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Employer Aided Start-Ups: A Good Idea?
A recent ruling by the Supreme Administrative Court has confirmed that financial support given to an employee's start-up business is regarded as the employee's salary income and not business income of the start-up. Taxand Finland discusses the case which led the debate.
This ruling was based on a case where the employee's employment contract had been terminated by his employer due to financial and production related reasons. The employer in this case was a Finnish company which belonged to a group of companies. In an effort to support the employees made redundant within the group, the employer's parent company had voluntarily launched a business subsidy program which enabled employees to apply for business subsidy for starting their own businesses. The business subsidy was paid against actual receipts of start-up expenses of the business and required, for example submitting an initial business plan.
During the notice period the parent company granted and paid a business subsidy of 20,000 euros to the employee's business' bank account. The parent company did not make any salary withholding from the payment and the payment was entered as received subsidy at the bookkeeping of the employee's business. In practice, the received subsidy was used to cover the start-up costs of the business.
The Supreme Administrative Court stated that it was irrelevant that the payment was made by the parent company and also that the purpose and conditions set for the granting of the subsidy did not have an effect to the actual nature of the payment as the employee's salary income.
Taxpayers should bear in mind that the Finnish Tax Administration has also recently given written guidance on the topic of employer's support to employees starting their own businesses. It appears that the ruling of the Supreme Administrative Court is in line with the respective Tax Administration's guidance. However, as stated in the guidance, certain forms of business support to the employee's start-up are possible to implement without this being regarded as taxable salary income for the employee.