Tax
The Netherlands is well on its way to providing ambitious entrepreneurs and startups with the best investment climate in Europe. Nevertheless, the Netherlands lags behind countries such as the United Kingdom and the United States. The existing legislation makes it difficult for Dutch startups to attract and retain talented staff. In 2020, investments in technology companies in the Netherlands amounted to €1.1 billion, compared to €10.4 billion in the United Kingdom and €45 billion in America (Silicon Valley). 40% of investments in the Netherlands are made by American investors.
In this article, corporate law attorney Dirk de Waard discusses the current scheme in the Netherlands and the adjustment of the tax scheme for share option rights, which tries to make Dutch startups more attractive to talented employees. In addition, a comparison is made with the regulations in the United States, the United Kingdom and Germany.
Current scheme regarding share option rights
The success of most startups is largely due to the quality of its employees. Many start-ups do not have sufficient turnover or profit to pay their employees attractive salaries. That is why they reward their employees with a lower salary with shares or options on shares. Under the current rules, the benefit obtained when the stock option is exercised – i.e. when the shares are acquired – is taxed as an employment benefit, as wages (in kind) with a tax rate of up to 52%.
Current regulations in the Netherlands tax the share option rights at the time of exercise. As a result, employer and employee must pay tax on the value of the shares that the employee has not yet been able to cash in on an IPO or sale of the company. In practice, the option rights are granted with a contractual restriction or restriction (“lock-up”) with the intention of binding the employee to the company. As a result of such a liquidity problem, it is unappealing for startups to use stock option rights as a tool to bring in and keep good employees.
Adjustment of the tax scheme for share option rights: what will change?
In the bill, the moment at which the share option rights are taxed (tax moment) will be shifted. Under the bill, the employee owes payroll tax when the shares are tradable. The scheme thus tries to prevent startups and their employees from having liquidity problems when they want to exercise their stock option rights. Part of the shares can then be sold if necessary. The option remains, however, to apply the old scheme, which means that the tax is levied at the time the options are exercised.
The measure is introduced as a generic measure for every withholding agent who offers an employee a stock option right. This also makes it possible to make use of a share option right in other situations in which the availability of liquid assets plays a role.
The bill is believed to make it attractive to employees to provide stock options as wages. The tax takes place depending on whether the shares are immediately tradable:
- The shares are immediately tradable upon exercise. The taxable benefit is the market value of the shares at the time of exercise, minus the exercise price paid;
- The shares will become tradable as soon as a contractual or legal restriction permits. It is therefore not a question of when the shares are actually sold. The moment of taxation is postponed up to a maximum of five years after the stock exchange listing of the company in which the shares are held. If this company is already listed on the stock exchange when the share option right is exercised, it is postponed to a maximum of five years after the share option right has been exercised. The taxable benefit is the market value of the shares, minus the exercise price paid; or
- The optional scheme: the employee chooses exercise as the taxable moment. The taxable benefit is the market value of the shares at the time of exercise, minus the exercise price paid. A discount on the value of the shares may possibly apply.
For the calculation of the tax to be paid, the value in the market at the time of taxation is used. Opting for the old scheme can therefore be tax-efficient if the value of the shares at the time the options are exercised is lower than at the time those shares become tradable.
The bill has been postponed, what is the criticism?
The bill to amend the share option regime will not come into effect on 1 January 2022. Following criticism from the House of Representatives, it has been decided to reconsider the bill. The measure would only be competitive to a limited extent from an international perspective and there is as yet no proper monitoring in place to determine whether the scheme is achieving its goal. It is being investigated whether this scheme can be limited in terms of target group to only start-ups and scale-ups. An amended bill is expected in 2022.
How do the United States, the United Kingdom and Germany tax the stock options?
The United Kingdom and the United States have a tax facility that stipulates for stock options that the tax date is shifted to the moment of sale of the shares. At that time, a lower tax rate (“capital gains tax”) will also apply, resulting in a higher net benefit for the employee. Germany has only a very limited tax facility for stock options. A bill to amend the law has been submitted that could move the tax date of stock options to sale and extend the tax facility.
The taxable moment in Germany and the United Kingdom is on exercise and on sale. In the United States, incentive stock options (ISOs) are taxed only on sale. Non-qualified stock options (NSOs) do not have a favourable tax provision and are taxed on exercise and sale.
The maximum rate in the UK is a progressive rate of up to 45% and applies from GBP 150,000. In the United States, a progressive rate of up to 37% at the time of exercise from $523,600 ($628,300 for a joint return with a married partner) and a maximum of 20% at the time of sale from $445,850 ($501,600 for a joint return with a married partner). In Germany the maximum rate is 45% upon exercise and 25% upon sale from €274,613.
Legal advice on employee participation
In the Netherlands, the rules on employee participation are unattractive which makes the Netherlands less attractive for talent. This makes it more difficult for startups to recruit and retain good employees. Startup cities London and Berlin are therefore more popular than Amsterdam. The new stock option tax adjustment law is a small step in the right direction, but not enough to compete with the United Kingdom, the United States or Germany.
VIOTTA’s lawyers advise companies on various forms of employee participation, such as Stock Appreciation Rights (SARs). Contact us today, we will be happy to help.
