Tax alert: Dutch government proposes new tax treatment on employee stock options
On May 31, 2021 the Dutch government published a legislative proposal changing the Dutch wage tax treatment of employee stock options for public consultation. Where previously the exercise (or sale) of stock options by employees triggered taxation, the exercise of employee stock options would not automatically trigger taxation under this proposal. Under the new rules, the employee stock options would trigger taxation at the moment the shares received by exercising the stock options would become tradeable. The new rules aim to replace specific rules for start-ups and scale-ups that were not deemed effective and to widen their scope. The public consultation will end on June 30, 2021.
Current employee stock option rules
Currently, employee stock options are treated as taxable wage for the Dutch Wage Tax Act at the moment of i) exercising the stock option or ii) sale of the option. The taxable amount is determined by the fair market value of the shares of the company less the purchase price and/or exercise price.
The specific rules for start-ups and scale-ups that were not deemed effective, aimed to support start-ups and scale-ups. Insofar the employee does not exercise more than EUR50,000 annually in stock options, only 75% of the fair market value of the shares received by exercising the stock option is taken into account if the following requirements are met:
- The employer has a so-called R&D declaration (S&O verklaring); and
- A minimum of 12 months and a maximum of 5 years have passed since granting the employee stock option.
However, this beneficial rule did not have the envisaged impact as just a small amount of companies opted to use it. The newly proposed rules have a more generic character to ensure effectiveness.
Under the newly proposed rules employee stock options will be taxed i) at the moment of exercising the option right, ii) when the shares received by exercising the stock option are considered tradable or iii) in case of a sale of the option.
In case the shares received by exercising the stock option are not tradeable due to a contractual agreement between the granter of the option and the employee (e.g., a lock-up period), this contractual agreement is respected for a maximum of 5 years after the initial public offering. After 5 years, the shares are considered tradeable and the contractual arrangement is no longer respected. Only if the shares are not tradeable by law, the shares are not considered tradeable after 5 years.
The new rules connect with the moment that shares received by employee by exercising stock options are tradable to ensure sufficient liquidity is available to satisfy the wage tax liability. Therefore, it should be easier for companies to grant employee stock options to attract and maintain employees.
However, we do note that the taxable amount is still determined by the fair market value at the moment of taxation. This means that if there is a significant increase in price between the moment of exercising the stock options and the moment of the initial public offering, more tax would be payable (due to the higher fair market value).
Given the foregoing, it is important to consider the upsides and downsides of using the possibility to pay taxes at the moment the shares become tradeable as opposed to the moment the stock option is exercised.
The newly proposed employee stock option rules are expected to enter into force on January 1, 2022.
More straightforward and less narrow rules for the granting of employee stock options make the Netherlands a more attractive jurisdiction for start-ups and scale-ups. The rules make doing business in the Netherlands easier by boosting liquidity (due to the deferral of taxation) and the possibilities for companies to attract talent, mainly in the technology sector.