14/03/2018

Finnish Supreme Administrative Court Equates Pension Insurance Payments to Earned Income

The Supreme Administrative Court has issued a decision determining when a group pension insurance policy taken out by a company for its entire personnel must be deemed a collected group pension insurance policy and when it must be considered an individual pension insurance arrangement.

In its decision, the Supreme Administrative Court stated that, in the arrangement it assessed, the company had completely substituted the monetary salary paid to its owner-entrepreneurs with pension insurance premiums, which led to the court finding that the arrangement was not a collective additional pension arrangement with respect to the owner-entrepreneurs. The court deemed that the insurance premiums paid for the company’s two owner-entrepreneurs were earned income in their entirety in accordance with section 13 of the Preliminary Tax Withholding Act. As such, the employer should have paid social security contributions on the premiums.

Insurance Premiums Deemed Earned Income

The tax audit carried out in the company concluded that the insurance premiums paid for owner-entrepreneur A (EUR 337,623 during 2010–2011) and owner-entrepreneur B (EUR 333,508 during 2010–2012) constituted earned income of the insured. As a result, employer social security contributions were imposed on the company as well as the related 10% tax increase. It is also worth noting that A and B took no monetary salary from the company. A and B also owned the shares of the company through a parent company.

Both the Finnish Tax Administration and the Administrative Court dismissed the company’s claim to rectify the decisions to impose social security contributions and tax increases issued in the tax audit.

Supreme Administrative Court Ruling in Line with Finnish Tax Administration and Administrative Court

The Supreme Administrative Court found that, though the fact that the policy covered the company’s entire personnel supported the interpretation of the insurance policy being a collective arrangement, an overall assessment of the group pension insurance brought up a number of factors indicating that is was actually an individual pension insurance arrangement.

First, the company had no wage earners at the time it took out the policy. Thus, the group pension insurance policy only applied to the company’s two owner-entrepreneurs, who through the parent company had full control of the company taking out the policy. Second, the salary costs of the owner-entrepreneurs encumbered the parent company’s results in full.

The Supreme Administrative Court did not change the conclusion of the lower instances, but agreed with the view that A and B had to be equated to owner-entrepreneurs of the company. Furthermore, the amounts of the premiums paid for A and B were large, and the company had not paid either person any salary. As such, the Supreme Administrative Court found that the company had substituted monetary salaries payable to A and B with pension insurance premiums and this could not be deemed a collective additional pension arrangement with respect to them. As a result, the premiums paid by the company were earned income of A and B in their entirety in accordance with section 13 of the Preliminary Tax Withholding Act.

Castrén & Snellman’s experts would be happy to assist you in the implementation of any pension insurance arrangements and incentive schemes.