Amendment taxable moment stock options per 1 January 2023

01/01/23

The share option regime has been changed as of 1 January 2023. In case shares are not tradable after the exercise of a stock option, the taxable moment will be deferred as a main rule, unless an employee decides to keep exercise as the taxable moment and puts it into writing.

This law was not part of the Dutch Tax Plan 2023, but has also entered into force as of 1 January 2023.

Previously, it was considered to let the bill enter into force on 1 January 2022. However, in response to criticism, the entry into force was postponed and a study was conducted to determine whether the target group could be limited to start-ups and scale-ups. The study explored several options. Based on this study, the State Secretary concluded that limiting the target group would lead to a more complex bill. Moreover, the State Secretary concluded that the bill in its original form avoided the risk of abuse in the best possible way. Consequently, the bill was passed without any amendments. Read below what exactly this means for you.

Previously liquidity problems could arise due to tax becoming due at the moment of the exercise of stock options, even if the actual shares obtained with the exercise could not be sold. With the change the legislator chose to defer the taxable moment in order to solve this issue. With this adjustment of the Dutch employee option regime, the Netherlands intends to meet the needs of start-ups and scale ups and to bring the regime more in line with the international tax treatment of stock options. Going forward it should be easier for (start-up) companies to attract and pay entrepreneurial, technical and ITC personnel. That being said, the adjustment applies to all types of employers.

The adjustment itself relates to shares obtained by exercising stock options that are not yet (deemed) tradable. It should be noted that in case of a legal or contractual restriction on the sale of the shares following the exercise of the stock options, the shares are in principle not considered tradable. The moment of taxation is then deferred to when the obtained shares are tradable.

Stock option regime

The stock option regime applies to stock options in the employer or in an affiliated company, involving the right to acquire shares (or a similar right) against payment of a predetermined exercise price. Under this regime up to 1 January 2023, the moment of exercise of the option right is the taxable moment. This meant that the fair market value of the acquired shares, less the amount paid by the employee, was taken into account as wages.

This could lead to a problem, especially with the aforementioned start-ups and scale-ups. The granted stock may not be tradable after exercise and/or a contractual or legal sale restriction (a so-called "lock-up") could apply. When stock option rights are exercised, there are not always sufficient liquid assets available for the employee to pay the tax due. The tax must then be paid from another source given that the obtained shares cannot be sold to create liquidity.

Amendments

The amendment of the regime will make stock option rights more attractive as wages for employees. Depending on whether the shares are tradable after exercise, taxation will be as follows:

At exercise if the shares are immediately tradable (or at disposal of the stock option right, if earlier). The taxable benefit is the fair market value of the shares at the time of exercise, less the exercise price paid.
At the moment the shares can be traded. Please note that this does not have to coincide with the actual disposal of the shares. The taxable benefit is the market value of the shares, less the exercise price paid.
At exercise if the shares are not yet tradable, but the employee chooses to keep exercise as taxable moment. The taxable benefit is the market value of the shares at the time of exercise, less the exercise price paid. A discount may be applicable over the value of the shares due to a sale restriction.

Election

If the employee wishes to keep taxation at exercise in case of non-tradable shares, certain conditions must be met:

The employee should notify the employer in writing; and
The employer must keep this election in the administration. Furthermore, as is also currently the case, the employer should withhold and remit the payable wage tax at the time of exercise.

If no choice is made, not in time, or incorrectly, the moment of taxation shifts to when the shares are tradable.

Interim benefits from the shares

Let’s assume that an employee exercises a stock option right and that the obtained shares are not taxed until they are tradable. Although the shares are not yet taxed, the employee is entitled to interim benefits such as dividend. In that case, the received dividend would be taxable as wages of the employee. Taxation takes place immediately when the employee receives the benefit.

Difference between listed and non-listed companies

The new regime applies to both listed and non-listed companies. A difference, however, is that - in order to avoid a long deferral of taxation - for listed companies a sale restriction over the shares is deemed to expire after a maximum of five years after the company's listing. If the company is already listed, the sale restriction is deemed to expire after a maximum of five years after exercising the stock option right.

Expiry of the 75% facility for companies with an R&D statement (“S&O verklaring”)

This amendment will also put an end to a special tax facility for (start-up) companies with an R&D statement. As of 1 January 2018 it was possible, subject to certain conditions and up to a certain maximum, to only take 75% of the exercise gain of the stock options into consideration. However, this regulation was hardly used in practice.

What does this mean for your organisation?

The regulation may make it more attractive for you as an employer to provide stock options in combination with a sale restriction.

If your employee wishes to keep exercise as taxable moment, then you should record the employee's choice in writing in your administration. This election for exercise as the taxable moment can be a convenient choice for the employee, if it is expected that the share price will increase. Moreover, there may be a discount on the market value as a result of a lock-up (a 'Discount for Lack of Marketability'). As a result, at the time of exercise, the taxable gain is lower than it is likely to be at the end of the sale restriction.

However, it should be noted that as an employer, you are still responsible for withholding the tax over the taxable gain even after your employee has ceased employment, regardless of whether the taxable moment occurs at exercise or at sale.

Finally, it should be noted that separate from this amendment, the legislator has also amended the Highly Skilled Migrant scheme for start-ups and innovative companies. This means that, under certain conditions, you can offer a lower salary to incoming employees, possibly supplemented with a share bonus.

Conclusion

This legislative amendment may help start-ups and scale-ups. It is expected that stock option rights will be more often used to attract skilled workers.

It should become easier for employers to attract (international) talent by using stock options regardless of a sale restriction. Please note that this regulation only applies to stock options and not, for example, to instruments such as Restricted Stock Units ("RSU"). The taxation of this type of equity awards will take place once the RSU become unconditional.