Artikel
Proposed extension of the tax relief rules for qualified employee stock options
Tax Alert
The Ministry of Finance has submitted a memorandum proposing extended relief in taxation of employee stock options. The proposal increases the possibility for small and startup companies to give attractive offers to key persons to acquire shares in the company on favorable terms in order to recruit and retain people that are important for the company's growth. The proposal is due to enter into force on January 1, 2022, if approved. The proposed extended tax relief is considered as the type of State Aid that must be approved by the European Commission before it can enter into force.
Background
Compensation that an employee receives from the employer is as a main rule taxable income in the hands of the employee. An employee stock option is a right to acquire a security on favorable terms in the future. A benefit of an employee stock option (benefit in kind) shall not be subject to taxation provided that certain conditions are met in relation to the issued options, the issuing company and the recipient of the options, so-called qualified employee stock options. Qualified employee stock options are not taxed when received by the employee and the employer does not pay employer social security contributions on the benefit value. If the conditions for tax exemption are met, the shares will be subject to tax when sold.
The purpose of the tax relief rules for qualified employee stock options, which were introduced in 2018, is to give small and startup companies with limited access to capital, but with potential to grow, the possibility to recruit and retain people who are important for the company's growth by offering the acquisition of shares on favorable terms in the company.
Currently, only companies up to a certain size can benefit from the regulation and only people employed by the company can be offered qualified employee stock options. In addition, the option holder must exercise the option to acquire a share in the company that issued the option. Companies have found the rules difficult to apply in practice, meaning they have been less able to benefit from the competitive advantage the rules are intended to give. In a ruling from the Swedish Supreme Administrative Court in September 2020, the tax relief rules for qualified employee stock options were assessed. The ruling resulted in an extension of how the rules can be applied and increased the accessibility for companies to use qualified employee stock options in practice.
Proposed changes
An extension of the rules is proposed in order to simplify the application of the rules and enable more companies to benefit from the regulation. In short, the proposal includes the below changes:
• The company
The rules are extended in relation to the size of the companies that can apply the rules. According to the proposal, the limit on the average number of employees and shareholders working in the company will increase to 150 and the limit for the company's net sales or total assets will increase to SEK 280 million.
• The option holder
According to current rules, the holder of the option must be employed by the company. It is proposed that also board members and deputy board members be covered by the rules even if they are not employed by the company. The reason for this change is that key persons in a company are not necessarily employees and can also be members of the board. The requirement of employment therefore limits the possibility to recruit and retain key people.
• The stock option
According to current rules, the option holder must exercise an option to acquire a share in the same company that issues the option. According to the proposal, this treatment should be extended to also cover a warrant that gives the right to acquire a share in the company as well as a stock option. In addition, the rules are extended to cover options or warrants which give a right to acquire a share in another company within the same company group. This change allows a parent company to issue an employee stock option to acquire shares in a subsidiary.
Deloitte's Comment
The proposal is a welcome extension of the rules on tax relief for qualified employee stock options and the proposed changes are expected to make it easier for companies to benefit from the rules. The proposal also provides a welcome clarification in relation to the ruling from the Swedish Supreme Administrative Court regarding situations where warrants can also meet the requirements for tax exemption.
It should be noted that all conditions regarding the option, the issuing company and the option holder must be met in order for tax relief to be granted. If all conditions are not met, the exercise of the option and/or the issuance of warrants would constitute a taxable benefit for the employee. Consequently, the employer is obliged to report the benefit, withhold preliminary tax and pay social security contributions on the benefit value.
Please contact Deloitte for assistance with designing option programs or with questions about the rules.
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