A government proposal regarding new legislation with respect to stock options and stock plans was announced in the Belgian press last week. Below you can find a short overview of the proposed changes with some initial high-level reflections. It is however important to note that no texts are currently available and that it is currently not certain whether this proposal will eventually be launched in its current format and if there is ultimately an agreement. We will provide additional updates once more information becomes available.
- The new proposed law would grant employees a choice to be taxed at grant or exercise. The current legislation (Law of 26 March 1999) already provides for a taxation at grant in case the stock options are accepted in writing within 60 days following the offer date. Stock options that have not been accepted in writing by the 60th day are considered as deemed refused and do not fall within the Belgian stock option legislation. In practice, the purchase of shares provided by deemed refused options are today regarded as an acquisition of shares at a discounted price, taxable at exercise. The proposed legislation would make it so that the beneficiary can choose the tax regime irrespective of how and when the beneficiary accepts the offer. This can unfortunately result in significant unwanted additional costs for the employer in the form of employer social security contributions.
- Stock options could no longer be transferred or sold. This is aimed at ending the system of paying out annual bonuses (short term incentives) in the form of warrants or OTC-options to realize a savings of social security contributions and income tax contributions. Paying out bonuses in cash would result in an increased social security burden for both the employer and employees. In case the current applicable tax brackets would not be adjusted downwards together with the introductions of the amendments of the current stock option legislation as part of the broader tax reform the net remuneration of employees would decrease.
- A second use of the stock option legislation is in the context of Long-term incentives. The new legislation would only be applicable in case the shares underlying of the options are those of the employer or an operational entity of the group to which the employer belongs. The current law of 26 March 1999 already states that the reduced valuation is only applicable if the underlying instrument is of the employer or an entity above the employer, but who is within the group to which the employer belongs, but does not exclude offers on instruments of other entities (co-investment vehicles, passive holdings, etc). The proposed legislation would make reference to an operational entity. It is unclear what will be considered an operational entity. As a result, amongst others, passive holdings might not be deemed as operational entities.
- In this context, the specific tax regime would no longer be applicable for individuals working via personal services companies as their own management company does not belong to the group of the entity whom they provide services to.
- Under the new proposed legislation it would no longer be possible to grant a “benefit certain” based on article 43, §8 of the current stock option legislation. Based on the current legislation, a so-called “benefit certain” that does not exceed the amount of the taxable benefit in kind is not considered as taxable. A benefit certain is amongst others used to increase participation rates of long term incentive plans by foreseeing that under specific limited circumstances the tax paid at grant could be compensated in case the options lapse.
Proposed specific tax regime for free grant of shares
The proposed legislation would also implement a new specific tax regime for the free grant of shares. Under this proposed new legislation, the taxation of the free grant of shares, share certificates or profit certificates would be deferred until disposal of the instruments. Under the Belgian legislation no such deferral of taxation is in principle possible, instead taxation arises immediately at grant provided the ownership is transferred at that moment in time. Due to this the use of restricted stock units is more common in Belgium. Restricted stock units are a promise to grant shares for free at a later moment in time provided the employee is still in service. Different from RSUs, even though taxation is deferred, the ownership of the share would be transferred immediately resulting in the voting and dividend rights to be immediately owned by the beneficiary.
If there was a decrease in value since the share was granted then taxation as professional income is limited to the actual value of the share upon disposal.
If there was an increase in value since the share was granted then taxation as professional income is limited to the value of the share at the time of grant and the portion above that is treated as taxable miscellaneous income taxable at 15 pct.
The fact that any increase in value is taxed at 15 pct is inline with the intent of the Minister of Finance to implement a capital gain tax of 15 pct.
Currently, it is unclear what the Belgian social security treatment would be for this potential new regime nor whether along with the introduction of the 15% taxation for this specific regime, a general taxation of capital gains will be introduced without broader tax reform.
Finally, it is unclear whether there will be any other requirements like having to offer the plan to all employees, a specific category of employees, etc.