Belgium intends to amend the stock option law and create a legal frame for equity incentives

The Ministry of Finance recently disclosed the first wave of the reform of the Belgian personal income tax system. This alert summarizes the main impacts of the proposed reform with respect to equity based compensation. It is important to note that these propositions are not yet voted and should still pass through Parliament, with possible adjustments and corrections.

The Minister of Finance aims to have a more fair, neutral and modern taxation scheme in Belgium.

Although the current stock option legislation is as a general rule maintained in the proposed reform, it is also considered as giving rise to abuses, notably with respect to stock options/warrants on third party shares or funds. The proposals therefore aim to tackle these third party stock option schemes.

Alongside those amendments to the existing taxation regime for stock-options (II), the draft introduces a legal framework for all type of employer based equity incentives (I), including on the one hand a deferral of taxation until the moment of sale of the shares, but on the other hand also introduces a capital gain’s taxation for increase of value between grant/vesting and sale of the shares. Finally, the Minister also proposes clarity on the tax rules around the treatment of management incentive plans that yield an excess Return on Investment for the beneficiary as compared to an internal investor (MIP) (III).
 

1. Legal framework for employer equity incentives

A legal framework will be introduced for all types of employer equity-based compensation (free shares, discounted shares, …).

The Minister’s intention is to defer the taxable event to the moment the beneficiary actually realizes cash from the sale of shares. The taxable benefit at sale will be determined as the difference between the fair market value at the time of the acquisition/vesting of the shares and the acquisition price (for free shares, the acquisition price is EUR 0). Such benefit would be considered as professional income subject to the progressive tax rates.

In case of a decrease of the value of the shares after the share was acquired/vested, the taxable benefit would be limited to the difference between the sale’s price and the acquisition price.

As a trade off for the deferral of taxation as professional income until the shares are sold, a potential capital gain (i.e. sales price minus fair market value at the time of acquisition/vesting) would be taxed at a rate of 15%. Until today, such capital gain is generally not taxable.

Example 1 – An employee receives 10 free shares from his employer in 2023. The fair market value of one share at the time of grant is EUR 20. The employee sells the shares at price of EUR 25 per share in 2027. The following income taxes are due in 2027: EUR 100 as professional income tax (i.e. 10 shares x EUR 20 x 50% tax rate) and EUR 7,5 as a capital gain’s tax (i.e. 10 shares x (25-20) x 15% capital gain tax rate).

Example 2 – An employee receives 10 free shares from his employer. The fair market value of one share at the time of grant is EUR 20. The employee sells the shares at price of EUR 17 per share in 2027. The following income taxes are due in 2027: EUR 85 as professional income tax (i.e. 10 shares x EUR 17 x 50% taxes) and no capital gain’s tax in the absence of a capital gain.

From a corporate tax perspective, the Minister of Finance’s proposal reverses the tax authorities’ current position and clarifies that all types of employer equity incentives shall be deductible from a corporate tax perspective.
 

2. Taxation at grant for stock-options

The proposed tax reform maintains the current possibility for stock options to be taxed at grant. Beneficiaries can still benefit from the notional taxation at grant if they accept the options in writing within 60 days.

However, changes are proposed to avoid what is considered unintended abuse of the stock option legislation with respect to third party options:

• The taxation at grant regime is only applicable to options on shares of the employer or a related group company. Over-the-counter options on third parties stock can no longer benefit from this favorable treatment. This is intended to bring an end to the use of third party warrants and fund options.

• The regime is only open to non-transferrable options.

• If there is a “certain” advantage when issuing the options, this advantage will in any event become taxable, and not only to the extent it exceeds the notional benefit in kind.
   

3. Equity-based management incentive plans

The proposed measures also aim to tackle what is considered as excess return on investment of management incentive plans. Management incentive plans typically require the manager to make a personal investment to become a shareholder and benefit from the growth of the company at exit. The Minister’s intention is to tackle complex schemes and compare the return obtained by the manager on the management incentive plan received from their employer with the return obtained by a third party. Any excess (“surplus”) is deemed to be linked to their professional activity hence subject to taxation as employment income at a specific flat rate of 35%.
 

4. Conclusions

With this reform the Minister of Finance intends to maintain the choice for a taxation at grant or exercise for “employer” stock options, but wants make an end to what is considered abuse of the stock option legislation for warrants and fund options on third party shares/funds. Therefore, Belgian employers should revisit bonus schemes that are delivered under the form of third party warrants or fund options.

For other types of employer based equity incentives – i.e. free/discounted share grants or stock options not falling with the taxation regime at grant – the proposed measures foresee a taxation at the time of sale of the shares, rather than at the time of acquiring the shares. The trade off for this deferral of taxation is the introduction of a 15% capital gain’s tax. This will however also require a complex administration and reporting burden for the taxpayer though the annual tax return filing, and is potentially the first step towards the introduction of a general capital gain’s taxation.

Furthermore, explicit guidelines are now issued for carried interests within management incentive plans in order to tax “excessive” return on investments as compared to shareholders who do not have a function with the company.

The proposal still needs to pass through parliament and one can question whether the objective of simplification is achieved, and also whether the current state of the proposals does not create a discrimination between shares acquired through an employer incentive scheme and shares acquired through private investment. This possible discrimination would also be in contradiction with the objective of increasing employee participation to the company’s capital and profit. It is therefore not unlikely that remediation measures to the draft law will be proposed.