Employee participation plans in the Netherlands explained
Many employers in the Netherlands offer some sort of employee participation plan. Saskia Foesenek from BDO looks at the more commonly used forms of employee participation plans in the Netherlands, the wage and income tax consequences in the Netherlands of such participation plans and what happens when you leave the Netherlands.
Employers are, more than ever, challenged to recruit, engage, and retain the most talented employees in the Netherlands. Therefore, a salary alone is not enough nowadays. Talented employees want to participate in the (financial) growth of the company. As a benefit, 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
There are 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 which are most used are, in no particular order:
- Share awards
- Options over shares
- Employee Stock Purchase Plans (ESPP)
- Restricted Stock Units (RSUs)
- Stock Appreciation Rights (SARs)
Some of the aforementioned employee participation schemes aim to enable employees to actually own shares in the company. Others merely aim to deliver cash based on the value growth of the company. For example, with some of these schemes, the SARs will lead to a cash payment (like a bonus), which is linked to the increased (share) value of the company. 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, causing tax due in cash. This may cause a significantly reduced net salary or even a negative net salary in the month such 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 not readily available for sale.
Finally, it's worth noting that independent contractors, officers, or any other individual rendering services to the company aren’t ruled out from participation schemes. However, please be aware that if you are not an employee and still participate in such a participation plan, the tax consequences in the Netherlands may be different and it is recommended that you seek professional tax advice.
Wage tax consequences in the Netherlands
In principle, everything an employee receives from their employer is taxable wage in the Netherlands. Consequently, the taxable wage should be processed through payroll, where your 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 per type of employee participation, as follows:
For the taxation of shares, the moment that an employee receives or buys the shares is the taxable moment. The taxable value is the fair economic value of the shares at the moment that they are granted to the employee, minus the purchase price (if any) of the shares. In principle, your employer will process this through the Dutch payroll system at that moment as a benefit in kind.
Options over shares
As of January 1, 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 that you received become tradable, this will create a taxable event for Dutch wage tax purposes. This moment can fall together with the date you exercise 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 the shares become tradable does not fall together with the moment of exercise (e.g. when contractual restrictions or insider trading rules prohibiting the selling 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 less the exercise price paid. Any dividends paid in the period between the exercise and the moment the options become tradable are considered to be taxable as wages. In both situations, your employer should process this as such in Dutch payroll, to calculate the wage taxes due.
Employees still have the possibility, offered under tax law, to place the taxable moment at the moment they exercise the options. If an employee would like to use this possibility, they need to make sure that such choice is made in writing to their employer. This needs to be done before or ultimately at the moment the options are exercised. It may be beneficial to use this possibility when you expect the share price will increase in the future or if substantial dividends will be paid before the shares acquired through exercise become tradable.
Usually, an ESPP allows the employee 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 certain discount. Such an ESPP falls under the wage tax law, considered to be an option and consequently, taxed accordingly. Your employer 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 certain conditions have been met - known as “vesting”. The taxable moment of RSUs is usually the moment they vest and become unconditional. The fair market value at the moment of the vesting of the shares delivered in exchange for the RSU minus any amount paid to obtain the shares is the taxable wage. Your employer should process this through Dutch payroll at the moment the taxable event occurs.
SARs are contractual rights entitling you to a payment in cash equal to the value appreciation of a certain number of shares in the company over a certain period. The taxable moment in the Netherlands occurs at the moment you receive the cash payment with respect to the SARs from your employer. Your employer should process this through the Netherlands payroll at the moment the taxable event occurs.
As long as you are employed in the Netherlands and you have a valid 30% ruling grant letter from the Dutch tax authorities, it will in principle be applicable on your taxable employee participation in the Netherlands. Please be informed that as of 1 January, 2024 the applicable wage for the 30% ruling will be capped at the Balkenende norm (223.000 euros in 2023 and indexed as of 2024). No transitional law applies if the 30% ruling was granted post January 1, 2023. For those to whom the 30% ruling was granted prior to January 1, 2023, the cap will not apply until January 1, 2026.
Income taxation in the Netherlands
Once your participation has been subjected to wage tax, the net remainder (shares or cash) will be taxed in Box 3 for the period that you qualify as a tax resident of the Netherlands. Box 3 taxation is based annually on the January 1 fair value of the total assets / savings minus the loans (though at the moment Box 3 taxation is under a high level of uncertainty) and should be reported in the personal Dutch income tax return.
If the 30% ruling applies to you, or if you are a non-resident of the Netherlands, you will most likely not be subject to taxation in Box 3 over the net remainder of the participation.
Leaving the Netherlands and still participating in the company
If you leave the Netherlands and you are still participating in an employee participation scheme, receiving shares or cash will still lead to taxation in the Netherlands and possibly in your new home country as well. To avoid double taxation, it is recommended that your personal situation be reviewed, as every country has their own tax legislation with respect to employee participations.
Broadly speaking, the Netherlands will seek to tax you at the moments described above, depending on the sort of plan you participate in. If your salary was subject to wage tax in the Netherlands at any time between the grant of the participation award and the moment such an award is vested, you will be taxed in proportion to the time spent in the Netherlands between the award date and the vesting date.
In such cases, you should contact a tax advisor who is specialised in cross-border situations for employees.
Do you need assistance with your Dutch taxes? The team at BDO specialise in helping expats in the Netherlands with financial matters. You can reach them by email at [email protected] or by phone at +31 40 269 81 11.