The Netherlands plans to adjust tax legislation on employee options for start-ups | Deloitte Netherlands

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The Netherlands plans to adjust tax legislation on employee options for start-ups

The State Secretary for Finance proposes to amend the tax legislation on employee options effective from 2022. This should make the Netherlands more appealing to start-ups. Following signals from the field, the State Secretary intends to postpone the taxation of income from options until the moment when the shares can be traded.

2 June 2021

Introduction

If companies want to retain employees for a longer period of time and have them share in the company’s business success, they often grant stock options to their employees. Especially start-ups favour this type of remuneration, because they are often short of funds when they start. The current Dutch tax regulations, though, are not optimal - especially for start-ups. Following signals from the field, the legislator will adjust the regulations by deferring taxation on income from options until the moment when the shares can be traded.

This is an internet consultation, not a bill that has already been submitted to the House of Representatives.

Current scheme

Options are subject to wage tax when the employees exercise the options. Shares obtained upon exercise are subsequently no longer part of the wage. As a rule, shares are then subject to taxation in box 3.

Challenges for start-ups

The current scheme is unappealing to start-ups, as the levy of wage tax may take place when employees cannot yet sell the shares. This may occur if the start-up is not yet listed on the stock exchange, or because employees are bound by selling restrictions. When exercising the option, employees would then have to pay tax on a benefit that cannot (yet) be cashed (“dry tax charge”). If they have the funds to do so, employees will then have to advance the tax. This advance is not repaid if the value of the shares drops later on. This is why option schemes are unappealing to start ups in the Netherlands.

Proposed scheme

A choice mechanism is introduced to meet these challenges. If the shares cannot yet be traded, employees can choose to be taxed:

  • when they can trade the shares, or:
  • when they exercise the options.


Tradability is understood to mean the moment when selling restrictions are lifted and employees concerned effectively are able to sell the shares obtained upon exercise. Whether or not employees choose to actually do so is irrelevant.

Broad scope

Through the proposal, the legislator meets the problems of start-ups, as initially there is no market for their shares. What’s more, this scheme can also apply to companies whose shares are, in effect, tradable, e.g., on the stock exchange. If employers contractually oblige employees to retain the shares for a certain period of time after exercising the option, taxation is also postponed until the time when the selling restriction expires. In that case, too, employees can still opt for taxation upon exercise of the option.

Five-year period

The option benefit in a situation in which employees cannot yet sell the shares, will be taxed no later than five years after the shares have been obtained (for listed companies), or five years after the IPO (for initially non-listed companies). This serves to avoid any overly long tax deferral. This five-year period only applies to contractual selling restrictions. If statutory selling restrictions are involved, such as under the Financial Supervision Act, this rule does not apply and a longer tax deferral is possible.

Corporate transaction

In the case of a share merger, a demerger of a legal entity, a merger of a legal entity, or an acquisition of 50% or more of the shares, the following applies. For options that have not yet been exercised and for shares obtained upon exercise that have not yet become tradable, the acquisition can take place without any tax consequences. This is subject to additional conditions.

Sales possibility for some of the shares

A concessionary scheme applies to specific situations in which employers or investors create the possibility for employees to sell part of the shares. Employees who participate in the sales possibility are taxed on the shares they actually sell. Employees who do not participate are taxed on the number of shares that they could have sold had they participated.

Abolition of facility for companies with an R&D statement

By launching the proposal, the legislator abolishes the facility for employees of companies with an R&D statement. Since 2018, only 75% of the exercise gain of an option is taxed for the employee if their employer has an R&D statement. In practice, this scheme has not, or hardly, been used.

Consideration Deloitte

The proposal signals the legislator’s response to the voices from the field. The Netherlands is strengthening the tax climate for start-ups. This is essential for a renewal of the Dutch economy and prevents start-ups from relocating. The scheme makes it easier for start-ups to attract and retain knowledge workers.

The scheme is generic. If they introduce selling restrictions, listed companies, too, can arrange that taxation on income from options of employees is deferred. The choice has been made for a scheme that facilitates more than only start-ups, such as an adjustment of the current facility for companies with an R&D statement.

The right to either choose for taxation when employees can trade the shares, or for taxation when employees exercise the options, is a very welcome addition to the regulations. Information for employees to make an informed choice is essential.

If they opt to defer taxation, employees also accept that they will be taxed on the actual benefit. This may exceed the benefit upon exercise and could make the choice for taxation upon exercise more appealing to employees.

Companies whose shares are already tradable may consider introducing selling restrictions, e.g., through an addendum for the Dutch participants in the scheme. In this way, the taxation of employees of those companies can be further deferred as well.

Apart from option rights, many other types of remuneration are available for companies to choose from. Each type has its advantages and disadvantages. A disadvantage of an option scheme is that its costs cannot be deducted from the result for corporate income tax purposes, while employees are still subject to tax on the benefit. In most other countries, the costs of option schemes can be deducted from the result.

If the right to a compensation is in cash instead of in shares, in most cases the costs can be deducted from the employer’s taxable result.

Under certain conditions, participation schemes for employees can be developed, either with taxation in box 3 (annual flat-rate levy on the employees’ net assets, capped at 1.7%; the actual benefit remains untaxed), or in box 2 (benefits are taxed at a fixed rate of 26.9%). This may be more favourable than taxation in box 1 (at the maximum rate of 49.5%), like option income.

We will be happy to explain the consequences of the new regulations for your company and for your employees. In preparing for the new regulations, we can also discuss with you which actions you can consider.


Source: https://www.internetconsultatie.nl/aandelenoptieregeling

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