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13 October 2021
Tapestry Alert: Netherlands
Proposed change to when options are taxed!
Dear
Client
As part of
its budget for 2022 (presented at the end of September), the Dutch
government has proposed a change to the timing of the taxation of
employee share options.
What are the current rules?
Under the
current legislation, option plans are taxable on exercise, which
can result in the employee having to sell shares to pay the tax.
Although this is the standard moment of tax for option plans,
issues can arise, especially for employees of private companies
(e.g. start-ups), if the shares are not easily tradable, or if the
shares cannot be sold, e.g. because the entirety of the shares
being acquired are subject to a holding or lock-up period. This is
mainly because it may not be possible to sell the shares in order
to pay the tax, and the employee may not have sufficient cash
available to pay the tax on exercise.
What are the proposed new changes?
Under the
proposed new rules, if the shares are not tradable, employees will
be able to choose whether to pay tax on exercise or to defer the
taxable moment to the point when the underlying shares can be
traded. If an employee defers the taxable moment, as long as
transfer restrictions continue to apply, the shares will not be
considered tradable and taxation will take place at the time the
acquired shares become tradable. ‘Become tradable’ is defined as
the moment on which any sale restrictions are lifted and the
employee may sell the shares they acquired on exercise.
The value of the shares at the relevant taxable moment is used to
calculate the tax that is payable. As a result, if the employee
defers the tax point from exercise to when the shares are tradable,
an increased amount of tax would likely be payable if the value of
the shares increased during the deferral period. On the other hand,
if the shares decrease in value over the deferral period, then a
lower amount of tax would typically be payable. If the employee
expects that the share price will increase after exercise, they may
decide not to defer the tax point for this reason!
What are the impacts of the proposed
changes?
The
employee will retain the right to be taxed on exercise, even if the
shares are subject to selling restrictions. However, the tax
deferral automatically applies,
so an election to opt out of the deferral must be made and recorded
'in a timely manner', and certainly before exercise. Note that, if
the shares can be sold immediately on exercise, the shares will
continue to be taxable upon exercise.
Restrictions apply to avoid long-term deferral of taxation. In
particular, the deferral can be no longer than five years after the
acquisition of the shares (for shares that are already listed) or
five years after the IPO of a start-up or other private company.
When are the changes due to take
effect?
The
amendment is due to take effect on 1 January 2022. The new rules
would apply to any options exercised on or after 1 January 2022
(regardless of when the options were awarded).
Tapestry comment
We are always delighted when rules are
changed to make it easier for employees to benefit from share
plans! This is an interesting change as, although it is common
practice for options to be taxed on exercise, dry tax charges can
be potentially problematic for employees of private companies where
there may not be a market for the shares. We suspect that the
change will be more useful to employees of unlisted companies for
this reason, so this change is a welcome development for them. For
employees of listed companies, the shares will likely immediately
be tradable on exercise, unless for example they are all subject to
a lock-up or other form of holding period. Companies may prefer
employees to continue to pay tax on exercise as this may be easier
for companies to administer for withholding tax purposes.
We don’t yet know the format of the election that
employees will need to make to opt out of the automatic tax
deferral, however we will keep an eye on developments and keep you
updated. Companies should keep a look out for this, given the
impacts it will have on the processes for and timing of the taxation
of options. Once this change takes effect, there will be two
different ways of taxing options that are subject to restrictions,
so companies will need to identify and record whether an employee
wishes to follow the tax deferral route or if tax is to be paid on
exercise (as is standard), and apply withholding accordingly.
We would like to thank our partner firm in the Netherlands, Graham,
Smith and Partners, for alerting us to this change.
If you have any questions on this alert, please do let us know.
Sharon and Sonia
 
Sharon Thwaites Sonia Taylor
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