Belgium offers a number of special tax regimes for share based initiatives.
Companies taking advantage of these regimes can provide a fiscally efficient, and hence very attractive, method of both retaining and incentivising their employees.
In Belgium the following share plans are typically used to incentivise employees:
- Share Option Plans; or
- Participation Plans; or
- Share Purchase Plans.
Share Option Plans
Whilst it is open to a company to grant options to acquire shares to Belgian employees which are not fiscally advantaged, it is possible to structure such options in a tax efficient way under a Belgian ‘qualified share option’ plan.
A share option will qualify as a ‘qualified share option’ in Belgium if both:
- the right granted to the option holder is a right to acquire, during a specified period of time, a specified number of shares in the capital of the granting company or an affiliated company at a price that is or can be determined; and
- the employee accepts the option in writing within 60 days of the date the option is offered. The 60th day is the date upon which the option is deemed to be granted.
The main characteristics of qualifying share option plans include:
- participation may be offered on a discretionary basis (but must be justifiable and objective);
- the grant of the option may be made subject to performance-related conditions - (however, in the event of such conditions being imposed, the option will still be deemed to have been granted on the 60th day following the offer of a qualifying option);
- the shares do not have to be listed or subject to any conditions.
Qualified share option plans are particularly popular with larger companies and are typically used as means to incentivise executive employees.
On the 60th day following the offer of a qualifying option (i.e. on the grant of an option):
- an option holder will be subject to income tax in respect an amount equal to 15% of the value of the shares that are the subject of the option as at the date of grant;
- this percentage is increased by 1% per year for any year that the employee is permitted to exercise the option beyond the first five years from the date of grant.
These percentages may however be halved to just 7.5% and 0.5% if all of the following conditions are met:
- the exercise price of the option is determined in a fixed way at the date of grant;
- the option cannot be exercised:
(a) before the first day of the fourth calendar year following the year of grant; or
(b) after 31 December of the tenth year following the date of grant;
- there is no guarantee against the risk of decrease in the value of the underlying shares;
- save in the event of the option holder’s death, the option is non-transferable; and
- the shares must be shares in either the employer or a parent company (including an ultimate parent company) of the employer.
In addition, if an employee has paid a contribution in order to receive the option, this contribution may be deducted from the taxable benefit.
No social security contributions will arise in relation to the amount that is subject to income tax on grant (unless the exercise price is less than the market value of the shares at the time of grant).
On vesting of a qualifying option (i.e. the option becoming capable of being exercised) there should be no further charge to income tax.
On exercise of a qualifying option, unless the terms of the option have changed, there should be no further charge to income tax.
On the sale of the shares resulting from the exercise of a qualifying option, any gain that is realised is tax exempt.
These fiscal advantages can make qualified share options very attractive indeed, both from the employee’s and the employer’s perspective.
Income tax can arise if:
- the exercise price of the option is set at less than the market value of the shares at the date of grant; or
- if the employer provides any financial support to the employee to help fund the tax arising on grant.
Employees cannot recover the personal income tax paid on grant if they do not exercise their qualified share options.
Participation plans allow employees to collectively participate in their employer’s profits either by way of a cash distribution or by way of an award of shares in the employing company. Companies can offer participation plans if they are both:
- a limited liability company; and
- subject to either Belgian corporation tax or Belgian non-resident corporation tax.
In order to qualify:
- participation plans must be introduced by a collective bargaining agreement on salaries (covering the same period which the participation plan will cover). Where companies have no trade union representation, the plan must be offered to employees in writing by way of a collective bargaining agreement or by way of a so-called accession charter;
- collective bargaining agreements must be registered with the Ministry or Employment and Labour;
- the plan must not replace salaries or benefits in kind already granted to employees of the company and must not give rise to a decrease in the fulltime equivalent employment;
- the employer must inform the workers’ council or the committee for prevention and protection at work on the relationship between the plan and the company’s employment policy;
- the plan must contain certain statutory terms, for instance, dealing with the duration and termination of the participation plan, whether or not employees are obligated to enter in the participation plan, etc.
