Sponsored briefing: Netherlands employee stock option tax proposal sent back to parliament

DLA Piper’s Jian-Cheng Ku and Rhys Bane present the newest updates on an ongoing worker inventory possibility tax proposal in The Netherlands

On September 21, 2021, the Dutch government printed its 2022 price range proposals, which included a established of tax proposal that generally took impact as of January 1, 2022 (the 2022 tax prepare). The 2022 tax prepare incorporated a proposal that would modify the moment staff stock solutions would be taxed in the Netherlands.

Simply because of critical concerns from the Dutch Household of Reps (Tweede Kamer der Staten-Generaal) and, in extension thereto, the chance of the Netherlands granting state help as a consequence of an modification proposed by a amount of political parties, the legislative proposal was place on hold until eventually a thorough assessment had taken position.

By letter of April 4, 2022, the Dutch State Secretary of Finance documented the findings of the evaluate. The Dutch government has, primarily based on its overview, concluded that it will place ahead the legislative proposal as-is, only amending the powerful day to January 1, 2023.

Present Taxation of Worker Stock Choices

The Netherlands has a particular tax routine for the taxation of revenue from the sale or performing exercises of these types of staff stock selections. Beneath these regulations, the appropriate to obtain shares in the firm that employs an person or rights of a comparable mother nature (an ‘employee inventory option’) is only taxable upon sale or exercising. This suggests that upon performing exercises the personnel stock choice, the good current market value (significantly less any expenses on the aspect of the
staff) is taxable, requiring the employer to withhold
up to 49.5% Dutch wage tax on these shares.

As the employer has to remit the tax to the Dutch tax authorities in income, this may perhaps require the employer to promote of a section of the shares the employee is entitled to or to withhold on the employee’s cash income. As this may be additional difficult for privately held firms, presented the illiquidity of the company’s shares, the legislative proposal set forward by the Dutch government in the 2022 Tax Plain aims to boost the liquidity placement of privately held firms, with a concentrate on start out-ups and scale-ups.

At the moment, there is a tax incentive for get started-ups and
scale-ups that decreases the tax base by 25% for specified qualifying organizations that grant up to €50,000 in employee stock choices to just about every unique on a yearly basis. On the other hand, provided the stringent requirements (the firm ought to have an R&D declaration from the Netherlands Organization Agency and the employee inventory alternative need to have been granted at least 12 months prior, but no longer than 5 several years back), this tax incentive in follow is hardly ever utilised.

Other legal rights that do not qualify as personnel stock options (these as stock-settled limited inventory models) are taxed as in-kind wages taxable at the minute the proper gets to be unconditional. This is frequently the situation after the restricted stock units are settled in inventory.

Proposed Taxation of Employee Stock Possibilities

The legislative proposal would consequence in the introduction of a various minute for the taxation of personnel stock possibilities. If a company’s shares are not yet tradeable, the employee stock options would be taxable either upon sale of the possibilities
or upon the shares becoming tradeable (and not on working out of the staff inventory alternative). The legislative proposal need to make improvements to liquidity of privately-held firms, as the Dutch wage tax (and social safety contributions) around this wage part would have to be withheld remitted later on.

The proposed guidelines also include an alternative for afterwards taxation if there is a lock-up time period. The lock-up interval is revered for up to five years.

At present, there is a tax incentive for get started-ups and scale-ups that decreases the tax base by 25% for specified qualifying companies that grant up to €50,000 in employee inventory choices to every particular person yearly.

Workforce may, having said that, pick to even now pay tax at the second the personnel stock choices are exercised (as opposed to the moment they develop into tradeable).

The flipside of the deferral in taxation is that if the employer and the personnel choose for taxation at the minute the acquired shares turn out to be tradeable, the taxable foundation is established on the foundation of the good current market worth at the moment the shares turn out to be tradeable. This fair sector benefit may perhaps, for example thanks to an IPO, be appreciably higher than the truthful sector benefit at the second of training. Consequently, far more Dutch wage tax and social stability contributions would have to be paid.

Important Takeaways

In the letter to the Dutch Dwelling of Representatives, the Dutch State Secretary of Finance has indicated not intending to increase the favorable tax therapy to other devices than personnel inventory alternatives.

This indicates that incentives for staff members in the Netherlands must be reviewed in order to evaluate whether or not these really should be modified in order to be ready to make use of the far more favorable tax treatment method, as the legislative proposal does not utilize to all fairness-dependent incentives.

In the letter to the Dutch Property of Representatives, the Dutch State Secretary of Finance has indicated not intending to broaden the favorable tax treatment to other instruments than personnel stock solutions.

It is also critical to take note that in principle, staff members are entitled to choose to pay tax at the second the staff stock possibilities are exercised by notifying their employer eventually at the instant of working out of the personnel stock solutions. This requires employer to be able to withhold ample funds in get to remit this tax to the Dutch tax authorities. Supplied that the personnel in basic principle has this suitable, it is important for employers to evidently document if and how this ideal can be exercised by personnel.

Offered the variance in taxable foundation if staff stock selections are taxed at the instant of training compared to the moment the acquired shares grow to be tradeable, with the latter normally resulting in a larger tax base, the liquidity profit of not possessing to pay out tax at the instant of training the employee inventory alternatives ought to be cautiously weighed from the influence of shares turning out to be tradeable may have on the tax foundation.

Finally, based on the steerage currently accessible, ‘tradeable’ does not always signify that a company need to be community. Even if shares can be acquired and offered in a shut location, for instance, among staff members, this could qualify as tradeable within just the that means of the legislative proposal. This should really be cautiously monitored in purchase to prevent the submitting of incorrect tax returns because of to mistakenly not having into account the capital get at
the minute the shares turn into tradeable.

Jian-Cheng Ku

Rhys Bane

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