The Government is preparing changes to the taxation of share exchanges – the impacts could reach thousands of entrepreneurs
The Finnish Government is preparing changes to legislation that would affect already completed share exchange arrangements. The aim is to prevent methods by which dividend taxes have been reduced through share exchanges. The changes would affect even thousands of entrepreneurs who have conducted a share exchange since the beginning of 2017.
Key changes:
1. Valuation principles: In share exchanges, the transferred shares would henceforth be valued at the original acquisition cost, not at fair value. This applies in situations where the parties are related. For example, a company created without capital would have a zero value, even though it may have accumulated assets. In this case, no dividend taxed as capital income could initially be distributed from the parent company, as the company's net assets would be zero after the share exchange. The changes would affect both the taxation of dividends and later capital gains taxation.
2. Maximum amount of cash consideration: The allowed amount of cash consideration used in share exchanges would increase from 10% to 50%, facilitating certain corporate arrangements.
3. Exchanges outside the EEA: Tax-neutral share exchanges would be possible under certain conditions also outside the EEA, such as to the United States or the United Kingdom.
Impacts:
The amount of dividends taxed as capital income that an entrepreneur who has carried out a share exchange after January 1, 2017, could withdraw would decrease significantly from the entry into force of the law. Changes in valuation principles would significantly weaken the use of share exchanges in corporate arrangements. Additionally, the change could violate the constitutionally protected principle of equality, as share exchanges made before 2017 would remain under the old rules. The values of accounting and taxation would differ from each other, which would cause additional administrative complexity. The impacts on, for example, the transfer tax and generational changes have not been sufficiently assessed.
Effective date: The proposal is open for public consultation until August 15, 2025, and it is intended to be processed in connection with the 2026 budget. The laws would come into effect as soon as possible. It is not yet certain whether the proposal will pass in its entirety as it stands. Due to the unanswered questions and potential constitutional challenges arising from the proposal, it is possible that there will be further changes to it.
Recommendation: Entrepreneurs who have conducted a share exchange after January 1, 2017, or are planning one, should closely monitor the situation and discuss potential implications with an expert.