The main characteristics of a participation plan include:
- generally, participation must be offered to all employees (whether full time or part time);
- participation may be restricted to employees with at least one year’s employment;
- profits may be distributed to employees on different terms but any differentiation between the profit rights of employees may only be made on the basis of objective criteria (including the length of employment, position, salary level, education).
The maximum differentiation ratio is 1:10;
in any financial year of the company, employee participation may not exceed either:
- 10% of the employer’s total gross salary cost; or
- 20% of the employer’s net profits after tax.
- where participation is by way of shares, save in certain specified circumstances (for example, on the death of the employee), the legal title to the shares must be non-transferable for a defined period of between two and five years.
- No income tax arises in respect of the profits distributed under a participation plan;
The profit distribution is however subject to a special withholding tax and is owed by the employer to the Belgian State within 15 days of the distribution of profits under a plan. The tax rate is currently:
- 15% in respect of profits distributed by shares. The taxable amount is calculated on the amount of the profit used by the company to grant the shares and is determined by reference to the quoted value of the shares (if the shares are listed) or the value of shares as determined by an auditor/external accountant (if the shares are not listed);
- 25% in respect of profits distributed by cash.
- No social security contributions arise in respect of the profits distributed by way of shares;
- Where profits are distributed by way of cash, a solidarity contribution arises. The current rate of this charge is 13.07%. Profits distributed by way of cash are exempt from employer’s social security contributions;
- The company profits that are used to finance the distribution under the plan (either by way of cash or shares) are subject to corporate income tax or non-resident corporate income tax (as the case may be) at the normal tax rate for the financial year in which the profit distribution takes place. The standard rate is currently 33.99%;
- If shares granted under a participation plan are transferred in breach of the five year transfer prohibition (as described above), an additional charge to tax of 23.29% may be levied. This tax needs to be withheld on the sale price by the selling bank or stock exchange.
Bearing in mind that income tax is currently charged at the applicable progressive rates between 25% and 50% depending on the individual’s level of taxable earnings, the 15% rate that is applicable to share distributions under a Participation Plan represents a significant fiscal advantage for employees.
Share Purchase Plans
Employers may invite employees to subscribe for newly issued company shares (with voting rights) at a discount of 20% to the shares’ market price at the time of subscription. Any company that has distributed at least two dividends in the previous three accounting years may offer such a share purchase plan.
The main characteristics of a share purchase plan with a 20% discount include:
- participation must be offered to all employees on the same terms and conditions;
the aggregate of:
- the increase in share capital under the plan during the accounting year in which an award is granted; and
- the increase in share capital as a result of all similar awards during the previous four accounting years, must not exceed 20% of the employer’s statutory share capital;
- save in certain limited circumstances (for example in the event of the death or disability of the employee or the employee’s spouse or the employee’s dismissal or retirement), employees cannot dispose of their shares for five years following subscription;
- the subscription price for the shares must not be less than 80% of the shares’ market value at the date of subscription as set out in the employer’s board of directors’ and auditors’ report.
On subscription of the shares, provided all the necessary conditions are met, there will be no income tax or social security contributions due from the employee.
Furthermore the employee is also entitled to deduct from his taxable income the price paid in order to obtain the shares of his employer (up to a maximum amount of 690 EUR).
During ownership of the shares, if the five year holding period is not met, income tax and social security contributions will be payable in respect of the 20% discount from the market value.
On sale of the shares, no income tax or social security contributions should be payable.
The fiscal advantages outlined above provide an effective means of both rewarding employees and incentivising them. Companies wishing to provide share based incentives to their Belgian employees may therefore wish to consider whether a Qualified Share Option Plan, Participation Plan or Share Purchase Plan should be utilised to enhance the motivation and retention of their workforce.
This briefing is correct as at October 17, 2011 and the tax treatment described above can change. It is intended as general guidance only and is not a substitute for detailed advice in specific circumstances.