In most European countries, employee share options are taxed on the amount of gain which accrues at the date of exercise i.e. the market value of the shares less any exercise price payable.
An exception to this has been the Netherlands where options have been taxed at the time they become "unconditional" (basically, the date they mature which may, subject to the terms of the option, be anywhere between the date of grant and the date of exercise). The amount of tax payable is assessed on two elements:
- The "intrinsic value" of the option - the market value when the option becomes unconditional, less the exercise price; plus
- The "expectancy value" - a statutory formula which assesses the capacity for future growth in the share price which is based on the remaining term after the option matures and its intrinsic value.
Under these rules, provided the option is exercised at least after the third anniversary of grant, there will be no subsequent tax on exercise.
Difficulties can arise with this system of taxation where the option has not subsequently been exercised because of a fall in the share price. The employee will have paid tax when the option became unconditional even though subsequently he makes no gain.
A change to the Netherlands share option legislation has now been made whereby the option holder can elect to pay tax on any gains at exercise rather than on the intrinsic value of the option at maturity and/or their expectancy value. Where "in-the-money" options are granted, a certain amount of tax may still be payable when the options mature, regardless of the election.
Whilst this may defer the tax until cash can be realised upon exercise of the option and sale of the shares, the total amount of tax may be greater than would otherwise have been the case if the share price had risen at a greater rate than expected under the statutory formula.
A notice of election to pay tax upon exercise must reach the tax authorities before the (first part of the) option matures and so employees need to carefully work out which approach may be better for them financially.
The assistance of Jan Roeland and Jean-Paul van den Berg of Stibbe is gratefully acknowledged
"© Herbert Smith 2002
The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.
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