Acquisition of own shares refers to a situation where a company acquires its own shares from its shareholder voluntarily for consideration by agreement between the parties. The Companies Act gives a very free hand to the acquisition of own shares. However, the tax laws impose a number of conditions for the acquisition of own shares to be reasonable for tax purposes.
A limited company may acquire and hold its own shares. The provisions on own shares are set out in Chapter 15 of the OYL. Acquisition of own shares means a situation where a company acquires its own shares from its shareholder for consideration by agreement between the parties. The redemption of shares, on the other hand, is a compulsory act by which the shareholder must transfer his shares to the company, either for consideration or free of charge.
In a private limited company, the only limit on the number of shares a company can acquire is that the company may not acquire or redeem all its own shares. At least one share must therefore be held by a third party.
Decision-making on the acquisition and redemption of shares
The repurchase and redemption of own shares is decided at the General Meeting. In a private limited company, a simple majority of votes, i.e. more than half of the votes cast, is sufficient for a decision. The General Meeting may itself decide to repurchase own shares or it may authorise the Board of Directors to decide to repurchase own shares.
The starting point for the repurchase of own shares is equal treatment of shareholders, with each shareholder being repurchased in proportion to his/her existing shareholding. However, own shares may also be acquired in other proportions subject to certain conditions. This is called a directed acquisition.
Directed share repurchase
A prerequisite for a directed acquisition or a corresponding authorisation decision is that there is a weighty financial reason for it from the company's point of view and a 2/3 majority of the votes cast and the shares represented at the General Meeting. Since a directed acquisition implies a disproportionate use of the company's funds for the benefit of shareholders, special attention must be paid to the relationship between the consideration offered and the fair price of the share when assessing the acceptability of a directed acquisition. The decision to acquire own shares shall state the consideration to be paid for the shares and the reasons for determining it and, if the consideration is in the form of assets other than cash, a statement of the value of such assets. The payment of any excess price may constitute an illegal distribution of assets. See also Valuation of the company and shares our article on.
However, since the requirement of equal treatment of shareholders is a matter of free will, shareholders can decide unanimously on a directed acquisition of shares even if there is no compelling economic reason for the company to do so.
The shares must be paid for out of the company's distributable assets
According to the Companies Act, it is prohibited to acquire shares in such a way that the company's free equity would become negative as a result of the acquisition. The acquisition of shares must be covered by the company's distributable assets. The creditors' protection procedure also allows for the distribution of funds from the company by reducing the share capital, the share premium reserve and the reserve fund.
Own shares held by the company
There are three ways in which a company can deal with treasury shares:
- the shares may be held by the company,
- the shares may be disposed of, or
- shares may be cancelled.
A private limited company may hold its own shares for an unlimited period if they have been acquired in accordance with the Companies Act.
Shares held by the company do not carry any rights. For example, they cannot be used to vote at general meetings. Such shares are not entitled to dividends or to any distribution of assets. Shares are not taken into account when the consent of all or part of the shareholders is required for the adoption of a valid resolution at a general meeting. Furthermore, the shares have no value in the company's balance sheet, i.e. they do not represent an asset value for the company.
Cancellation of treasury shares
The Board of Directors may at any time decide to cancel own shares held by the company. Such cancellation shall terminate the rights attached to the share and the share shall be removed from the register of shareholders. Such a decision may be taken by the Board of Directors if, as is normally the case, the cancellation of the shares does not affect the share capital or the proportionate ownership of the shareholders. The cancellation must be notified for registration without delay. The shares are cancelled when the notification is registered.
TAXATION OF THE ACQUISITION OF OWN SHARES
The outline of the tax treatment is described below and cannot be applied as such to an individual acquisition of shares in a company. In such cases, I recommend that the company and/or its owners consult a tax lawyer or accountant before proceeding with the acquisition.
The tax authorities have recently tightened their interpretation of the tax treatment of various corporate arrangements, including the acquisition of own shares, so companies and their owners should be prepared for the possibility that it may be necessary to seek a preliminary ruling from the tax authorities before acquiring own shares in the company. You should allow a couple of months for this.
Capital gains tax
When a company acquires its own shares from shareholders for consideration in a transaction under Chapter 15 of the Companies Act, the transfer price received by the shareholder is, as a general rule, taxed on the basis of the transfer tax provisions. Capital gains from the sale of companies or investment property are taxed as capital gains. In 2024, the tax rate on capital gains will be 30 % up to EUR 30,000. For capital gains above €30,000, the tax rate will be 34 %.
