Blog series part 2: Shares (options) and the Stock Options Tax (Amendment) Act

In our first blog On employee participation, we dwelled on participation through Stock Appreciation Rights. In this second blog, we address a more classic form of employee participation; the issuance of shares. Several flavours are possible here. These include normal or flexible shares, stock options or depositary receipts. This blog discusses share issuance and share options. The next blog will discuss flexible shares and depositary receipts.  

To choose between the different options, it is important to ask yourself at least the following questions: 

• Why is it desirable for employees to participate and what is the purpose? 
• Which employees can participate and what do they consider important? 
• Should employees only benefit from the value development of the company or will they also have a say in the decision-making process? 
• What is the company's liquidity position? 
• Are there plans to sell the company in the (short) term? 

We are happy to think along with you in this respect and in our blog series we already list the different employee participation structures. 

Possible benefits of shares (options): 

• Employees benefit with growth and value developments, but also run a risk if growth fails ("skin in the game"). 
• With share options, employees are in principle not at risk as exercise is a choice. 
• High level of involvement, creates more support for decision-making and higher employee productivity. 

Possible disadvantages of shares (options): 

• The issue and transfer of shares is done through the notary. 
• When value is negative, employees are reluctant to exercise stock options. 
• Employees not only have financial rights but, as co-owners, they can also exercise influence through voting, meeting, speaking and information rights, among other things. With share options, this is the case only after the options have been exercised. 

Shares 

The issuance of ordinary shares is a far-reaching form of employee participation. This is because employees, as shareholders, get a big spoon in the pie, and the question is whether this is desirable and appropriate for the purpose of issuing shares. If it involves an employee you would like to retain and actually give a voice in the company, then this is an opportunity to get them invested and actually involved in the organisation. Involving "key" employees in the decision-making process in this way increases commitment and creates more support than top-down decision-making. 

Stock options 

In addition, you can also choose to give share options. In this case, shares are not transferred directly, but agreements are made about when the shares can be bought and at what price. Employees then decide for themselves whether the share option is exercised, thus reducing the investment risk. 

Before 1 January 2023, this form of participation was more tax unattractive, which meant that it was little used in practice. The problem was (especially for scale and start-ups) that at the time the share option right was exercised, there was insufficient cash to pay the tax. 

Stock option rights tax (amendment) act 

As of 1 January 2023, the Share Option Rights Tax (Amendment) Act came into force. This has made it more attractive to bind employees through share options. Namely, this change in the law makes it possible to defer the moment of taxation until the moment when the shares are (allowed to be) traded, instead of the moment when the option (to buy the shares) can be exercised. This is an important difference and will be explained below using an example. 

Situation before 1 January 2023

Suppose an employee - in the old situation - is at some point given the option to buy 500 shares in two years' time at an agreed exercise price of €5 per share. A condition is that the employee must still be employed at the time of exercise. Two years later, this is still the case and the employee wants to exercise the option. The value of the shares has since risen to €50 per share. In the old situation, this employee had to pay the purchase price of (500 x 50) €2,500 at the time of exercise. And in addition, at that time, wage tax was levied on the remaining value of (500 x 45) €22,500. Suppose the employee is not yet allowed to sell the shares at that time (e.g. because of an agreed lock-up period), then this employee may not be able to exercise the share option because he or she does not have enough money to pay both the purchase price and the tax. To counter this problem, the law has been amended on this point. 

Situation as of 1 January 2023

As mentioned, this change in the law makes it possible to defer the tax moment. Incidentally, this applies to employees of all companies and not just scale or startups. To determine the amount of tax, the value of the share at the time of tax payment is considered. Suppose the value of the share has increased from the time of exercise and the time the share may be traded, so more tax has to be paid. To avoid this, the employee in question can also choose to pay the tax directly when exercising the option (the so-called option scheme). 

Conversely, it is possible to apply a discount if there is a decrease in the value of the shares in the period between the time of exercise and the time of taxation. 

Want to know more? 

We regularly give presentations on the various forms of employee participation, helping you, as an entrepreneur, to make an appropriate choice. We are then ready to help you implement the participation plan in your organisation. If you would like more information about this, please contact us Team Employment Law.  

Read part 3 of this blog series here.