Amendments to the regulations concerning the taxation of share
exchanges have been proposed in the recent government bill
148/2011. The proposal affects the exit tax regulations and
includes amendments to the Business Income Tax Act (360/1968;
"BITA" ) and the Income Tax Act (1535/1992;
"ITA").
Amendments to the BITA and the ITA are expected to be implemented
on 1 March 2012. They would be applicable for the first time in the
assessment of 2012. Due to the extension of the time limit, the
amendments to exit tax regulations are applicable to share exchange
arrangements which have taken place after 1 January 2009.
The Law in Force
Exchange of shares is defined in section 52f of the BITA. The
exchange of shares is at stake when a limited liability company
acquires a sufficient number of shares in another limited liability
company to give it the majority of the voting rights, or when a
company which already has a sufficient number of shares acquires
more shares. The acquiring company issues new or already existing
shares in exchange for the acquired shares. In case money is used
as consideration, the proportion of payment in money shall not
exceed 10 % of the nominal value of the shares used as
consideration.
The special provision regarding the exchange of shares in force
does not trigger taxation of profit on sales, share exchange
arrangement being a tax neutral transaction, but the taxation is
postponed until the replacing shares are forwarded. For the part
that has been paid in money, profit on sales is taxable without
postponement.
However, the profit on sales has been taxable before forwarding the
shares if the shareholder moves abroad from Finland within three
years after the end of the year of the share exchange according to
section 52f(3) of the BITA. In case of this exit tax, the taxable
profit is counted as the difference between the acquisition cost of
the original shares and the value of the shares received in
exchange. The values are counted at the moment of exchange. Thus,
changes in the value of the replacing shares do not affect the
amount of the taxable profit.
Amendments
According to the proposed regulations, the exit tax is triggered
when the shareholder moves outside of the EEA or forwards the
shares after moving to another EEA country within five years after
the end of the year of the share exchange. This means that the exit
tax is applicable in fewer cases when moving within the EEA does
not trigger the taxation, but on the other hand the time limit has
been extended.
Regulations in force have been applied only when the shares issued
in exchange have been new shares, whereas the new regulations also
allow applying the exit tax in case of already existing shares
which have been owned by the acquiring company. According to the
proposal, the exit tax applies only to individuals.
In order to clarify the legislation, a new provision is also added
to section 10 of the ITA. This defines the profit on sales which
has not exceptionally been taxable as Finnish-source income due to
section 52f of the Business Tax Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.