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Government Proposes New Act on Personnel Funds
On 9 April 2010 the Finnish Government issued a bill to Parliament proposing a new Act on personnel funds. The aim is to render personnel funds as a means of rewarding the employees more attractive to both employers and employees, and thereby increase employee participation to company profits. The new Act is proposed to enter into force on 1 January 2011. Taxand Finland reviews the new proposal and its impact on personnel funds.
Despite the tax and social security related benefits available to personnel funds, this form of employee remuneration has not been especially popular in Finland. At the end of 2008, there were only 57 registered personnel funds.
The primary reason for the lack of interest has been due to a 5 year lock-up period under which employees cannot withdraw the funds. This restrictive provision is now proposed to be eliminated. Other key proposals are included below.
- The scope of the Act is enlarged to cover companies employing at least 10 employees (currently this limit is set at 30 employees). Additionally the company's turnover should be more than EUR 200.000.
- The new Act also covers municipalities and universities, as well as foundations and associations exercising an economic activity.
- Administrative procedure for establishing a personnel fund is made lighter.
- In addition to company profitability the funds distributed to the personnel fund may also be based on the employee's individual performance under the financial period.
The financial benefits are proposed to remain in force. Funds distributed to the personnel fund by the employer are deductible in the employer's taxation. Employer's social security contributions are not due, which presents an approximate benefit of 20 - 25 % compared to cash bonuses, for example. Only 80 % of the funds distributed to the employee are considered as taxable income subject to earned income taxation. Employee's social security contributions are not due in most cases.
The funds available for withdrawal to the employee are capped at 15 % of the employee's share of funds annually. Considering that investment profits accrued on the capital of the fund are tax exempt, the effect in time of this withdrawal restriction should be comparable to what is usually seen with deferred bonus plans and share incentive programs.
The proposed new Act should increase the flexibility of personnel funds and thus improve their position compared to other employee participation schemes. Personnel funds may also be combined with existing share awards. For example, the profits from the personnel fund may be distributed as shares of the employing entity instead of cash, if the company is listed. Should the proposed Act be passed in the Parliament, personnel funds may well become a serious contender for existing employee incentive schemes.
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