Box 3 and start-up to scale-up tax reforms put SARs in focus for Dutch employee incentives

Attracting and retaining top talent is expensive. For many Dutch companies, particularly start-ups and scale-ups that cannot yet compete on base salary, equity and profit-sharing schemes have long been the answer. Options, shares, phantom rights, depositary receipts: the range of instruments is well established but is about to be overhauled by two significant legislative developments: "box 3" reform and the new start-up and scale-up option regime. Getting ahead of both could save employees and their companies a substantial amount in tax.

Box 3 in crisis

Box 3 is the Dutch wealth tax on savings and investments held by individuals outside a business. For private equity in particular, where participants may receive a significant return on investment, structuring employee incentives through box 3 has historically been particularly favourable. This is due to the notional return of 6% on shares that forms the basis of the current system. This notional return is taxed yearly at 36%. 

The problem is that the system became legally unsustainable following a Dutch Supreme Court ruling known as the "Christmas judgment" (Kerstarrest) on 24 December 2021. 

The new system 

In January this year, Parliament's lower house introduced and adopted the resulting legislative proposal, the Actual Return Box 3 Act (Wet werkelijk rendement box 3), despite objections over complexity, implementation and the technical abilities of the Dutch tax authorities. 

The new "box 3" system aims to tax actual returns, consisting of both a direct return, such as interest and dividends and an indirect return, such as the increase in value of shares. The value increase of shares would in principle be taxed annually, although for shares in start-ups and scale-ups, a capital gains tax would apply instead; that is, not taxed annually but at the end of the holding period, for example, upon sale of the shares. 

That annual taxation of unrealised gains deserves a moment's reflection. An employee holding shares in their employer's company, even if those shares are locked up and cannot be sold, could face a tax bill on paper gains alone, resulting in a "dry" tax charge; that is, a tax charge without available funds to pay the tax. There is no carry-back relief: if the value subsequently decreases, there is no tax refund.

Due to this new box 3 system, a restructuring of current box 3 incentive plans into a box 1 (SARs or qualifying options (see further below)) or box 2 structure could result in significant tax savings. 

The new regime had been expected to enter into force on 1 January 2028, but the legislative road has been anything but smooth. On 2 September, the Dutch minister of finance recalled the bill before the Senate could vote – and it remains unclear whether a Senate majority exists. 

Box 3 reform has become one of the major points of division between the coalition parties, complicating the finalisation of  the state budget in time and ahead of Budget Day (Prinsjesdag) later this month. With that deadline looming, the coalition appears to have put the reform on hold. The future of the new rules, as a result, is highly uncertain.

Even so, the direction of travel is clear: taxing actual returns on employee equity holdings will become the standard, and that has direct implications for participation plan design.

The case for SARs

Against this backdrop, the Dutch market is ,likely to move towards stock appreciation rights (SARs) schemes, also referred to as "'virtual stock" or "phantom shares", and this shift is already underway.

Under SARs schemes, the employee does not receive actual shares but a cash bonus equivalent to the value of a given number of shares. The plan replicates the financial benefits of stock ownership without issuing actual shares. 

From a tax perspective, SARs carry a compelling set of advantages compared to direct equity.

No box 3 exposure

Because the employee never holds actual shares, the new capital accumulation tax does not apply. Any payment under a SAR is subject to personal income tax and wage tax at the moment an unconditional right to the payment arises.

No liquidity risk

Under the current stock option regime, tax can be due even if the shares still cannot be sold for cash, a cash-flow mismatch that creates real friction for employees. A SAR pays out in cash, so the employees have the funds to meet their tax liability when it arises.

Corporate income tax deductibility

This is perhaps the most underappreciated feature of SARs, and one that matters greatly to a company's bottom line. Cash-related incentives, such as a cash bonus and SARs, are deductible for CIT purposes, provided the employee's salary remains below the €728,000 threshold – . Stock-related incentives, such as options, restricted stock units and performance stock units, are generally not deductible for CIT purposes. 

SARs' advantages 

Taken together, the advantages of SARs are considerable:

• No box 3 exposure: the annual unrealised gains tax does not apply.
• No liquidity risk: cash payout aligns the tax moment with actual receipt of funds.
• CIT deductibility: the payout reduces the company's taxable profits, unlike equity-based instruments.
• Administrative simplicity: no share valuations, no capital structure amendments, no STAK – Dutch trust office foundations – or pooling entities required.

Start-up and scale-up exception

For companies that qualify as start-ups or scale-ups, or just innovative companies in general, the legislative picture is more nuanced, as special incentives are available for these companies.

