Employee stock options would not be subject to benefit taxation if certain criteria are fulfilled
The Swedish Parliament has voted in favor of the current government’s proposal in the budget proposition 2017/18:1 that employee stock options (Swe “personaloptioner”) should not be subject to benefit taxation if certain criteria are met. The purpose of the new regulation is to facilitate for smaller companies and start-ups to recruit and retain key personnel in the company. The new regulations will be applicable for options acquired after the 31st of December 2017.
The new regulations implies that if an employee of a smaller company or a start-up receives an option from the employer he or she should not be taxed in the income category employment income at exercise. Instead, the taxation occurs when the acquired shares are sold. As a consequence, no social security contributions should be paid by the employer on the benefit value.
However, there are a few criteria that must be fulfilled in order for the new regulation to be applicable, regarding the company, the options and the employee receiving the options. It is critical that all criteria are fulfilled for the new regulation to be applicable. A brief summary of the criteria will follow below.
- The shares must not be traded on a regulated equity market
- The average number of employees must be lower than 50
- The net sales or the balance sheet total must not exceed MSEK 80
- The company must not operate in the following areas: the financial sector (i.e. banks, or companies offering funding), insurance, production of coal or steel, land trade, real estate, raw material or financial instruments, long term rental of premises or residences, legal services, accounting or audit.
- The public sector must not control, directly or indirectly, 25% or more of the equity or the votes
- The business must not have been active for more than 10 years
- The business must not be in any financial difficulties
- The option must qualify as an employee stock option (Swe "personaloption")
- Exercise of the option cannot be sooner than three years from grant and no later than ten years from grant.
- The total value granted per employee cannot exceed MSEK 3
- The total value of granted options cannot exceed MSEK 75
The option holder
- Cannot control, together with immediate family, more than 5% of the equity or votes in the company
- The employee should be employed by the company during the 3 year earning period
- The working hours should, on average, be at least 30 hours per week
- The remuneration the employee will receive from the company should at least correspond to 13 income base amounts (i.e. SEK 799 500 for 2017)
Comments from Deloitte
There are several different factors to consider when designing an incentive program. The effect of taxation is one such factor.
The new regulation provides a beneficial alternative for eligible companies as they can grant options without benefit taxation for the employee. Stock options as an incentive is considered to be a flexible and powerful tool for recruiting and motivating personnel and the new regulation makes this form of compensation more attractive for smaller companies and start-ups. However, when designing an incentive program there a many important factors, aside from taxation consequences, that should be considered to implement a successful incentive program suitable for the company.
If you have any questions on how your organization could be affected by the new regulation or if you have any other questions regarding, for example, how to design an incentive program, please do not hesitate to contact us.
Our specialists in Sweden and abroad have many years of experience of designing and implementing bonus and equity based incentive programs for employees working in a national and international environment. We can assist you and your organization with any questions that may arise when designing and implementing an incentive program, including preparing and drafting of required decision-making material and legal documentation, analyze tax and accounting aspects of the incentive program and valuation of business and financial instruments.