Qualified employee stock options in the proposal from the Committee reviewing the tax treatment of incentive schemes

The Committee presented its proposal for changed tax rules as regards incentive programs on March 15. The Committee’s report incorporates, primarily, a proposal on so-called qualified employee stock options. In addition, there is a proposal for an adjustment of the so-called securities rule.

Qualified employee stock options

The Committee proposes that employees receiving employee stock options will not, under certain circumstances, incur a taxable benefit at exercise of the options. In addition no social security contributions will be payable by the employer. The options may not be exercised to acquire shares earlier than three years after their issue, and must be exercised within 10 years from date of issue, in order to meet the criteria for qualified options.

There are a number of requirements in the proposal on the issuing company, amongst other things, the company cannot operate within certain industries, for example, bank and finance and letting out of properties. The proposal also includes rules imposing restrictions on the size of the company that can issue qualified stock options. There are also certain limits on amounts as regards the options; the total value of the options at grant must not exceed SEK 100 million and the value per participant must not exceed SEK 5 million.

The proposal results in a state budget expense of SEK 180 million. The Committee proposes that this be financed through an increase in the standard amount of income that is subject to tax when legal entities make allocations to tax allocation reserves.

”Securities rule”

The Committee also proposes that the legislative provision, the so-called “securities rule” (Chapter 10, 11, first point, Income Tax Act) be adjusted. The adjustment provides that if there are pre-emption clauses that restrict the holder’s possibility to realize the full market value of the securities for a period that exceeds two years any value increase from the point of acquisition until the lapse of the restriction is to be taxed as employment income. In other words, the point of taxation is deferred. However, if the pre-emption clause only applies for two years from the date of acquisition the restriction is acceptable and any proceeds will be taxed as capital income.

A special obligation regarding documentation and statements of earnings and tax deductions is also to be introduced in conjunction with securities being acquired in connection to employment.

Comments

The scope of application as regards qualified employee stock options is, based on the proposal, limited, both in terms of what kind of business a company that issues options can undertake and also as regards the period of time during which qualified employee stock options can be issued. The Committee concludes that the introduction of general tax relief measures results in a high state budget expense. At the same time, a rule providing selective tax relief for only certain companies and/or industries can run the risk of being in conflict with EU’s state aid rules. Consequently, this proposal on tax relief for qualified employee stock options will require approval by the EU Commission. This also implies that the capacity for expanding the scope of application can be limited.

The change in the securities rule is intended to facilitate the application and interpretation of the rule. However, this results, at the same time, in a restriction on the current practice whereby an acquisition is seen to have taken place also when restrictions in the right of disposal apply. The proposal implies that taxation is deferred which, in a situation where the value of the securities increases, leads to a higher level of income to be taxed as employment income, which also leads to a liability to pay social security contributions by the employer. In other words it leads to increased taxation. A number of the Committee members have claimed, in a dissenting statement, that this part of the proposal should not be implemented.

The proposal was presented to the Minister of Finance on March 15. The next step is that the proposal will be sent for referral. The Committee’s proposal is that the changed regulations should come into effect from and beginning 1 January 2018.