On April 13th 2017, the Belgian tax administration has published a new circular letter (Circular letter 2017/C/21 dd. 13 April 2017) in relation to the tax treatment of stock options that are granted directly to managers (physical persons) who operate through a management company.
This circular letter follows from the controversy that arose at the end of last year in this respect, and confirms that such grants cannot benefit from the beneficial reduced tax valuation rules for the purposes of the Belgian stock option law. Interestingly, this position only applies to options that were offered after the date of publication of the circular letter (13 April 2017). This seems to imply that direct grants that were made before (or even on) this date may still benefit from the former practice of the tax administration whereby the more beneficial valuation for tax purposes was accepted under certain circumstances.
The Belgian stock option law of 26 March 1999 provides that, subject to certain conditions, the grant of stock options to physical persons can benefit from a special tax regime. This regime basically implies
- that the benefit in kind resulting from the grant of the options is taxable at grant, and that any gains resulting from the exercise of the options and/or from the sale of the underlying shares remain, as a matter of principle, free of tax; and
- that the benefit in kind resulting from the grant of the options is determined on a lump sum basis. The taxable amount is equal to 18% or, subject to conditions, 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, subject to conditions, 0.5%) for each year or part of a year that exceeds that five year period.
The above-mentioned special tax regime only applies to options that are granted to physical persons. Options that are granted to (management) companies are out of scope of the stock option law and are generally subject to a far less favorable tax treatment.
In situations where members of management operate through a management company, many companies have – for the reasons set out above – chosen to directly grant stock options to the underlying managers (physical persons) of that management company rather than to the management company itself.
The main downside of such way of working was that, as a matter of principle, such ‘direct grants’ could not benefit from the beneficial 9% valuation of the underlying shares (i.e. since the relevant options do not relate to shares of the company to the benefit of which the relevant physical persons exercised their professional activities, which is one of the conditions for the reduced tax valuation rules to apply).
In practice, the tax administration however accepted that in certain circumstances, such type of grant could benefit from the reduced valuation rules (e.g. where the management company was a board member of the company to the shares of which the options related, and provided that the underlying manager-physical person qualified as the “permanent representative” of his management company for these purposes).
The circular letter of 13 April 2017 now puts a halt to this (informal) practice and clearly states that stock options that are granted directly to the underlying manager (physical person) of a management company can no longer benefit from the reduced valuation rules. This does however not take away from the fact that as a matter of principle, direct grants under the Belgian stock option law remain possible and permitted. The only consequence of the circular should be that the taxable benefit resulting from such direct grants will now in all cases be equal to 18% of the fair market value of the underlying shares rather than 9%.
The circular applies to stock options that are offered after the date of its publication (i.e. 13 April 2017). This seems to indicate that options that were offered directly to the managers (physical persons) of management companies on or before that date may still benefit from the reduced valuation rules (provided of course that the relevant conditions were met – see above).
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