Tax legislation on employee options to be amended, effective from 1 January 2023 | Deloitte Nederland

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Tax legislation on employee options to be amended, effective from 1 January 2023

Subject to Senate approval, the tax legislation on employee options is adjusted from 1 January 2023, with the goal to make the Netherlands more appealing for startups. Taxation will be deferred until the shares become tradable. Still, employees may opt for taxation when the options are exercised.

27 November 2022

Actions for employers, for now

  • Inform option scheme participants of the legislative amendment.
  • Adjust the exercise form, to allow employees to opt for taxation on exercise. One option is to include a tick-the-box in the exercise form, reading as follows:
    • To the extent possible under Dutch law, I opt for taxation on exercise of the option right (please tick if you wish to choose this option).
  • Check whether a de facto sales restriction applies to an employee who exercises options.

Deloitte can help you with this.

We will now discuss the content of the legislative amendment.

Introduction

If companies want to retain employees for a longer period of time and let them share in the company's business success, they often issue options to employees. Because startups often have little money available early on, this type of remuneration is particularly popular with them. Especially for startups, however, Dutch tax regulations are not the best. Signals from the professional practice have prompted the legislator to amend the regulations, by deferring taxation of income from options until the moment the shares become tradable. But, employees may opt for taxation when the options are exercised.

Current regulation

Options are subject to wage tax when employees exercise them. Following this, the shares acquired upon exercise no longer fall within the scope of wages and, as a rule, the shares fall within the scope of taxation in box 3.

Challenges for startups

The current regime is unappealing to startups because the wage may be taxed when an employee is not yet in the position to sell the shares. The employee then owes tax on a benefit that cannot (or not yet) be cashed in on.

New rule

A choice will be introduced to address these concerns. If the shares are not yet tradable, the employee can opt to be taxed when:

  • the employee can sell the shares (default); or
  • when the employee exercises the options.

Tradable means the moment when any disposal restrictions are lifted and the employee in question effectively has the option to dispose of the shares acquired upon exercise. Whether the employee opts to actually sell the shares is not important.

Broad effect

Through the proposal, the legislator addresses the problems at startups, which have no market for the shares when they start. In addition, this scheme may also apply to companies whose shares are tradable, e.g. on the stock exchange. If the employer contractually obliges the employee to retain the shares for a certain period of time after exercising the option, taxation is also deferred until the sale restriction expires. In that case, too, the employee can still opt for taxation on exercise of the option.

Five-year period

To prevent an overly long tax deferral, the option benefit will be taxed no later than five years after acquisition of the shares (for listed companies) or five years after an IPO (for initially unlisted companies). This five-year period applies only in the case of contractual sales restrictions. This regulation does not apply if statutory sales restrictions are involved, such as those under the Financial Supervision Act, in which case a longer deferral of taxation is possible.

Company takeover

The following applies in the case of a share-for-share merger, a demerger of a legal entity, a merger of a legal entity, or an acquisition of 50% or more of the shares. In respect of options not yet exercised and shares acquired upon exercise that have not yet become tradable, the acquisition can be carried out without tax consequences. This is subject to additional conditions.

Deloitte’s view

Through the law change, the legislator responds to signals from the professional practice and the Netherlands thus strengthens the tax climate for startups. This is essential for innovating the Dutch economy and prevents startups from relocating. Under the scheme, startups can more easily retain knowledge workers.

The scheme has a generic design. By implementing sales restrictions, listed companies can likewise arrange to defer taxation of employees’ income from options.

Some listed companies apply rules under which a group of employees/directors has the obligation to retain a certain number of shares to show they have confidence in the company. Those situations, too, may involve non-tradable shares, with which taxation is basically deferred until the moment when employees do have the option to trade the shares, unless they choose for taxation at exercise.

The right to opt for taxation when the employee exercises the options must take place no later than the date of exercise. It is essential to inform employees so they can make a well-informed choice.

When accepting the tax deferral, employees likewise accepts their being taxed on the actual benefit, which may exceed the benefit on exercise. This may make taxation on exercise an attractive choice for the employee.

In addition to options, companies have a host of other types of remuneration to choose from. Each type has its own pros and cons. One disadvantage that an option scheme has is that its costs cannot be deducted from the results for corporate income tax purposes, while the benefit is taxed on the employee. We will be happy to explain the consequences of the new regulation for your company and for your employees.

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