Hannes Snellman Counsel to a Founder in a Dispute Confirming Capital Gains Tax Exemption for a Rolled-over Investment

Finland generally allows tax exempt share transfers by companies provided that certain technical conditions are met, including a minimum holding of 10% and minimum holding period of one year, and provided that the shares are categorised as fixed assets for tax purposes. However, especially the latter has proven to be a highly disputed question, leading to numerous litigations. Last year, the Finnish Supreme Administrative Court published new precedents, shedding light on the question (see our blog post). However, open questions still remain, some of which were addressed in a recent Administrative Court ruling, where Hannes Snellman secured a victory for the taxpayer.

In the case, our client’s company had back in 2018 sold shares in an operative company founded by the client to a private equity sponsor, and had, along with some minority sellers, reinvested part of the sales proceeds to the sponsor’s holding company. The original share sale was deemed to qualify for capital gains tax exemption. After the majority investment by the private equity sponsor, our client’s company continued to hold approximately 18% of the sponsor’s holding company shares, and the founder remained for a while active in the operative business, i.a. continuing to serve as CEO of the operative company as well as the holding companies. After serving as CEO in the companies, the founder remained in a senior leadership position in the company structure.

A few years after, our client’s company partially exited from the rolled-over investment. According to the Finnish Tax Administration (“FTA”), the sale of the sponsor’s holding company shares did not qualify for capital gains tax exemption. The FTA claimed, e.g., that although the original sale qualified for a tax exempt sale of fixed assets, by interposing a private equity sponsor’s holding company to the structure in the roll-over, the business connection between our client’s company and the company he had founded had ceased to exist. Consequently, following FTA’s logic, as such connection had never existed between the founder’s company and the sponsor’s holding company in the first place, the sale of the holding company shares could not qualify for participation exemption. The Adjustment Board upheld the view of the FTA, and found that the share sale was taxable. An idiosyncratic feature in the Finnish capital gains tax rules is that Finnish private equity sponsors or their holding companies are not at all eligible for capital gains tax exemption. The decision by the Adjustment Board seemed to suggest that founders investing through their companies alongside private equity sponsors become tainted and cannot anymore have the right to tax exemption.

Hannes Snellman’s tax litigation team strategically led the appeal process where our client appealed the FTA’s decision to the Administrative Court, which, in the end, overturned the Adjustment Board decision. Taking into account the ownership history between our client and the operative company, the business reasons for the holding structure, and the role of the founder in the business after the majority investment by the private equity sponsor, the Court concurred with the team’s argument that the rolled-over investment had been made for sound economic reasons, and not aimed for unjustified tax concessions. Therefore, the holding company shares were to be categorised as fixed asset shares for the founder’s company. As also the technical requirements were fulfilled, the share transfer was to be treated capital gains tax exempt. The state settled for our client’s positive outcome and did not seek for a leave to appeal the case to the Supreme Administrative Court. The Administrative Court ruling is thus now final and legally binding. The more general importance of the case is that it confirms a founder’s right to capital gains tax exemption for a rolled-over investment even though Finnish private equity sponsors are excluded from the tax exemption.

Hannes Snellman’s tax litigation team comprised Jenni Parviainen and Heikki Vesikansa.