Persons of key importance for the emerging enterprise are usually given shares in the start-up company without any significant capital contribution or purchase price. Finnish start-up enterprises are usually established as private limited companies (Oy). Shares in such companies can be acquired by way of transfer from the founding shareholders to the new partner, or by issuing new shares in the company.

If a key person of the enterprise acquires shares without consideration or against a purely nominal purchase price or capital contribution, this transaction may make the acquirer liable to pay gift tax. Finnish gift tax does not apply only to gifts in the legal-technical meaning of the term. It must be paid in respect of any forms of transfer of property for which the transferee pays less than 75% of the market value of the transferred property. Therefore, gift tax can be incurred on a sale of shares as well as when subscribing for newly issued shares.

Finnish gift tax is payable on a share sale even if the transferee is not a resident of Finland, as long as the transferor has his or her residence in Finland. Therefore, Finnish gift tax is applicable in all cases of subscription for new shares in a Finnish company.

Tax allowances for gifts are negligible under Finnish law. Only gifts with a value of less than €4,000 are tax-free. Transfers of shares to important cooperation partners in start-up companies can remain below the allowance in the earliest phases of the establishment process in which the company does not yet have any equity capital in excess of the original share capital. The minimum share capital in a Finnish limited company is €2,500.

However, the actual market value of the company and its shares increases as soon as the start-up activities create value and profit expectations for the enterprise. This increase in value becomes apparent at the latest when the company succeeds in attracting investors of venture capital.

If the two transactions described in the example are executed at about the same time, the consultant’s share acquisition will trigger an obligation for her to pay gift tax. It will not be possible to persuade the tax authorities that the same shares for which the investor is ready to pay a substantial price are of lesser value in relation to the consultant. The difference between the market value (as represented by the price paid by the investor) and the nominal price paid by the consultant will be regarded as a gift. The gift tax in this case would amount to €155,300.

Where a foreign transferee is concerned, the question of whether additional tax liability will be incurred in his or her home country will depend on the applicable national tax laws and on the tax treaties – if any exist - between the countries involved.

Gift taxation as such is certainly avoided if the transferee of shares pays the full market price for the acquisition. It is generally possible for the company to pay an agreed sum of money to this person by way of fee for his or her services to the company. Such payment may be made at the same time as the purchase of the shares and can be used for paying the purchase price. In order for this type of arrangement to be accepted by the tax authorities, the payment must be economically reasonable. In any case, the payment of such fee to the new shareholder will be treated as his or her income and thus subject to income tax. If the recipient of the fee is not a resident of Finland and has performed the relevant services outside Finland, income taxation is generally governed by the tax laws in the shareholder’s home country. Depending on the circumstances, such arrangement may or may not be preferable as compared to Finnish gift taxation.

In order to make it possible for key persons to be bound to the company without triggering the tax effects described above, the share transactions must be completed as early as possible. The earliest possible - and therefore most advantageous - point in time for this to occur is upon formation of the company. No tax liability arises on subscription for shares against nominal payment in the process of company formation. No tax need be paid also when shares are acquired in the period immediately following establishment before any measurable business value has been created. However, as time goes by, depending on the progress of the start-up and the addition of new investors, share transfers for nominal consideration become increasingly difficult to defend against taxation.

If a key person is to be included in the structure of the enterprise without the parties concerned wanting to transfer shares at such an early stage, one possible solution is to grant that person an option to acquire shares at a later date. When assessing the tax consequences of an acquisition based on an option, the option price is compared with the market value of the shares at the point when the option was granted. Frequently, the shares have not yet acquired significant value at the time the option is granted. In such cases, there is no liability to gift tax even if the market value of the shares exceeds the option price significantly at the time the option is exercised.

The option arrangement must, however, be seen in an entirely different light if the holder of the option is (also) an employee of the company. Where share options granted to an enterprise’s employees are concerned, Finnish tax law provides that the full advantage obtained from the option - i.e. the difference between the option price and the market value when the option is exercised - is regarded as taxable work income.