Stock options
Hedging of tax on stock options granted
Ruling Commission accepts hedging through cash payment for personal income tax paid on stock options granted
Marc Verbeek
25/06/2018
Stock options
Stock Options

When an employer grants stock options to its employees and when these fall within the scope of the stock option law of March 26, 1999, the employee can benefit from a favourable lump sum taxation at the moment of grant.  In this respect, the options are deemed to be granted the sixtieth day after the date of the offer provided the beneficiary accepts the offer in writing within 60 days.

The taxable benefit in kind amounts to 18% of the value of the underlying shares if the life of the options, starting from the date of the offer, does not exceed five years, and is increased with 1% per year or partial year exceeding the initial five-year period.  The rates may be reduced by half  if certain conditions are met, amongst others that the option price must be determined at the moment of the grant. 

Further when the employee is granted a ‘certain advantage’, he must be taxed on this advantage for the taxable period the advantage becomes certain, provided this is higher than the benefit in kind he was taxed on. 

The personal income tax paid at grant is also the final tax on the stock options, irrespective of whether the employee exercises the options later on and irrespective of the value of the underlying shares at the moment of exercise.  It is therefore possible that the employee never exercises his options because the value of the shares has decreased or that the employee suffers a loss at exercise in comparison to the tax paid at grant.

Hedging of the tax cost

In practice, some techniques were developed to hedge the tax cost:

  • The option plan can foresee that the exercise price is decreased in case the value of the underlying shares decreases.  Disadvantage is that the taxation at the reduced rates is not possible as one the conditions for these reduced rates is that the option price must be determined from the start.
  • The employer pays a cash bonus to the employee of which the net amount is sufficient to finance the tax.  Disadvantage here is that this technique is very expensive for the employer.

Ruling commission

The ruling commission was recently asked to rule on the following technique: the granter of the stock options pays a cash amount that equals:

  • the tax paid at grant in case the beneficiary does not exercise the options or
  • the difference between the tax paid at grant and the capital gain realized at exercise when the capital gain is lower than the tax paid. 

The ruling commission’s answer was affirmative.

The cash payment certainly is a ‘certain advantage’ but as long as it is lower than the amount of benefit in kind on which the employee was taxed at grant, no additional taxation occurs.

Further the reduced rates are not lost because the original option price does not change.

Finally the ruling commission also confirmed that the cash payment is a deductible cost for the employer as the granting is linked to the professional activity of the beneficiary and that it does not constitute tax abuse as from an HR point of view a higher acceptance ratio can be achieved.

Example: grant of options with an exercise price of 100, whereas the value of the shares is also 100. If the taxable benefit in kind is calculated at 9%, the tax cost is about 4,5. Suppose the value of the shares is 103 at exercise, then the capital gain is 3. The net cost of 1,5 can be compensated.

Conclusion

The cash payment as hedging technique for the personal income tax paid at the moment of grant of stock options has been positively received by the ruling commission. The hedging clause can even be added to the option plan during the life of the plan.  The employee can however still not be covered in case of termination of the labour agreement leading to the forfeit of the options.