Employee Participation Scheme

Option schemes and employee participation

Lex has developed a fiscally-attractive alternative to traditional option schemes: the employee participation structure.

In an employee participation structure, employees become immediate shareholders in your company (if desired, without voting rights). This sophisticated combination of shareholding and debt ratios protects your employees from becoming subject to high tax liabilities.

Traditional option scheme

When you award share options to your employees, the tax authorities consider this to be a taxable benefit (income) for your employees. This can have negative consequences.

The Dutch tax authorities make a distinction between “unconditional” and “conditional” share options. This distinction makes it risky to directly copy an American options agreement and apply it here in The Netherlands.

Conditional share options

Conditional share options are options that may only be exercised when a particular uncertain event has taken place. An example would be an optionthat may only be exercised after 3 years on the condition that the employeeis still employed by the company at the moment of exercise.

Unconditional share options

Unconditional share options are options whose exercise does not depend ona future uncertain event.

This type of option can be exercised immediately after it is awarded to the employee.

Taxable moment

In general, the taxable moment that is applied is the moment at which the options can be exercised. Unconditional options are taxable at the momentthey are awarded. Conditional options are taxable at the moment that they become unconditional (in our example, after 3 years).

The taxable option benefit comprises an intrinsic and an expected value. Depending on the duration of the options, the percentages of the expected value are:

1 year 4% 7 years 26%
2 years 8% 8 years 29%
3 years 12% 9 years 32%
4 years 16% 10 years 35%
5 years 20% 15 years 45%
6 years 23% 20 years 50%

Once the options have been assessed and tax has been levied on them, in principle they thereafter fall outside the Dutch tax system.

Exceptions

An exception to this is the situation in which an option holder has a substantial shareholding in the company, or when there is an instance of a company buying back its own shares. Options awarded or accepted on or after 26 June 1998 also form an exception. If these options are either exercised or sold within 3 years after they were awarded, then the holder will become liable to a supplementary tax assessment.