Supreme Court clarifies exception from additional levy on excessive severance payments
According to the Supreme Court there is no difference between conditionally and unconditionally granted stock option rights for application of the exception from the pseudo final levy on excessive severance payments.
12 january 2017
Additional levy on excessive severance payments
The Dutch Supreme Court issued an interesting judgment on the 75% pseudo final levy (pseudo-eindheffing) payable by employers on any excessive part of severance payments on December 23, 2016. The levy is to be paid on top of the regular payroll tax for the employee.
In the case under consideration, several employees left the employer’s business in 2011 and 2012. These employees had been granted stock option rights between 2007 and 2010, which vested in 2011. The question to be solved by the Supreme Court was whether or not a benefit relating to exercise of the abovementioned stock option rights was to be included in determining the amount of the final levy due. After all, the rules provide that the levy is not due if and insofar as the pay qualified as severance pay relates to the sale or exercise of stock option rights granted in a year prior to the calendar year preceding the year in which the employment was terminated. The legislator assumes this period to leave insufficient room for assuming that the stock option rights relate to termination of the employment.
Timing of the option grant
The State Secretary argued in the appellate proceedings that the abovementioned exception is not applicable in this case, since the stock option rights granted first vested in 2011. However, the Supreme Court rejected this position in its ruling of December 23, 2016. The timing of the grant of the stock option right is decisive and this is defined as the moment of concluding the contract that sets out the right to acquire the stock. The Dutch Supreme Court argues that the legal text does not indicate that the vesting or non-vesting of such rights is in any way relevant.
The Supreme Court ruling provides clarity about stock option rights and applicability of the pseudo final levy in respect of excessive severance payments. Yet it remains to be seen how equivalent rights, such as Restricted Reserve Units (RSUs), Stock Appreciation Rights (SARs), and phantom shares granted to the employee long before the date of termination of employment, are to be treated. These rights, too, cannot be said to be related to termination of the employment. However, in a 2014 ruling the Supreme Court did not put such rights on a par with stock option rights.
Source: Dutch Supreme Court December 23, 2016, 16/01732, ECLI:NL:HR:2016:2897