New stock option legislation was approved by the Dutch Parliament and applies from 1 January 2023.
Under this new legislation, the benefit from employee stock option plans is taxed on the date that the shares, received when exercising the stock options, become tradeable. However, employees may instead choose to be taxed on the date the option is exercised.
Background
The Dutch legislation regarding the taxation of employee stock options is amended after discussions initiated by the start-up and scale-up community. Employees of such companies are commonly remunerated with employee stock options. However, it has not always been possible for these employees to immediately sell some of the shares in order to pay the tax due which led to cash—flow issues.
Adjusted taxable event: tradability of the shares
Under the new legislation, the point of taxation is the date that the shares become tradeable. While the legislation does not define ‘tradeable’, shares should be considered tradeable when the employee is able to sell the shares to any other person, even if only to a limited group of potential buyers. It is irrelevant whether the shares are actually sold. Specific (partial) buy-out situations will require careful consideration.
In practice, the new rules will have a significant impact for shares in non-listed companies. The new rules will have no impact if the shares are immediately tradeable.
Where there are legal or contractual sales restrictions on the shares, the new legislation will also have an impact on companies that are listed or become listed. The rules include exceptions where there are legal or contractual restrictions. Shares with legal sale restrictions are not considered tradeable until the restrictions end. For contractual restrictions, there is a specific rule to avoid a long-term tax deferral. In case of contractual restrictions, if the company is listed, the shares are deemed to be tradeable after a maximum of five years post-exercise. If the company is listed after exercise, the shares are deemed to be tradeable at most five years after the stock exchange listing date.
For clarity, the change of the taxable event date does not itself result in a more favourable income tax position for the employee, but rather offers a solution to the cashflow issue. The taxable benefit is the fair market value of the shares at the taxable date less the employee purchase price. Thus, by taxing at the time of tradability, an increase in value of the shares will produce a higher tax liability.
Choosing the taxable event at exercise
The new rules permit an employee to choose the tax position to be determined on exercise of the option. To do so, an employee must submit a written request to the employer (the wage tax withholding agent), and it should be retained by the payroll administration. If a timely request is not made or has not been filed correctly, the new rule will apply (i.e., deferral until the shares are tradeable).
Concurrence with the 30% facility
Special attention is needed for employees who exercise their stock options and benefit from the 30%-facility. The 30%-facility is available (upon application) to employees who are recruited from abroad and meet specific criteria. The facility can be granted for a maximum period of five years from the start of the employment in the Netherlands. The facility enables the employer to pay up to 30% of the taxable salary as a tax-free allowance, whereby the salary on which the 30%-facility can be applied, is capped from 2024; transitional rules apply. This facility can also be applied on income from employee stock options, but only if the point of taxation is within the duration of the 30%-facility. Employees benefitting from the facility should consider whether taxation at the time of tradability still falls within the duration of the 30%-facility, and within the income cap and make an informed decision regarding the optimum time of taxation.