Create the correct expectations regarding your share-based incentive program

PwC-skatteradgivning-Meeting-solid_0002_burgundy.png ‹ Back to the articles

PwC-skatteradgivning-Meeting-solid_0002_burgundy.pngDo you have employees who have received shares and, then, have been disappointed in the fact that they need to pay tax on the benefit? From our experience, we know that many companies having share-based incentive programs have found that the participations in the programs have been disappointed with the results. This can, to some degree, be due to the fact that they have not understood that the benefit is going to be taxed and/or they have also not known when such tax is to be paid.

Unexpected tax can create disappointment

When an employee receives shares from its employer free of charge, this is a taxable benefit which is taxed as employment income. When the employee receives the benefit, the employer is required to deduct the tax charged on the benefit from the employee’s salary paid out during the same month as the month in which the benefit is received. If the value of the benefit is sufficiently large, the paid out cash salary can be zero. If this is a surprise for the employee, it can, of course, create frustration and financial problems. Further disappoint can arise later when the benefit is reported in the employee’s income return and any remaining tax due (in other words, the tax amount in question actually exceeded the amount of salary to be paid in the month in which the benefit was received) is charged to the employee. In addition, a negative surprise can take place when a possible sale of the shares is declared at a later point in time in the tax return of the employee and he or she discovers that they must, in addition, pay tax on any gains on the shares.

Communication is important

It is usual that a company invests considerable sums in producing and issuing various types of share-based incentive programs, for example, through share savings plans or performance shares. In conjunction with participating in a program, employees often receive information regarding how the program works, under what terms they can receive shares free of charge and how this benefit is taxed. Sometimes, this is the only information which the participants in the program receive. A number of years later, often between three and five years, the incentive plan shares are issued. At this point in time, the information provided when the program was initiated has often been forgotten. In addition, it can take time to convert a benefit in the form of shares into cash. The frustration experienced by the employee can, in the worst case, negate all of the positive value and effects originally intended to be produced by the incentive program.

A lot of that which is described above can be counter-acted by the employer communicating about the plan in an effective manner so that the participants understand what will happen and they can handle the economic effects of their participation in the plan.

Here are some tips for better communication regarding incentive programs:

  1. Provide information prior to each event and not only in conjunction with the initiation of the program.
  2. Provide information as to what will happen in close connection with the actual event, for example, prior to the incentive plan shares being issued and, subsequently, when the tax is deducted from the employee’s salary.
  3. Provide the employee with the opportunity to present questions to an individual in the company who can explain the practical details of the chain of events inherent in the plan.

By ensuring that the participants in the incentive program are kept informed, the premises are improved in terms of the employees appreciating the value of the benefit in the right manner.

Contact us if you want to receive more information on how to communicate with employees regarding your incentive program!

Do you have any questions on individual taxation?

Malin Andersson

Malin Andersson

Malin Andersson arbetar med nationell och internationell personbeskattning på PwC:s kontor i Göteborg. Malin är specialiserad på incitamentsprogram, riskkapitalinvesteringar och övriga kapitalinvesteringar. Malin har tidigare arbetat på PwC:s kontor i Stockholm och på PwC i London under en kortare period.
010-212 81 60
Malin Andersson works with national and international personal income taxation at PwC’s Gothenburg office. Malin specialises in incentive programmes, venture capital investments and other capital investments. Malin used to work at PwC’s Stockholm office, and she also worked for a short time at PwC in London.
+46 10 212 81 60

Leave a comment

Related articles

Read the article

Swedish tax withholding obligations for foregin companies

Non-Swedish companies which have employees or board members resident in Sweden and who performs part of the work time in Sweden will have a ...

Read the article
Read the article

Swedish tax relief for foreign experts has been extended - tax relief can now be granted for a five year period

New rules apply from January 1, 2021. The period for which tax relief, the so called “expert tax relief” can be granted has been extended ...

Read the article
Read the article

Economic employer – Swedish parliament decided on the new proposed rules

The Swedish parliament has decided to adopt the bill on changed rules for taxation of temporary work in Sweden. This means that new rules ...

Read the article