Belgian stock option scheme: complex, unfair and outdated ?
In the war for talent, Belgian start-ups are under heavy fire from global tech companies. Stock options are essential in attracting new people, but many claim that the Belgian system is not very competitive. As a result, Belgian tech unicorn Collibra has recently moved their holding company to the Netherlands. From there it will grant stock options to its 1.300 employees, of which about 800 of them are in the US.
In most developed countries, stock options are considered taxable when they are exercised. Belgium, however, knows a special regime that allows for a taxation when the options are granted. The system was introduced with the Belgian Stock Option Act of 26 March 1999. The Belgian legislator had to find a way around the fact that we basically have no capital gains tax. This requires the system to (i) tax stock options at grant, and (ii) ensure a strike price at fair market value. There is also the underlying rationale that the Belgian Treasury prefers to collect taxes today instead of waiting till tomorrow.
The preferential regime is built around the explicit acceptance by the beneficiary within 60 days after the offer is made. If accepted on time, the taxable value is equal to max. 23% of the fair market value of the underlying shares. It can be further reduced to as low as 9% if certain conditions are met. However, if accepted beyond those 60 days, the total gain realized at exercise will be taxed as salary at the standard progressive rates (25% up to 50%).
The absence of a capital gains tax may sound like heaven on earth for founders, but it proves to be a real challenge for many Belgian start- and scale-ups. The fact that the valuation at grant is relatively low, does not avoid taxes are due up front without any guarantee the future stock will ever increase in value. When a start-up valuation is catapulted to unprecedented heights, stock options are often simply refused in view of the immediate financial implications. Many prefer to wait until the moment of exercising the options, which means paying the full rate (>50%) on the realized gain years later. This could easily run into the millions after a successful merger or IPO.
In countries like the US, a stock option grant does not trigger any immediate income subject to taxes. Neither does the option exercise if you hold the stock in the year you acquire it. The taxable event occurs only later when you sell the acquired stock. In that case you can elect to sell only enough shares to cover your exercise costs (incl. income taxes). This is often referred to as a ‘cashless exercise’ as no out-of-pocket payment is required.
The Netherlands will introduce a similar regime as from 1 January 2023 onwards. As of next year, the taxpayer has the choice to pay the taxes upon exercise or postpone this until stock can be sold. In this case, the sale of stock will create additional liquidity for the taxpayer which can be used to pay the income taxes due.
Stock options have become an important tool for attracting the right developers, software engineers, top salespeople, and senior management, both in Belgium and abroad. However, the level of risk embedded in the current Belgian stock option regime is not considered to be very attractive. Despite the high quality of the Belgian start-up scene, companies have a difficult time attracting the right talent. With a tidal wave of venture capital and investors pumping approx. 1.4 billion into start-ups in 2021, you would really expect the opposite.
Belgium has already taken several initiatives to create a more competitive business environment, like the tax shelter for start-ups and an R&D tax credit. However, the result is often a complex maze of regulations to please everyone left, right and in between. When a certain rule is implemented to which everyone consequently adapts, the rules are changed again a few years later. The scheduled overhaul of the royalty tax regime is a good example of this. Legal uncertainty is the worst-case scenario for any entrepreneur, which may result in more sparkling tech stars leaving the Belgian sky…