The Dutch government has published a draft Start-Ups and Scale-Ups Tax Incentive Act (Wet fiscale stimulering startups en scale-ups). Under the proposed scheme, the tax burden on options for employees of start-ups and scale-ups will be reduced from the current maximum of 49.5% to a maximum of approximately 32.17%. This is achieved by taxing only 65% of the benefit derived from employee stock options. It is worth noting that, taking into account the CIT deduction element, SARs may still be more tax efficient, even given the base reduction to 65%. 

Under the draft rules, the taxable moment may be deferred to the point of sale of the underlying shares, instead of the point at which the options are exercised or become tradable. That deferral is significant. It eliminates the dry tax charge that has historically made options unattractive to employees in illiquid companies: the employee only pays tax when they actually have cash in hand from a sale. Up to that point, the options are also not included in the box 3 tax base. 

The proposed effective date of the bill is 1 January 2027, although this may shift depending on the progress of the legislation. 

Who qualifies?

The draft bill's scope extends well beyond what most people would describe as a start-up or scale-up. A company qualifies if it operates using a scalable and repeatable business model arising from innovation. There are no requirements in terms of size, revenue or date of incorporation. 

More specifically, a scalable and repeatable revenue model means the ability to grow revenues rapidly without a linear increase in people, resources or costs, through the use of technology that lowers marginal costs and creates economies of scale. Innovation means developing or improving products, services, processes or technologies involving technical novelty or significant functional improvement relative to the sector. The company must be unlisted, and no more than 25% of its shares may be held directly or indirectly by a listed entity.

However, the definition does seem vague and broad. Qualification is determined by the Netherlands Enterprise Agency (RVO) on behalf of the Dutch minister of economic affairs. A positive determination takes the form of a decision (beschikking) that is valid for eight years from the date of issue and extendable by further five-year periods. Given the scope of the definition, there will be much interest in seeing where the RVO will draw the line when it comes to a "scalable and repeatable revenue model" and '"innovation". 

Qualifying conditions

A qualifying option right should satisfy the following conditions:

• Minimum holding period of two years before exercise. It must be agreed in writing that the option may not be exercised earlier than two years after the date of grant. This is designed to link the tax benefit to long-term commitment and involvement in the development of the company.
• Exercise price at least equal to fair market value at grant. The exercise price of the option must be at least equal to the fair market value (waarde in het economisch verkeer) of the underlying shares at the time of grant.
• Three-party approval procedure for share sales. It must be agreed in writing that, for any proposed sale of shares acquired upon exercise of the option, the employee is required to obtain prior written approval from the employer, evidenced by an agreement signed by the employee (seller), the employer (the start-up or scale-up), and the buyer jointly. This mechanism ensures the employer can withhold and remit the correct amount of wage tax at the moment of sale, even after the employment relationship has ended.
• Adequate record-keeping by the employer. The employer must maintain its administration in such a way that, at any point in time, adequate records of share ownership, option rights and transactions can be derived from it, including records confirming that the approval obligations have been met and that actual transactions are recorded.
• No overlap with the carried interest regime (lucratief belang). The regime does not apply if the option right or the shares obtained upon exercise qualify as a carried interest (lucratief belang) within the meaning of article 3.92b of the Income Tax Act 2001. However, this does not have to be a bad thing as these types of investments have their own tax-efficient way of structuring via box 2 (up to 31%).
• Options only on shares in the employer itself. Unlike the general option regime under the Dutch Wage Tax Act 1964, option rights on shares in the capital of an affiliated company do not qualify. The option must relate exclusively to shares in the capital of the employer itself. This is an important condition as, in practice, shares in non-Dutch parent companies are often issued as remuneration for employees working at the Dutch operating company-level. These types of equity structures should be restructured in order to benefit from the new rules.
• Retrospective application. The new rules may also be applied to option rights granted on or after 17 April 2025, provided those options were not subject to wage tax on or before 31 December 2026 and satisfy all conditions set-out above, with the specific requirement that the RVO application must be submitted no later than 31 December 2027. 

Osborne Clarke comment

Even though this is still draft legislation, it may already be necessary to restructure current incentive plans now in order to benefit from the new rules when they enter into force. 

For most companies that do not qualify as start-ups or scale-ups, SARs are rapidly becoming the instrument of choice. They are tax-efficient for the employee, generate a genuine CIT deduction for the company, and are insulated from the box 3 overhaul.

For qualifying start-ups and scale-ups, the new option regime is genuinely competitive, particularly the combination of sale-linked taxation and the 65% base reduction, though SARs may still be the more tax-efficient route. If your company might qualify, restructuring current option schemes to meet the requirements for the new rules should be an immediate priority.

Either way, the time to review incentive structures is now, before the legislative changes crystallise and the window for proactive planning narrows.

For more information on how these developments affect your company's incentive planning, please contact the Osborne Clarke Netherlands tax team.