate restructuring carried out in accordance with the continuity principle—such as a merger or demerger—lead to the assessment of deferred tax; rather, the deferred tax would follow the new shares in the same way as their acquisition cost. However, a share exchange would be considered a transfer to the extent that cash is received as consideration.
The taxpayer would be required to report annually to the Tax Administration, before the end of the tax year, whether any shares have been transferred. A report would be required even if no shares have been transferred and the taxpayer wishes the deferral to continue. Failure to file the report would result in the deferred tax being assessed for payment; however, if no shares had in fact been transferred, the taxpayer could file for a reassessment. The taxpayer could also terminate the deferral by notifying the Tax Administration, but the termination would apply to the entire remaining deferred tax. No late payment interest would be assessed for the deferral period. Starting with the taxation for the year in which the deferral ends, the standard penalties for late payment of earned income tax would apply.
What happens if the value of the shares declines?
The government’s proposal also includes protection against a decline in the value of the shares. If the sale of the shares resulted in a deductible capital loss, a portion of the loss corresponding to the income tax rate on capital income—30 percent, according to the government proposal—would be deducted from the deferred tax. After the deduction, the deferred tax payable would be limited to the sale price minus the price paid for the shares and options. To the extent that the loss could not be deducted from the deferred tax, a capital loss as defined in Section 50 of the Income Tax Act would be confirmed. This protection would not apply to gifts or divisions of property; in addition, a separate protection is proposed for estates, in which the inheritance tax value of the shares would be used instead of the sale price.
Options already granted may also be subject to the amendment
The law is proposed to take effect on 1 January 2027. According to the proposal, the deferral rules would apply to options exercised after the law takes effect, regardless of when they were granted. The old stock option program would therefore not necessarily need to be completely replaced with a new one, but its terms and conditions and exercise periods would need to be reviewed.
Before deciding to exercise an option, one should also assess the deadlines under the current option terms and any other corporate restructuring measures. The mere goal of deferring tax payment is not sufficient grounds to assume that the exercise date can be freely postponed.
What should a company do now, and what else should be considered regarding the proposal?
The company should review its stock option program, the target companies in the case of group structures, the dates of grant and exercise of the options, and the structure of its assets. At the same time, it should plan employee communications and the notification procedure. An employer could refrain from withholding tax on stock option benefits if the conditions for deferral are met and the employee notifies the employer that they are requesting a deferral. The stock option benefit would still be reported to the Income Register, and the deferral request would be reported at the same time. The request would be included in the pre-filled tax return, which the employee would be required to review. Employee communications should also address the annual reporting obligation and the impact of stock option benefits on withholding tax for other earned income.
The government proposal would also amend the provisions on employee stock offerings (Section 66a of the Income Tax Act). The requirement that the shares be those of the employee’s own employer company would be removed, allowing such offerings to be organized at the group level as well. If shares of the parent company were offered for subscription in an employee stock offering, the parent company would have to be an unlisted company. A “majority of employees” would mean a majority by headcount at the level of the employer company, and no one’s share could be merely nominal. No deferral of tax payment is proposed for the employee offering; therefore, the deferral applies only to tax payable on employee stock options.
It should be noted that this is only a government proposal. Consequently, any changes to the programs and commitments made to employees must ultimately be based on legislation as finally enacted. We would be happy to assist you in assessing how the proposed deferral model would affect your company’s incentive plan and what its implementation would entail.
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