Tax

Belgium | Stock options regime: tax free compensation of the employee’s losses

Written on 10 Jul 2018

Under Belgian law, when options are offered and accepted in writing within 60 days following the day of the offer, the participant receives a "benefit in kind", taxable on grant (the Law of 26 March 1999 on stock options). The value of the options granted for a period of 5 years can be evaluated on a reduced, lump-sum basis, equal to 9% of the value of the underlying shares (if certain conditions are met) provided the exercise price equals the value of such shares on grant. If the conditions are not met, the rate is 18%.

The personal income tax payable by the employee on such benefit in kind is a definitive and non-recoverable tax, payable whether the options are exercised or not.  If the options are “underwater” (the exercise price is higher than the value of the underlying shares), the employee would typically not exercise the options and would suffer a loss, equal to the taxes paid on grant.

A recent ruling by the Belgian Tax authority accepts that in the case of underwater options, the employer is allowed to compensate the employee with an amount equal to the loss (generally equal to the income tax paid on grant), without any additional income tax consequences for the employee.

As a result, the employee will not suffer any loss resulting from the benefit of participating in the incentive plan.  In addition to the tax exemption for this cash compensation, the employee will be able to maintain the benefit of the lump-sum valuation of the stock options at 9% (no ‘recapture’ of the other half will occur, as the conditions for the reduced valuation are still deemed to be met). Finally, the ruling committee confirmed that the cash compensation will be tax deductible for the employer. This compensation has to be considered within the rules of the stock option plan.

With this new possibility for the employer to cover the employee’s risk, the Belgian stock options regime is more attractive than ever.