Information Note on the Court’s case-law 54

June 2003

M.A. and Others v. Finland (dec.) - 27793/95

Decision 10.6.2003 [Section IV]

Article 1 of Protocol No. 1

Article 1 para. 2 of Protocol No. 1

Secure the payment of taxes

Retroactive law to make sale of stock options subject to income tax: inadmissible

The applicants are all directors of a limited liability company. In 1994, the company’s annual general meeting decided that a bond loan with warrants be issued. All of the applicants subscribed for bonds under the subscription programme in April of that year. As the law then stood (Income Tax Act 1992), any potential gains from their shares would be treated as cap ital gains and taxed accordingly at a flat rate of 25% of the difference between the acquisition price and the sales price. There was a statutory presumption that the former was 30% of the latter. In September 1994, the Government tabled a Bill to amend th e 1992 Act, which would treat stock options as an employment benefit and therefore subject to normal income tax. The tax would be applied at the time the option was exercised or transferred, from 1995 onwards. In October 1994, the Board of Directors of the company decided to allow the transfer of stock option certificates earlier than originally agreed. The applicants exercised their stock options, the total net value of which was approximately 3.2 million euros.

Parliament decided that changes of this sort should not escape the amendment. Therefore, when the amendment took effect on 31 December 1994 it had retroactive effect wherever a company had made artificial changes so as to receive an undeserved tax benefit. With respect to “pure” cases, i.e. in which companies had not sought to avoid the effects of the imminent changes, there would be no retroactive effect. The decisive date for the amendment was 16 September 1994, the date on which the Bill had been introduced. The applicants were in the highest inco me tax bracket for 1994. Their tax burden was considerably heavier under the amended legislation. The applicants applied to their local Tax Rectification Boards, relying inter alia on Article 1 of Protocol No. 1. The Boards rejected their claims. They did not accept that when assessing taxable gains a deduction of 30% should be made, representing acquisition price. The applicants appealed unsuccessfully to the relevant County Administrative Courts and thereafter to the Supreme Administrative Court. That cou rt found that the relevant tax on income was not a confiscatory measure, and that the applicants’ taxable income corresponded to the actual gains from the sale of their stock options. This was not inconsistent with Article 1 of Protocol No. 1.

Had the appl icants retained their stock options in accordance with the original agreement, their net value would have been approximately 32 million euros on 1 December 1988 (the original date after which transfer was permitted). If they had kept them until 30 December 1999, their net value would have been far higher, at approximately 148 million euros.

Inadmissible under Article 1 of Protocol No. 1: The Court examined the complaints from the angle of a control of the use of property “to secure the payment of tax”. Even before the 1994 amendment took effect, the applicants would have been liable under the Income Tax Act, with the benefits of the lower purchase price being taxed as ordinary income and the profit from the sale of stock options treated as capital gain. The 1994 amendment certainly fell within the State’s margin of appreciation despite the fact that it applied to existing arrangements. Its retroactive effect did not in itself violate Article 1 of Protocol No. 1. The Court considered that the applicants did no t have an expectation protected by Article 1 of Protocol No. 1 that the tax rate would, at the time when they would have been able to draw benefits from the stock option programme according to it original terms, be the same as it was when they subscribed i n 1994. A different assessment might be warranted if the amendment had been applied retroactively to “pure” cases, but this was not the applicant’s situation. The main aim of the retrospective implementing provision was to prevent stock option arrangements from escaping it, which could not be regarded as unreasonable. The impact of the measure was not such as to amount to confiscatory taxation. Despite the significant financial consequences for the applicants, the measure did not impose an excessive burden on them. Their tax liability reflected their high earnings, based on real profits from the sale of their stock options. The impact of the measure was to be assessed at the relevant time, without regard to subsequent developments in the stock market. Taking into account States’ margin of appreciation in taxation matters, the measure did not upset the balance between the protection of the applicants’ rights and the public interest in the securing of the payment of taxes: manifestly ill-founded.

© Council of Europe/European Court of Human Rights This summary by the Registry does not bind the Court.

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