When acquiring own shares, the capital gain is calculated in the same way as when selling shares, i.e. the acquisition cost of the shares is deducted from the acquisition price paid by the company. The cost assumption may be used instead of the acquisition cost when it is more advantageous to the taxpayer. For shares held for more than 10 years the presumption of acquisition cost is 40 % and for shares held for less than 10 years the presumption of acquisition cost is 20 %. The actual tax payable on the acquisition price paid by the company is 19-25 % when the presumption of acquisition cost is used.
Transfer tax
Transfer tax is payable on both the redemption and acquisition of own shares. Transfer tax is also payable on the transfer of shares acquired by the company. The taxable person is the transferee, in this case the company. The acquisition of treasury shares is considered a transaction and is subject to a transfer tax of 1,5 %.
In which cases can the acquisition of own shares be considered tax evasion?
When a company acquires its own shares from shareholders for consideration in a transaction under Chapter 15 of the Companies Act, the transfer price received by the shareholder is, as a general rule, taxed on the basis of the transfer tax provisions. Where the acquisition of own shares involves the distribution of the company's assets to shareholders, the so-called tax avoidance provision (Article 29) of the Tax Procedure Act (TPA) on disguised dividend distributions may apply.
If a limited liability company pays a price for its shares that is higher than the fair value, the amount in excess of the fair value is taxed as a disguised dividend distribution under Article 29.1 of the Income Tax Act. The definition of the value of the company used by the tax authorities is discussed in in the article on valuation. Regardless of the amount paid for the shares, the distribution of company assets to shareholders by redemption or acquisition of shares may be considered a disguised distribution of dividends under § 29.2 of the VML if it is obvious that the distribution of assets has been made in order to avoid tax on the dividend. However, the application of this paragraph does not require a pricing different from the current one.
In the interpretation of Article 29.2 of the VML, case law and tax practice play an important role. According to the established interpretation of case law, some of the circumstances of redemption situations are considered aggravating and some mitigating. For example, the provision has generally not been applied to redemptions of shares in connection with generational changes or situations where a minority shareholder is bought out of the company. The new provisions of the Companies Act on the acquisition of own shares aim to ensure equal treatment of shareholders.
In tax law, the starting point is that a disguised dividend is deemed to arise if the shares are acquired or redeemed in equal amounts from all shareholders, or if there is no other change in the ownership or control of the company.
The application of the tax avoidance article is justified by the following (aggravating circumstances)
Where shares have been redeemed in equal proportions from all shareholders, the tax consequences of a disguised distribution have been held in the case law to be precluded mainly only in situations where the company has distributed to its shareholders surplus funds generated by the company's downsizing and the sale of surplus assets or assets which have become redundant. In these situations, the company's capital requirements have been considered to have been reduced.
Instead, in circumstances that the tax authorities consider aggravating;
- Only part of the shares have been acquired from the main shareholder,
- The funds used for the acquisition have been ”collected” through recent disposals of assets prior to the acquisition,
- A regular dividend distribution has been refrained from and
- The purchase price is offset by forgiving the shareholder's creditors to the company.
In particular, the following factors (extenuating circumstances) militate against the application of the tax avoidance article
The reduction of the company's activities and the reduction of its capital needs can therefore be considered as mitigating circumstances for the application of the provision of Article 29.2 of the VML mainly only in situations where the acquired shares are cancelled. In situations where the acquired shares are reissued, there is no final reduction in the company's capital which would normally justify a distribution of assets to shareholders.
If a business reason is given for the acquisition of own shares, it is not considered to be a case of avoiding dividend tax. The reasons considered acceptable in tax practice have been present when:
- All shares are acquired from the minority shareholder,
- The majority shareholder acquires all the shares or as many as he/she does not control the company;
- The shares will be acquired for the company in order to implement a generational change;
- The company's activities are reduced or otherwise materially changed, resulting in a lower capital requirement and cancellation of the shares;
- The purchase price used is up to the fair value of the shares;
- The shares are acquired to distribute the company's activities and the company has regularly distributed dividends.
However, the application of tax avoidance rules is always based on an overall assessment, so the above should not lead to the conclusion that if there are three arguments in favour and two against, then the tax avoidance rules do not apply. Moreover, even in an acceptable arrangement, a disguised dividend may arise if the price paid for the share to the shareholder exceeds the fair value of the share. I recommend that in a situation where there is any uncertainty, this assessment should be carried out by a lawyer or accountant who is familiar with taxation.
Jari Sotka
Lawyer, MBA
Tel. 040 544 0610
[email protected]
Amos Attorneys at Law Oy
www.amoslaki.fi
The author has worked as a lawyer and advocate for more than 25 years, focusing throughout his career on preventing and solving legal problems for small and medium-sized enterprises.