Hannes Snellman Counsel to a Client Receiving a Confirmation from the Supreme Administrative Court that an Effective Redemption Clause is to be Taken Into Account when Valuing Shares for Gift Tax Purposes

The Supreme Administrative Court has in its 14 September 2018 ruling KHO 2018:129 stated that an effective redemption clause had to be taken into account when determining the valuation of a share for gift taxation purposes.

In the case at hand, a Finnish limited company had a redemption clause in its articles of association, according to which each shareholder, and secondarily the company, had a right to redeem a share sold to a person that was not an existing shareholder or a lineal descendant of an existing shareholder.

A shareholder donated a number of shares in the company to his children, and the gift tax valuation applied by the tax authorities, EUR 843.24 per share, was based on the company’s balance sheet substance. The valuation principles set in the redemption clause, however, led to a redemption price of EUR 377.21. 

Supreme Administrative Court, revoking the decision by the Administrative Court, accepted the taxpayer’s argumentation and held that the redemption clause led to an effective and functioning threat of redemption that in the circumstances at hand effectively prevented the sale of the shares to any price exceeding the redemption price. As the donee, together with related parties, only held a minor interest in the company, they did not have such influence in the company that they could cause the redemption clause to be lifted or the threat of redemption otherwise mitigated in a potential further sale of the shares in question.   

Thus, the Supreme Administrative Court held that the probable sales price of the shares upon a hypothetical future sale was limited to the price set in the redemption clause, and also gift taxation had to be based on this same value.

The ruling is of particular significance for the shareholders in non-listed companies with a broad ownership base, having an effective redemption clause, or planning to introduce one, in their articles of association.

The team included Lauri Lehmusoja.