Belgium and Development on Taxable Income for Stock Options
In Belgium, there has been a modification to the rules governing the taxation of stock options. In general terms, the change has been made to the “expectation value” of an option, from the 15-percent value of the shares if the life of the option, starting from the date of the offer, does not exceed five years – this has been increased to 18 percent.
The Act of 26 March 1999 as amended by the Act of 24 December 20021 provides that stock options that are offered in writing to individuals and accepted in writing are taxable at grant. We provide a brief summary of the rules below.
Taxable Income
The taxable income related to the grant of stock options depends on whether the option itself is traded on a stock exchange.
• If the options are traded on a stock exchange, the taxable benefit is equal to the closing price of the option on the day preceding the offer.
• If the options are not traded on a stock exchange, taxable income is calculated on the basis of the value of the underlying shares. The value of the shares is different for quoted shares as opposed to non-quoted shares. o For quoted shares, the value of the shares that will be used to determine the taxable income is, at the choice of the offeror, either the average closing price of the shares during the 30 days preceding the offer or the closing price of the day preceding the offer.
o If the non-quoted shares, the value of the shares has to be determined by the offeror of the option, and has to be approved by the statutory auditor of the company issuing the underlying shares. If this company does not have a statutory auditor, the company should appoint an auditor for this purpose. The value of the shares, however, may not be lower than the actual value of the shares at the moment the option is granted. The overall minimum value is the value of the shares determined by dividing the company’s equity by the number of shares, based on the last approved annual accounts.
First Component: Expectation Value
The first component of taxable income is the “expectation value.” Initially, this was equal to 15 percent of the value of the shares if the life of the option, starting from the date of the offer, does not exceed five years, increased with 1 percent per year or partial year exceeding the initial five-year period. For options offered as of 1 January 2012, the basic 15 percent has been increased to 18 percent.2
The above percentages may be reduced by half if the following conditions are met:
1. The option cannot be exercised before the end of the third calendar year following the date of the offer (i.e., an option granted in 2012 may not be exercised before 1 January 2016).
2. The option has to be exercised within 10 years after the date of the offer.
3. The option cannot be transferred (except in case of death).
4. The option has to be granted by the company that has issued the underlying stock or by a parent company. A parent company is a company which is considered as such based on Belgian accounting legislation.
5. The employee may not be covered against a possible devaluation of the underlying stock (hedging provisions).
6. The option price has been determined at the time of the offer.
Conditions 1, 2, and 3 can either be included in the stock option plan itself or in a personal commitment made by the employee (e.g., in a side letter).
If the beneficiary is covered against a possible devaluation of the share value subsequent to the grant of the option (see condition 5), additional taxable income equal to the reduction applied at the time of grant will have to be recognized, at the latest, at the time the employee ceases to be a resident of Belgium for income tax purposes or in the eleventh (11th) year following the offer.
If conditions 1 to 3 are not provided by the option plan but are included in an individual commitment of the beneficiary, the same additional income will have to be reported at the time of breaking residence for Belgian income tax purposes or in the eleventh (11th) year following the offer, unless the beneficiary provides the tax authorities with formal evidence that the above conditions were met.
Second Component: Options That Are ‘in the Money’
In addition to the expectation value, a second component of taxable income has to be reported if the options are in the money, i.e., if the exercise price is lower than the value of the shares at the date of the offer. The difference is to be added to the lump-sum valuation described above. If the option is out of the money, i.e., if the exercise price exceeds the value of the shares at the time of the offer, the difference cannot be deducted from taxable income.
Other Considerations
If the option plan is drafted or amended subsequent to the grant of the option in such way that the employee will have a warranted benefit at the time of exercise, this benefit also has to be added to the taxable income at the time the income becomes certain, to the extent that this income exceeds the taxable income determined according to the above-mentioned lump-sum valuation method.
If the employee has to pay a price for the option, the price to be paid may be deducted from the taxable income determined according to the above rules.
The possible spread between the exercise price and the value of the shares at the time of exercise of the option will not be subject to income tax.
Calculation of Income Tax
The above-mentioned income is subject to normal graduated income tax rates.
Options that are not offered in writing or not accepted in writing within 60 days following the offer of the options are generally taxable at exercise. The taxable income is the gain arising on the exercise.
Source: KPMG
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