Many employers in the Netherlands offer some type of employee participation plan. This article discusses the more commonly used forms of employee participation plans, the wage and income tax consequences of those participation plans, and what happens when the employee leaves the Netherlands.
Employers are, more than ever, challenged to recruit, engage, and retain the most talented employees in the Netherlands. A salary alone is not enough nowadays; talented employees want to participate in the company’s financial growth. Employees with “skin in the game” will put in more effort, work harder, and will be more connected to their jobs.
Widely used employee participation schemes
The Netherlands provides numerous employee participation schemes. Usually, the contractual rights for employee participation are included in an employee participation agreement between the employer and the employee or there is a general scheme/plan and every employee becomes a participant via an individual participant agreement. The employee participations plans that are most frequently used include:
- Share awards
- Options over shares
- Employee stock purchase plans (ESPPs)
- Restricted stock units (RSUs)
- Stock appreciation rights (SARs)
Some employee participation schemes aim to enable employees to own shares in the company. Others merely aim to deliver cash based on the company’s value growth. For example, with some of these schemes, the SARs will lead to a cash payment (like a bonus) that is linked to the company’s increased (share) value. With “cash-based” plans, the employee will not become a shareholder of the company. Sometimes, the employee is offered the choice to receive shares or cash.
The problem with participation schemes that deliver shares or similar, rather than cash, is often that the shares are a taxable benefit in kind, generating tax due in cash. This may lead to a significantly reduced net salary or even a negative net salary in the month in which the share awards are subject to wage tax. This can be especially difficult if the shares are not listed on an open stock market and/or are not readily available for sale.
Independent contractors, officers, or any other individual rendering services to the company aren’t ruled out from participation schemes. However, for employees that participate in such a participation plan, the tax consequences in the Netherlands may be different and they should seek professional tax advice.
Wage tax consequences in the Netherlands
In principle, everything an employee receives from an employer is taxable wage in the Netherlands. Consequently, the taxable wage should be processed through payroll, where Dutch wage taxes are withheld and employee social security contributions are remitted (if applicable). With respect to employee participations, the taxable moment and consequently the taxable value can differ by type of employee participation, as discussed below.
The taxable moment for the taxation of shares is the moment when an employee receives or buys the shares. The taxable value is the fair economic value of the shares at the moment they are granted to the employee, minus the purchase price (if any) of the shares. In principle, the employer will process this through the Dutch payroll system at that moment as a benefit in kind.
Options over shares
As of 1 January 2023, the taxable moment of options in the Netherlands is, by default, the moment the shares received by exercising the options become tradable. As soon as the shares received become tradable, this will create a taxable event for Dutch wage tax purposes. This moment can be simultaneous with the date of exercise of the options. If this applies, the taxable amount is the amount of the options exercised, multiplied by the exercise price, minus the option exercise price paid.
If the moment when the shares become tradable does not coincide with the moment of exercise (for example, when contractual restrictions or insider trading rules prohibiting the sale of shares apply), the moment the shares do become tradable is the taxable moment. The taxable amount is the economic value of the shares at the moment they are tradable minus the exercise price paid. Any dividends paid during the period between the exercise of the option and the moment the options become tradable are considered taxable as wages. In both situations, the employer should process this as such in Dutch payroll, to calculate the wage taxes due.
Employees still have the opportunity, offered under tax law, to place the taxable moment at the moment they exercise the options. If an employee would like to use this opportunity, they need to make sure that the choice is made in writing to their employer before or at the moment the options are exercised. It may be beneficial to choose this option when you expect the share price to increase in the future or if substantial dividends will be paid before the shares acquired through exercise become tradable.
ESPPs usually allow employees to elect to save a certain percentage of their net earnings during a certain period, usually six months. At the end of the six-month period, the accumulated savings may be used to purchase shares in the company at a discount. Such an ESPP falls under the wage tax law, is considered to be an option, and is taxed accordingly. Employers should process the ESPP through Dutch payroll at the moment the taxable event occurs.
An RSU usually is a promise to exchange the RSU for actual shares in the company once some conditions have been met - known as “vesting.” The taxable moment for RSUs is usually the moment when they vest and become unconditional. The fair market value at the moment of vesting of the shares delivered in exchange for the RSU minus any amount paid to obtain the shares is the taxable wage. The employer should process this through Dutch payroll at the moment the taxable event occurs.
SARs are contractual rights that entitle the employee to a payment in cash equal to the value appreciation of a specific number of shares in the company over a certain period. The taxable moment in the Netherlands occurs at the moment the employee receives the cash payment with respect to the SARs from the employer. The employer should process this through the Netherlands payroll at the moment the taxable event occurs.
The 30% ruling is a Dutch tax exemption for employees who were hired abroad to work in the Netherlands. Subject to various conditions, an employer can pay 30% of an employee’s salary as a tax-free allowance. The 30% ruling makes it possible for foreign workers with specific expertise and salary levels to pay no tax on 30% of their income for a maximum of five years.
For an individual employed in the Netherlands who has a valid 30% ruling grant letter from the Dutch tax authorities, the ruling in principle will be applicable to a taxable employee participation in the Netherlands.
As of 1 January 2024, the applicable wage for the 30% ruling will be capped at the “Balkenende norm” -- EUR 223,000 in 2023 and indexed as of 2024. No transitional law applies if the 30% ruling was granted after 1 January 2023. For those who were granted a 30% ruling before 1 January 2023, the cap will not apply until January 1, 2026.
Income taxation in the Netherlands
Once an employee’s participation has been subjected to wage tax, the net remainder (shares or cash) will be taxed in Box 3 – the Netherlands’ wealth tax regime -- for the period that the employee qualify as a tax resident of the Netherlands. Box 3 taxation is based annually on the 1 January fair value of the total assets/savings minus the loans (although at the moment Box 3 taxation is under a high level of uncertainty) and should be reported in the personal Dutch income tax return.
Employees who have a 30% ruling, or who are not Netherlands residents, will most likely not be subject to Box 3 taxation over the net remainder of their participation.
Leaving the Netherlands and still participating in the company
If an individual leaves the Netherlands and continues to participate in an employee participation scheme, receiving shares or cash will still lead to taxation in the Netherlands and possibly in the individual’s new home country as well. To avoid double taxation, it is recommended that the personal situation be reviewed, as every country has its own tax legislation regarding employee participations.
Broadly speaking, the Netherlands will seek to tax individuals at the moments described above, depending on the type of plan that individual participates in. If the individual’s salary was subject to wage tax in the Netherlands at any time between the grant of the participation award and the moment the award vested, the individual will be taxed in proportion to the time spent in the Netherlands between the award date and the vesting date.
In those cases, individuals should contact a tax advisor who specialises in cross-border situations for employees.
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