Employee Stock Options (ESOPs) are a type of equity compensation that companies grant to their employees and executives. The employee is offered the right to buy a specific number of shares of company stock, at a specified price, within a certain time frame. The general purpose is to acquire company shares at a discount or free of charge, and this in view of potentially realizing a capital gain in case of a future sale (IPO, merger, etc.). In many multinational companies, stock option plans are used to reward, bind, and motivate key employees.
Instead of granting shares directly, the company gives equity options, which is a derivative that obtains its value from the underlying stock. This ‘call’ option can apply to existing shares or give a right to subscribe to newly created shares in case of a capital increase in the future. In that case, they are called (stock) warrants. The employee will be given the right to buy the company’s stock at a pre-determined price (strike price) on or before an expiration date. The terms and conditions of the options granted are typically laid down in an Employee Stock Option Plan (ESOP) or a Long-Term Incentive Plan (LTIP).
In most countries, options are considered taxable when they are exercised. Belgium, however, has a special regime in place that allows for a taxation when the options are granted. According to the Belgian Stock Option Act of 26 March 1999, employees and managers who receive stock options as part of their remuneration package can, under certain conditions, benefit from a more favourable tax regime and even a full exemption from social security contributions. For the preferential regime to apply, the options must be explicitly accepted in writing by the beneficiary within 60 days after the offer is made.
As the taxable moment will occur when the options are granted, no taxes will be due after that. From a Belgian perspective, the future vesting, exercise, or sale of either the options or the underlying stock, will have no further tax implications for the employee.
At the time when the options are granted, the taxable value (benefit in kind) is equal to 18% of the fair market value of the underlying shares if the shares are not publicly traded. If the options can be exercised for a period of more than five years, the taxable benefit is increased with 1% per year beyond this 5-year period. The above rates can be reduced to resp. 9% and 0.5% if the following conditions are met: (i) the options apply to shares in the employer’s capital (or a group entity); (ii) the exercise price is determined upon granting; (iii) there is no hedging against a potential decrease in value; (iv) the options cannot be exercised the first 3 years after the offer is made or after the 10th year; (v) the options granted are non-transferrable.
The benefit itself will be taxed as professional income at the standard progressive rates (25% up to 50%) and increased with a local surcharge. No social security will normally be due.
TAXPATRIA® can advise on the tax implications of your company’s ESOPs and LTIPs and assist with the payroll withholding and income tax filing requirements.