The Belgian tax authorities have published a new circular letter (Administrative Circular 2017/C/21 on 13 April 2017) in relation to the tax treatment of stock options that are granted directly to indiviudal managers who operate through a management company.
This circular letter confirms that such grants cannot benefit from the reduced valuation rate of 9% for the purposes of the Belgian stock option law.
Belgian managers often deliver services to their clients though a “management company” or “ManCo”. The ManCo and the end-client, then enter into a “services agreement” formalising the management activities to be performed by the manager. The provision of services though a “ManCo” can be efficient to the extent that the private manager does not need to receive 100% of the company fees as personal remuneration, resulting in tax and social security advantages. In addition to these advantages, the company’s profits can be transferred to the individual by means of lower taxed dividends and private pension schemes.
Stock options that are granted at nil cost to individuals are deemed to be remuneration in kind, and are taxed at the same rate as ordinary remuneration. For non-listed options, the tax charge is determined on an (advantageous) flat-rate basis (see below). A grant of stock options to companies, however, cannot benefit from this specific tax regime.
Accordingly, an informal practice exists whereby stock options are granted directly by the client to the individual behind the management company, based on the fact that the individual is the permanent representative of the ManCo, ignoring the absence of relationship between the client and the private manager. In such cases, one point to be considered is the valuation of the benefit in kind granted to the representative: is it possible for the individual to claim the reduced valuation rate provided for by the specific Belgian stock option regime?
One of the four conditions for the application of the reduced rate (9% instead of 18%), is that the option relates to the shares of a company (i.e. client) benefiting from the professional activity being performed by the beneficiary of the stock options. Historically, the tax authority has confirmed the application of the reduced rate in specific cases.
The administrative Circular 2017/C/21 of 13 April 2017 issued by the Belgian tax authorities explicitly defines the limits of such a grant. The tax authority considers that from a legal and tax point of view, any grant based on the services delivered through the management company fail to meet the condition of a professional activity performed by the beneficiary required in order to benefit from the reduced rate as it is the management company that delivers services to the client and not the individual manager.
The circular applies to stocks options granted after the date of its publication (13 April 2017). This provision could arguably be interpreted as providing a grandfathering clause to options granted before13 April 2017, so that they might benefit from a reduced rate if the other conditions are met.
Valuation principles applicable for the upfront taxation of stock options granted to Belgian individuals (with the specific stock option tax regime)
- General principles
Stock options which are granted to individuals for their professional activity carried out in Belgium are deemed remuneration in kind, and are taxed at the same rate as ordinary remuneration.
The tax charge arises when the stock options are granted, and not at any later date, provided conditions are met. The tax value of the grant is determined using specific rules. This results in a specific tax regime on stock options granted under qualifying schemes.
- Stock options taxable value
(a) Preferential taxable valuation at 9%
Stock options which are not listed on a stock exchange and which meet a number of conditions listed below will constitute a taxable income amounting to 9% of the value of the underlying share when it was granted. The options which are valued at a rate of 9% are added to the beneficiary’s taxable income.
The conditions for this preferential rate of 9% are as follows:
- the option relates to the shares of the company benefitting from the professional activity performed by the beneficiary (the circular highlights the difficulties of meeting this first condition when the services are provided through a management company), or a parent company of this first company;
- the exercise price is definitively established when the option is granted;
- the options may not be exercised before the third year following the year in which they were granted, or after a period of ten years following the year in which they were granted;
- the transfer of the options may not be permitted except in the case of the death of the beneficiary; and
- between the date when the options are granted and the date when the options are exercised, the value of the underlying shares might decrease. Neither the company granting the options nor a related company can protect the optionholder against this risk of reduction in value.
(b) Ordinary taxable value (valuation at 18%)
If the options do not meet the conditions set above, they will be valued at 18% of the current value of the underlying shares. In the case of options with a lifespan exceeding 5 years, this value has to be increased with an additional 1% for each year or portion of a year after the initial five-year period.
Osborne Clarke can assist you with your stock options, to ensure they are fully compliant with this new administrative point of view. If you would like to discuss this please contact one of our experts listed below.