Many companies want to provide long term incentives to their employees, which are related to company stock. To this purpose a stock option plan, a share purchase plan or other share based remuneration scheme can be set up.
It is, however, not always possible for an employer to use actual company shares to be used in such a scheme. For example when the company’s shares are not quoted on any stock exchange, company shares may not be available to be used in a share plan. As an alternative to an actual share plan, use could be made of so-called Stock Appreciation Rights (SAR) or Phantom Shares.
A Stock Appreciation Right strongly resembles a stock option, but instead of actually selling shares to the beneficiary, an entitlement is granted to a future cash payment. Under a SAR there are no share transactions with the employee, but only cash payments. The amount of the cash payment is dependent on the evolution of the value of the company or of company shares. Also similar to stock options, there usually are a number of conditions to be met before the actual cash payment will be earned and paid out.
In this way, a SAR can be defined as:
In Belgium, SAR are not a common long term incentive. It can, however, occur that individuals, who are employed within a multinational group of companies receive SAR from the foreign parent company or head office of the Belgian local subsidiary or branch office.
The question then arises as to the tax treatment in Belgium of the benefits, derived from the SAR scheme. More specifically one has to determine the moment on which the benefit becomes taxable (at grant, at vesting, at exercise….) and the amount of income on which tax is due.
Ruling request – plan features
An interesting ruling was issued in 2013 by the Belgian tax authorities relating to a foreign SAR scheme, where benefits where granted to Belgian beneficiaries.
In the case at hand, the SAR were offered to Belgian beneficiaries by the foreign parent company of the Belgian employer. Upon vesting (i.e. when the conditions of the plan are met), the beneficiaries may receive a cash payment, which then is not made by the foreign parent company, but which is directly paid out by the Belgian local employer. All beneficiaries were private individuals, who were residing in Belgium and who were subject to the normal Belgian income taxes for resident tax payers.
In order to increase employee retention, a vesting period was defined under the SAR scheme. The beneficiaries could only exercise their entitlements after a period of time and provided that they were still employed by the company at the moment of vesting of the SAR. Employees, who would in the meanwhile leave the company would lose any unvested rights (and future cash payments) under the scheme.
Employees could participate in the scheme on a voluntary basis, by accepting a formal SAR grant within a period of 90 days. The SAR could not be transferred by the employee (except in case of death, where a transfer would me made to his heirs).
The plan had a vesting scheme over a period of 3 years: after each year 1/3 of the SAR grants did vest (i.e. the related rights to cash payments were definitively acquired by the beneficiary). In special cases, vesting was accelerated (death of the employee, incapacity to work due to accident or illness, retirement or take over of the company).
At the moment of vesting, there was no automatic payment of the cash remuneration. The beneficiary still had to ask for the payment (through a formal exercise notice) and could do so up to 10 years following the grant of the SAR (except in case of dismissal for cause, as a result of which the unexercised SAR entitlements were lost).
In case a beneficiary wanted to receive the cash payment (after the vesting took place), a formal exercise notice needed to be filed and payment would be made within a period of 10 days following the exercise moment. The cash payment was equal to the increase in value of the company’s shares between the moment of grant and the moment of exercise. It could therefore be beneficial to the employee not to immediately exercise vested SAR as the value of the underlying shares could still increase through time.
All entitlements under the scheme were lost either:
In case of termination of the employment by the employer for cause, all entitlements were lost. This did not only apply to unvested SAR, but also to SAR which had already vested but were not yet exercised. The Belgian employer had made an exception to this part of the plan and had confirmed that in case of dismissal for cause, vested SAR would be paid out anyhow.
Ruling of 15 October 2013
Belgian tax law has no specific rules relating to SAR benefits. They are to be treated under general tax law.
In the ruling, the tax authorities confirm that the SAR benefits are taxable as regular income from employment under article 31, second section, 2° of the Belgian Income Tax Code (ITC).
When looking at the timing of the taxable event, reference was made to article 360 ITC, which mentions that tax is due on taxable income, which has been obtained by the tax payer in the course of the income year. For the SAR one then further had to determine the moment on which the related income was actually obtained by the employee.
In many cases, the moment on which income is obtained coincides with the moment on which a cash payment is made to the beneficiary. This is, however, not always the case. For SAR it is possible that income is earned upon vesting, but that the cash payment is delayed up to the moment when the formal exercise notice was submitted by the employee and when the payment was made to the employee.
For Belgian income tax payments, income is only ‘obtained’ by an employee if he can actually immediately collect the related cash payment.
Under the rules of the SAR plan, the beneficiary could at the earliest collect any cash payment after the end of the vesting period (each year 1/3 of the SAR entitlements did vest). Upon vesting, the beneficiaries could submit an exercise notice up to the end of the 10 year expiration period of the plan. Since the SAR could not be transferred (except in case of death) the beneficiary was not able to accelerate the plan benefits by selling the SAR to a third party.
The actual entitlement to the cash payment therefore only arises upon exercise. After that moment, payment is due by the Belgian employer within a period of 10 days. The amount of the payment is then equal to the value of the shares of the company at exercise minus the value of the shares at grant. This implies that at the moment of vesting, the amount to be paid to the employee is not yet consolidated.
For this reason, the Belgian tax authorities are of the opinion that the SAR benefits are not yet taxable at vesting, but only become taxable upon exercise. At that moment the amount to be paid can be determined and payment can be claimed by the employee. The taxes are subsequently calculated on the amount of cash which is effectively paid out. This amount is also to be mentioned on formal Belgian tax pay documents (fiche 281) by the Belgian employer.