Modification of the deferral regime for stock options in the Netherlands
In December 2000, legislation governing employee stock options became effective which allows employees to choose when their stock options are taxed: on the date(s) the options vest or on the date(s) the options are actually exercised. The legislation was applicable for any options where the taxable event (i.e., vesting for conditional options) occurred after December 28, 2000. This meant that stock options with a vesting schedule whereby a part of the award (for example 25%) had already vested before December 28, 2000 were not covered by the deferral regime. In practice, this led to unreasonable results.
In response to concerns about the applicability of the deferral regime, the Dutch State Secretary of Finance recently published a decree presenting a solution. The new decree indicates that employees can elect for a retroactive deferral of taxation in certain circumstances, provided strict conditions are met. Employees making this election can offset or reclaim taxes already paid in this respect. Please note that the deadline for notifying the tax authorities of this election is January 27, 2003.
To which options does the new decree apply?
The decree only applies to options granted before December 28, 2000, of which one or more tranches vested prior to December 28, 2000.
Consider the following example:
Option grant date:July 1, 1999
Vesting schedule:25% on July 1, 2000
25% on July 1, 2001
25% on July 1, 2002
25% on July 1, 2003
As a result of this new decree, deferral of taxation is now possible for the second, third and fourth tranches. The scope of the election regime is, therefore, widened to all vestings occurring as of December 28, 2000. The decree does not impact any vestings before December 28, 2000.
How does the decree affect social taxation?
Consistent with the existing deferral legislation, the election to defer tax until the date of exercise will only defer National Insurance Contributions since they are incorporated within the wage tax rate. Social insurance taxes will not be affected and will be payable upon vesting (for conditional options), regardless of the election made if the employee’s annual wages are under the applicable ceiling.
What are the conditions needed in order to take advantage of this new decree?
The main conditions are:
- The employee and employer should notify the individual’s income tax inspector in writing about the election, with a copy to the company’s wage tax inspector. The notification has to be signed by both the employee and the employer. Note there is no official form for use in submitting the election. Due to calculations that must be included in the notification (see ‘2’ below), it is recommended that a tax advisor prepare the notification. PricewaterhouseCoopers-Netherlands would be pleased to assist. The tax inspector must receive the notification by is January 27, 2003;
- The notification must include a calculation of (a) the amount that was taken into account as taxable benefit from stock options on the vesting date(s) after December 28, 2000, and (b) the amount of income, which should have been reported if a deferral election was made.
How does the employee get a refund of the excessive wage tax for 2000 and/or 2001?
The employee can reclaim the excess amount of wage tax withheld in 2000 and/or 2001 through the 2000 or 2001 income tax return. If an employee exercised any of their options in 2000 and/or 2001, the amount taxable at exercise should be reported in the income tax return.
How does the employee get a refund of the excessive wage tax for 2002?
If the employee now decides to defer tax until exercise based on this decree and wage tax was withheld on options that vested in 2002, settlement should take place in the 2002 payroll administration of the employer. A number of conditions apply in this case, inter alia, that the payroll administration should contain an overview of the stock option benefits and the settlements made. If an employee exercised any of their options in 2002, the amount taxable at exercise should still be included in the 2002 payroll administration.
What should an employee do now?
If any employee wants to make an election to defer taxation until exercise under this decree, a number of immediate actions need to be taken. First, the tax authorities must receive notification of the election by January 27, 2003. Second, settlement needs to take place in the employee’s personal income tax return (for 2000 and 2001) and/or in the payroll administration (for the year 2002). The payroll administration will still need to process the settlements for 2002. The timeframe is tight, as the annual closing usually occurs in either December or January. Therefore, it is essential that both the employee and the company act quickly to take advantage of this change.
For more information about any of this development, please feel free to contact any of our team members listed on the next page.
Carine Schneider (Partner) / (415) 498-5916Julie Rumberger / (415) 498-5462
(408) 817-4162
Deborah Luby / (415) 498-5621
Siobhan Hurley / (415) 498-5366
Bill Dunn (Partner) / (267) 330-6105
Jill Hemphill (Partner) / (267) 330-6275
AmyLynn Flood / (267) 330-6274
Geoffrey Hammel / (267) 330-6331
Aaron Sanandres / (646) 394-4605
Aldona Gorman / (646) 394-4298
Jason Overmier / (720) 931-7259
Allison Scott / (407) 236-5156
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