The personnel fund system has been used for large-scale tax avoidance, which is deemed short-sighted and foolish by HS financial editor Anni Lassila. The taxman introduced new guidelines on March 26 that caused confusion in the industry by potentially changing the decades-old taxation practice of personnel fund shares. The details of the guidelines are complex and controversial, with even experts struggling to understand the taxman’s intentions.
The personnel fund system was created 35 years ago to encourage ordinary employees to invest long-term. Companies paid employees a portion of profits that were transferred to a fund managed by the employees themselves, typically investing in the company’s stock. The tax incentive allowed for tax-free investment of these funds, with taxes only paid upon withdrawal. However, some companies began exploiting the system for tax avoidance by funneling a large part of their income into personnel funds.
The taxman’s new instructions have sparked debate within the personnel fund industry, with confusion arising from the interpretation of the guidelines. Some old funds assume that the entire performance bonus is funded, while in others, employees can decide for themselves whether to fund the bonus. The taxman’s example number three caused confusion regarding when taxes should be paid on funded rewards, leading to misunderstandings among experts.
There are concerns about the abuse of the system, with some companies exploiting loopholes to minimize taxes for high-income earners. The purpose of personnel funds was to encourage long-term investment for ordinary employees, not as a tax avoidance strategy for the wealthy. Proposed solutions include enacting a reasonable maximum amount that can be invested in the fund annually, regardless of company reward systems, to address tax avoidance issues and restore the fund’s original purpose.
Overall, the exploitation of the personnel fund system for tax avoidance threatens its existence and undermines its intended purpose of promoting long-term investment among ordinary employees. It is essential to address these issues to protect the integrity of the system and prevent further abuse.