Shifting the tax moment of employee stock options
As an employer, you are obligated to withhold and remit payroll taxes on stock option rights. Until the end of 2022, this taxation occurred at the moment when your employee converted stock options into shares. This taxation moment sometimes led to liquidity problems because your employee had to pay taxes at a time when they were not yet allowed to sell the shares.
From January 1, 2023, this problem has been resolved by shifting the taxation moment: the payroll tax is now assessed at the moment when your employee can trade the shares obtained from the exercise. At that moment, your employee has the opportunity to convert the shares into cash and can thereby meet his/her tax obligation.
Choice Scheme for Taxation on Stock Options
For determining the moment of taxation, under the new regime, it is important to consider whether the acquired shares are tradable, for example: if there are no selling restrictions and if your employee can actually sell the shares obtained upon exercise.
If the shares are not immediately tradable, your employee can make use of the 'choice scheme'. When exercising a stock option right, there is not always a liquidity shortage. Under certain conditions, your employee can choose to have the moment of taxation at the time of conversion (essentially the regime until 2022) rather than at the moment when the shares become tradable. The choice scheme can be interesting for the valuation of stock option rights and the associated taxation.
How Do You Value Stock Options?
As an employer, you must withhold and remit payroll taxes on the value of stock option rights at the time of enjoyment (exercise or tradability moment). Valuation should take place at fair market value.
The Tax Authority's Payroll Tax Knowledge Group took a position on the valuation of freely granted publicly traded shares with a restriction on alienation on June 29th, 2023. A publicly traded share on which you, as an employer, have agreed with your employee to restrict alienation is, in fact, worth less than the same share without such a restriction.
When determining the value of shares with a restriction on trade, you can apply a write-down. Assessing the value of the trade restriction (write-down) is quite complex. You can also make use of a substantiation rule, even if your employee chooses to be taxed on stock option rights at the time of exercising these stock option rights.
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