Finnish Tax Agency's Attempt to Increase Tax Burden of Earn Out Payments Defeated in Court

Hannes Snellman's Tax & Structuring team assisted a taxpayer in court proceedings, which secured earn-out payments received from the sale of shares being taxed as normal capital income. The Finnish tax authorities claimed that taxation should be assessed at the highest progressive tax rates applicable to salary income. These claims were based, among other things, on the earn-out payments' conditional nature and dependance on the continuing employment of the seller in the target company. However, the tax authorities' arguments proved unsuccessful and the taxpayer's arguments prevailed in court.

This case underlines the ever growing importance of tax implications in M&A transactions. Taking tax matters properly into account when drafting M&A agreements gives a better footing for the taxpayer if tax authorities' reactive measures are initiated against them after the transaction. The client was advised by Lauri Lehmusoja, Ossi Haapaniemi and Heikki Vesikansa.