Stock options and management companies: new Circular Letter clarifies lump-sum valuation

Stock options are not only a great way of incentivizing personnel, the beneficiaries can often also benefit from a favorable tax treatment when they are granted the options. Indeed, beneficiaries of stock options are not taxed on the fair market value of the benefit received, but on a (lower) lump-sum benefit at the moment of the grant. A new Circular clarifies how that lump-sum benefit must be calculated when the options are granted directly by an operational company to the manager of a management company.

Preferential tax regime for stock options

The preferential tax regime for stock options was introduced with the law of 26 March 1999 (the “Law on stock options”).

The scope of the Law on stock options is rather broad and allows – according to some – that the preferential tax regime is also available when the options are conferred by an operational company to a manager (individual) of a management company that offers, on its turn, management services to the operational company. In other words, the existence of the management company is ignored for purposes of the grant and the options are deemed to have been attributed directly by the operational company to the manager.

Percentages halved: also for managers of management companies?

If the conditions laid out in the Law on stock options are met, the taxable advantage for being granted stock options is calculated on a lump-sum basis at the moment of the grant. That taxable advantage is, in principle, fixed at 18% of the underlying value of the stock to which the options relate. This percentage can be reduced by 50% if certain conditions are cumulatively met. One of those conditions is that the stock options must relate to “stock of a company for the benefit of which the professional services are performed or to stock of another company that is directly or indirectly affiliated with the former company”.

When we assume that the manager (individual) working for a management company that, in its turn, provides management services to an operational company, can benefit from the preferential tax regime of the Law on stock options, then the aforementioned requirement to benefit from the reduced percentage cannot be applied. After all, that manager does not perform its services to the operational company (the shares of which the options relate to) but to the management company.

Nonetheless, the Central Tax Administration allowed for the reduced percentage in the abovementioned case, but only if certain conditions are met:

  • The management company cannot only deliver (management)services to the operational company but also needs to be a statutory director of the latter
  • The manager (individual) is a permanent representative of the management company
  • The options are retained for a minimum of 3 years

New Circular puts a halt to discussion

The viewpoint of the Central Tax Administration gave rise to ample debates. Clearly there was no consensus on this topic within the tax administration. The Ministry of Finance announced in the press that the stock options should, in these cases, be granted to the management company rather than directly to the individual manager. As a result, he stated, the reduction of the lump-sum taxable benefit by 50% cannot be applied to this case.

The Minister also announced that official administrative guidance on this matter would be issued in the form of a Circular Letter. That Circular Letter now has been published, on April 13th. The full text is available here. In the Circular Letter it is clarified that the reduced percentage to calculate the lump-sum advantage can indeed not be applied in the case at hand since the condition that the options must relate to the company in which the beneficiary is performing the services is not met.

It is remarkable, however, that the Circular is less restrictive then the Minister of Finance initially announced. Indeed, the Minister initially stated that, when granting stock options directly to the manager of the management company, the taxable benefit should be calculated on the basis of the fair market value of the underlying shares to which the options relate at the moment of the grant. In other words, in the original viewpoint of the Minister, the lump-sum valuation of the taxable benefit as provided for in the Law on stock options cannot be applied to the case at hand. In the Circular Letter this statement was softened by allowing for the lump-sum valuation to be applied, but denying the benefit of the reduced rate to calculate such benefit.

The Circular Letter applies “to stock options granted after the publication of the Circular Letter”. As a result, managers (individuals) that have been granted stock options prior to (or even on?) 13 April 2017 can still benefit from the reduction of the lump-sum benefit with 50%.

What about stock options granted directly to the management company?

The beneficial tax regime of the Law on stock options is only applicable to options granted to individuals (natural persons). As a result, the granting of stock options to legal entities is explicitly excluded from the scope of application of the law.

A recent ruling (2015.532 of 2 February 2016) clarifies the tax treatment when the stock options are granted directly to the management company. In this ruling, the management company had the opportunity to acquire stock options. That management company, however, was not granted those shares without any consideration but had to pay a premium to the issuer. From the narrative of the ruling it can be concluded that ample discussions had taken place between the parties to determine the premium. This observation allows the Ruling Commission to consider that the premium was at arm’s length and therefore could neither give rise to a so-called abnormal or gratuitous advantage received (article 207 ITC) nor result in the recognition of a taxable profit (article 24, par. 1, 1° ITC) in the hands of the beneficiary.

The abovementioned ruling suggests that in case the stock options are granted without consideration, in the eyes of the Ruling Commission there is a necessity of immediate profit recognition in the hands of the beneficiary, thus resulting in taxation. This is exactly what is confirmed in another, more recent ruling (ruling 2015.508 of 12 April 2016). In light of the GIMLE case of the European Court of Justice (case C-322/12 of 3 October 2013), however, it is doubtful whether such position is correct. A saga undoubtedly to be continued … .