Belgium: New tax position on cashing out of stock options raises planning opportunities

Estimated reading time 6 minutes

The generally accepted position that such payments for the release of stock options should be treated as ordinary taxable income, except in some specific company restructurings, has now been revised following a recent tax ruling

Facts

Employees of a Belgian company, which was part of an international group, were granted share options by a non-Belgian group affiliate.  The share option plan was managed outside Belgium. Most of the employees accepted the options within 60 days of their grant.  By doing so, this meant that they were subject to a tax charge at the date of grant of the options, in accordance with the provisions of Belgian legislation as at 1999.  This provides for a charge to tax based on a favourable lump sum valuation of the benefit. Further details of how this charge to tax operates are set out below.

Following the subsequent takeover of the group, all share options were cancelled in accordance with the provisions of the plan.  The employees received a cash allowance from the foreign company equivalent to the difference between the exercise price of the options and the market value of the shares under option on the date of cancellation.

New ruling of the Belgian Office for Advance Rulings in Fiscal Matters

The Service des Décisions Anticipées (Belgian Office for Advance Rulings in Fiscal Matters) (“SDA”) ruled on, 31 March 2009, that, in such circumstances as described above, payment of an amount to the option holders upon cancellation of their options does not trigger any charge to tax as professional income if the option holders were taxed on their options in accordance with the Belgian legislation of 26 March 1999.

The taxable benefit resulting from the grant of share options must, in principle, be calculated (according to the law of 1999) based on the value of the underlying shares and taking into account a fixed percentage of 15% (increased by 1% per year for each year the option is exercisable after a period of five years from grant).  However these percentages are halved if several conditions are satisfied, including the fact that options may not be transferred or assigned by the option holder.  As a result of the characterisation given by the SDA in this case, one of the conditions for the lower valuation will no longer be met, such that there must be a revised calculation of the initial amount of tax paid

Therefore, as the taxable benefit on grant was initially valued on the basis of reduced percentages of 7.5% and 0.5%, as set out in article 43, §6 of the Law of 26 March 1999, the beneficiaries must be taxed again on an additional equivalent amount.  Despite the fact that the share plan was managed abroad and regardless of the fact that the share plan was cancelled, the Belgian employing company was required to report this additional benefit on its year-end individual salary sheets.

Analysis

In this case, the SDA considered that the amount paid for the cancellation of the options should be regarded as a “transfer” of options arising as a result of, or in relation to, the performance by the recipient of a professional activity.  According to the SDA, “this means (as a general rule) that the withdrawal of the benefit (...) will be taxed, regardless of when the ‘cash cancellation’ takes place, however only if a cash payment indeed takes place”.

Nevertheless, since the SDA characterised the allowance as the “counterpart to [a] transfer of stocks”, it ultimately ruled in favour of its exemption.  This characterisation of the allowance as a “transfer price” allows for full exemption of the amount paid on cancellation of the options, in accordance with the provisions of the law of 1999.

However, the 50% reduction of the valuation of the taxable benefit that may have been applied at grant must be withdrawn.

The ruling also clearly states that this supplementary taxable benefit must be reported by the Belgian employer on a tax sheet if the allowance is paid by a foreign company.  This is a very strict application of article 44 of the Law of 26 March 1999.

Commentary

The ruling is innovative and very interesting as the handling of payments received as a result of, or in relation to, the cancellation of share options is the subject of frequent discussions with the Belgian tax authorities.

The ruling could allow for substantial tax savings when the increase in value of the underlying share is greater than the result of the initial percentage of 15%+ or 7.5% applied to the initial valuation.  It also applies to all Belgian companies, regardless of whether shares are publicly traded or not.

As a matter of practice, in order to avoid protracted discussions with the Belgian social security authorities, companies should continue, where possible, to manage their cancellation program outside Belgium without recharging any cost to the Belgian affiliate.  This approach is also recommended to ensure that payroll tax does not have to be deducted within 15 days of the month following the one in which the allowance is paid.

However, it is also important to note that this is not an optional regime which a company can refuse to apply if the amount paid on cancellation of the option is lower than the initial taxable lump sum benefit applied at grant.

Though the decision is silent on the characterisation of the payment as the “counterpart to [a] transfer of stocks” which resulted in the SDA favouring its exemption, this seems to result from the application of article 42, §2 of the Law of 26 March 1999.  According to this provision, “the benefits obtained in the event of the transfer of an option, the exercise of such option or the transfer of the stocks acquired as a result of this exercise do not constitute any taxable professional income”.

Resources

The Service des Décisions Anticipées (Belgian Office for Advance Rulings in Fiscal Matters) ruling no. 900.045

For further information or to discuss any of the issues raised please contact Jean Louis Davain (jean-louis.davain@loyensloeff.com) on +32 2 743 43 45.

This article was produced by, and re-produced with kind permission of, our correspondent firm in Belgium, Loyens & Loeff.  www.loyensloeff.com