Amended tax treatment of stock option rights
Companies that want to bind employees for a longer period of time and let them share in the business success often issue stock options to employees. This form of remuneration is particularly popular with start-ups, which often have little money available at the beginning. However, the Dutch tax regulations are not optimal, especially for start-ups. Responding to signals from the business community, the legislator will now amend the tax treatment of stock options by postponing taxation on option income until the moment when the shares can be traded.
Options are subject to payroll tax at the moment an employee exercises them. Then, the shares obtained upon exercise are no longer subject to payroll tax and are usually taxed in box 3 (income from savings and investments).
The current scheme is unattractive for start-ups in particular, because payroll tax can be levied at a time when the employee cannot yet sell the shares, for example because the start-up is not yet listed on the stock exchange, or because employees are bound by sales restrictions. When exercising their option, an employee owes tax on a benefit that cannot (yet) be cashed (dry tax charge). The employee must pay the tax from their own resources. This makes option schemes unattractive for start-ups in the Netherlands.
To address these concerns, it has been proposed to shift the taxation date to the moment the employee can trade the shares. If the shares are immediately marketable at the moment the options are exercised, the taxation date will be the same as under current legislation and nothing will change. If the shares are not marketable at the moment of exercise, employees can choose to be taxed immediately rather than at the later moment when the shares become marketable.
Marketability means the moment at which any legal or contractual restrictions on alienation are lifted and the employee concerned can dispose of the shares obtained upon exercise. Whether or not the employee chooses to actually dispose of the shares is irrelevant. It should be noted that the dividends paid on the shares up to the time at which the shares can be traded are taxed as salary at the level of the employee in the situation that the employee is taxed at the time at which the shares become marketable.
In order to avoid an overly long tax deferral, option benefits in situations where employees cannot yet sell their shares will be taxed no later than five years after the acquisition of the shares (for listed companies), or five years after the IPO (for initially non-listed companies). This five-year period does not apply to legal sales restrictions.
With the proposal the legislator meets the problems of start-ups, which initially do not have a market for their shares. In addition, this regulation can also apply to companies whose shares are marketable, for example on the stock exchange. If the employer contractually obliges the employee to keep the shares for a certain period of time after exercising the option, taxation is also postponed until the time when the sale restriction expires. Even in this case, the employee can still opt for taxation upon exercise of the option. With the introduction of the proposal, the legislator abolishes the facility for companies with an R&D statement.