Are you considering allowing your employees to participate in your business? We can help you do this right. We can lay out all the advantages and disadvantages of an options plan. We will also talk with you about whether allocating shares directly might be a better option.
Employee participation explained
Finding the right people is one thing, but more and more businesses are becoming concerned with keeping them. Employee participation is an increasingly popular way of binding employees to the company. There are a number of reasons for this:
- Remuneration via shares is cheaper
- Lower salary, but payment in shares
- Increases the employee’s attachment to the company
- Lower turnover, keeping the good people within the organization
The most tax-advantageous alternative is to have employees acquire shares. In many cases, this will be shares without voting rights, or the shares can be placed in a trust office (STAK). In the latter case, employees are not issued ‘ordinary’ shares, but rather depositary receipts for shares. These will be without voting right; the employee maintains only the economic rights to the shares. The employer sits on the board of the STAK and exercises the voting right on the shares.
When employees become shareholders, special tax aspects will always come into play. There are a number of possible situations: The employee may pay an arm’s-length price for the shares. This could be with the employees’ own money or, potentially, borrowed capital, including a loan from the company. In this situation, there are no tax consequences.
- The employee need not pay anything, or only a small proportion of the price. The difference with the actual value of the shares is considered to be remuneration in kind.
- One of the major advantages of the participation through shares is that the benefit obtained when the share price rises is not taxed as salary. For employees who hold less than 5% of the shares, the shares are reported in box III. In that case, they pay a fixed amount in tax on imputed return on investment each year. The dividend actually received, or revenue received from a sale of the shares, remains otherwise untaxed. At shareholding of 5% or more, the employee is qualified as a holder of a substantial interest. In this case, dividend and revenues upon sale of the shares are taxed at a rate of 25%.
- There is an exception to this rule, which is the following: If the allocation or holding of shares is linked to the performance of work, and returns can be qualified as excessive, then the shareholding may be classified as a lucrative interest. In this case, the employer is deemed to be paying the employee for work in the form of the return earned on the shares. In that case, the advantage earned from the shares is taxed in its entirety.
A disadvantage of the share participation is that the employees run the risk of losing their investment if the value of the shares falls.
Another way to allow the personnel to participate in the value development of the undertaking is the granting of options. An advantage of this approach is that the employees do not need to pay anything upon the granting of the options, so they are not exposed to the risk of a fall in the share price.
Only upon exercise of the options do they earn a return, and the amount of the difference between the exercise price of the option and the underlying share. The disadvantage here is that the employees are taxed progressively, so from a tax perspective, options are not particularly advantageous.