In a circular letter of 13 April 2017 (nr. 2017/C/21), the Belgian tax authorities further clarify the tax treatment of stock options granted to managers who work with a management company.
According to the Belgian stock option law of 26 March 1999, private individuals (employees and self-employed) who receive stock options as part of their remuneration package can, under certain conditions, benefit from a more favorable tax regime.
In brief, the stock options are taxable at grant on a lump sum basis, whereby any gains resulting from the exercise of the options and/or from the sale of the underlying shares later on, remain in principle tax-free.
The taxable amount is equal to 18% (or, under certain conditions, to 9%) of the fair market value of the underlying shares. If the option is exercisable during a period of more than five years, the taxable amount increases by 1% (or, under certain conditions, by 0.5%) for each year that exceeds the five-year period.
However, this special tax treatment only applies to options that are granted to private individuals. Options that are granted to (management) companies do not fall within the scope of the Belgian stock option law and are generally subject to a less favorable taxation. In that scenario, a taxation would also take place at exercise or sale of the options, no longer at grant.
For that reason, many companies therefore prefer to directly grant stock options to managers as private individuals, rather than to a management company instead.
In practice, the tax office has accepted in the past, that a grant to a management company could benefit from the more beneficial lump sum taxation, but only on the condition that (i) the management company was a board member of the company to which the options on shares were granted; and provided that (ii) the manager as a private individual qualified as the ‘permanent representative’ of his management company.
The downside of this was that these ‘direct grants’ could not benefit from the beneficial reduced valuation of the underlying shares at 9%, since the relevant options would not relate to shares of the company on behalf of which the relevant private individuals exercised their professional activities, which is one of the conditions set by the stock option law to allow for the reduced tax valuation rules to apply.
The reason for this is that the manager obviously only works for his management company, not for the company to which the granted stock options relate. Furthermore, the circular also mentions that it is not relevant whether this manager is also appointed director of the underlying company or not.
The circular letter of 13 April 2017 now puts a halt to this administrative tolerance and explicitly states that stock options that are granted directly to the manager, as a private individual, of a management company can no longer benefit from the reduced valuation rules.
This nevertheless still allows the possibility for a ‘direct grant’ under the Belgian stock option law. The only consequence is that the taxable benefit in kind resulting from such grant to a management company will now in all cases be equal to 18% of the fair market value of the underlying shares and not to the reduced rate of 9%.