On June 28, 2022, the Dutch Parliament adopted the Bill to amend the tax regime for stock option rights.
Under current legislation, stock option rights are taxed with Dutch Payroll tax at the moment the employee exercises or alienates the stock options. The taxable benefit arising when the stock options are exercised or alienated equals the fair market value of the shares at that moment minus the option exercise price. In practice, the moment of taxation under the current rules is considered quite unbeneficial, as tax is due at a time that the employee may not have sufficient resources for the payment of these taxes as it may still (merely) own shares for which often no market is available (hence these cannot be sold). Techleap.NL has drawn attention to this bottleneck and argued for a more favourable tax treatment. To support the start-up and scale-up sector, the Dutch Secretary of Finance published a legislative proposal to meet the needs of practice and therefore to move the taxable moment to a later moment. In this way, the legislator responded to the problem that many start-ups and scale-ups encounter.
New legislation as of January 1, 2023
According to the legislative proposal, the taxable moment will shift from the moment of exercise of the stock options to the moment that the acquired shares become tradable (main rule). The taxable benefit arising when the shares become tradable equals the fair market value of the shares at that moment minus the costs that are charged to the employee in respect to the stock options. Becoming tradable is defined as the moment alienation restrictions are lifted and the acquired shares can be sold. It is irrelevant whether the employee actually opts for a possible alienation. As well as under the current legislation, the moment of alienation of the stock options will still be a taxable event.
The moment that the acquired shares are tradable can be determined objectively and because of that it prevents any deferral of tax. By Ministerial regulation shares may be deemed not to be tradable, in part or in full, or be tradable. In two specific situations the acquired shares will be taxed even though they may not be sold pursuant to a contractual obligation, namely within five years (i) after an IPO of a company in which the shares are held and (ii) after exercise by an employee of a listed company.
Not in all cases there is a lack of liquidity to pay taxes. Therefore, the employee can opt to be taxed when exercising its stock options. In summary, the main rule will apply in case the acquired shares become tradable, but the employee can still opt for taxation when exercising the stock options. This can be beneficial in case there will be high expected increase of value of the shares in the time between the moment of exercise and the moment when the shares become tradable.
Even though the legislative proposal will enter into force on 1 January 2023, employers can already start investigating the possibilities for their employee participation plans. As long as the stock option will not be exercised or alienated in 2022, there should be no taxable event in this year. Thereafter, unexercised or unalienated stock options will be covered by the new legislation.
We would be happy to advise in this matter.
For further information, please contact:
Arnoud Knijnenburg, Partner, Bird & Bird