The Finnish Government is preparing a reform that has been discussed for years: changing the taxation of employee stock options so that tax would be triggered only when the underlying shares are sold, rather than when the options are exercised.
On paper, this is a timing change.
In practice, it goes much further.

Where the current system breaks down

Under the current rules, the tax point sits at exercise.
The employee is taxed on the difference between fair market value and subscription price, regardless of whether the shares can be sold.
That leads to a familiar problem: tax becomes payable on value that is still theoretical.
For early-stage companies, this is not a corner case – it is the default.
Shares are illiquid, valuations move, and employees are effectively asked to fund tax out of pocket.
Unsurprisingly, that distorts behavior.
Options are exercised late, participation is reduced, and in some cases the entire instrument becomes unattractive.
From a legal standpoint, the system is coherent.
From a commercial standpoint, it has been difficult to defend.

What the Government is now proposing

The proposed change is straightforward in principle: no taxation at exercise, taxation only when the shares are actually sold.
At the same time, the rules on employee share offerings would be expanded so that employees of subsidiaries could participate in parent company equity arrangements.
Both changes point in the same direction: making equity-based compensation usable in practice, not just in theory.

Why this matters more than it seems

The most immediate effect is obvious.
The so-called “dry income” issue largely disappears.
Employees are no longer taxed before they have liquidity.
But the more interesting point is what happens underneath that.
Once taxation follows exit, the entire risk profile changes.
Employees are no longer exposed to tax risk if the company fails.
That alone tends to increase participation and willingness to take equity as part of compensation.
For companies, this is equally material.
Equity starts to function as a real alternative to cash, not just a supplement.
That has consequences for hiring, retention and ultimately capital allocation.
In other words, this is not just a tax rule change. It changes how incentives are actually used.

The part that still matters: the details

At this stage, the key elements are clear, but the boundaries are not.

A few points will determine how effective the reform ultimately is:
• Scope: whether the regime applies broadly or comes with limiting conditions
• Transition: how existing option plans are treated
• Income character: whether and how the benefit is split between earned and capital income
• Anti-avoidance: particularly valuation and structuring constraints
• Cross-border situations: which jurisdiction gets to tax what, and when

None of these are purely technical.

Each of them can materially affect whether the regime is actually used.

Practical angle: what to do now

Even before draft legislation is published, there is a case for taking a closer look at existing arrangements.

In particular:
• how current option plans behave under a deferred taxation model
• whether alternative structures would become preferable
• whether there is any benefit in waiting, accelerating, or redesigning

For some companies, the right answer will be to do nothing for now.

For others, especially those in active hiring phases, this may already influence how incentives are structured going forward.

Closing observation

The direction is now clear.
Finland is moving toward a model where taxation follows realised value rather than paper gains.
That aligns better with how growth companies operate and how employees experience equity in practice.
At the same time, the proposal is still exactly that – a proposal.

The outcome will depend on how the open questions are resolved in the legislative process.

We will follow the development of the Government proposal and the subsequent legislative work with close interest, in particular how the technical details are ultimately shaped and how they translate into real-world structuring.

Senior Associate Marko Moilanen,

email: [email protected]

tel: +358 40 517 0002