Employee participation is a good way to increase involvement, but an organization needs to organize this properly. Employee participation can be designed in many different ways. The economic, tax and legal implications vary considerably from method to method. Cm: put it in a row for you.
Employee participation can be a way to keep employees involved in and in the company’s interest for a long time. Such an arrangement is always tailor-made. Finance expert Tim de Leeuw, Crowe Foederer agrees. ‘There are a number of principles. From long-term bonding and captivating, reward for special performance of a person to reward for performance in the company as a whole. A bonus depends on the individual’s performance. Profit sharing depends on the company’s profits. In this connection, you must therefore make the company’s and the individual’s goal clear and transparent.
“One can incorporate a claw-back clause as a counterweight to taking too great risks. The bonus will then be refunded if too much risk is taken to obtain the bonus. In all these cases, it is wise to think about the departure of the employee in case of mutual consent, illness or dismissal. What happens then? From a tax point of view, bonuses and profit sharing run through Box 1 for the employee and through P&L for the employers. ‘
Share revaluation rights
What about Stock Appreciation Rights (SAR)? These were in the news recently when online supermarket Picnic had overlooked them for the accounts. De Leeuw: ‘It is an instrument with which you as a company want to let your employees benefit from the company’s intended increase in value. This is a relatively simple agreement between the company and the employees, to which no company relationship is attached. In other words, no shareholder rights. The advantage is also that no financial contribution is required from the employees. Where this applies to shares and options. ‘
Keep it simple, advises De Leeuw. “Do not make the arrangement too difficult. SAR setup often starts with a valuation and which method you want to use. For example, the discounted cash flow method or five times Ebitda as a valuation method. Make sure you include the impact of the valuations on the balance sheet now and in the future.” Guus van Houts, corporate finance expert at Crowe Foederer: ‘It can get annoying when employees want to practice SAR and there is not enough cash available to do so.’
When is the payout?
De Leeuw: ‘As an employer, you need to monitor this instrument. How much and when is the money out? In addition, it is also important to know what happens if an employee leaves the company for better or worse. For example, that you are obliged to offer the shares on departure. For tax purposes, this scheme places you in Box 1 according to the pay-as-you-earn principle. If the net amount is significant, it is taxed in box 3. It also depends on the employee’s assets. ‘
Through the payment gateway
Tax specialist Michael Dekkers adds to De Leeuw. »Taxation usually accompanies the company, but this is not always the case with special forms of remuneration. When you start working with employee influence or special forms of remuneration, you can not avoid thinking about taxation at an early stage. Bonuses essentially fall into Box 1 and go through the payment gateway. Depending on the size of the net benefit, this will then also go to Box 3, where income from savings and investments is taxed. With SAR, it quickly becomes a little more complex. The bonus payment is dependent on the value development of the shares and is usually made subject to a time limit.
In principle, the SAR is therefore included in box 1, but there is a risk that a taxed right arises earlier, after which a property right ends up in box 3. This may be undesirable if the employee has not yet received cash. You must therefore make good agreements about the SAR scheme in advance to prevent this. Bonus, profit sharing and SAR are basically deductible in corporation tax. According to the SAR, there is a deduction limit for employees whose salary exceeds 598,000 euros (amount 2022). ‘
Shares without voting rights or letter shares
What about the tax treatment of shares and depository receipts? Box 3 is for interest rates of less than five percent, Box 2 for interest rates of five percent and more and Box 1 for lucrative interest rates, says Dekkers. In addition, the technology must be examined carefully: “If you are to use shares without voting rights or, for example, letter shares, it must be carefully considered whether these are considered a separate class for the significant interest rate scheme. If so, you may still have a significant interest of more than five percent of that kind as an employee. And thus end up in box 2 instead of in box 3. ‘
The lucrative interest rate scheme was introduced in order to be able to collect tax in box 1 of certain excessive benefits that accrue to employees and contractors and are calculated as remuneration. ‘The lucrative interest is broadly worded. For example, if the tax inspector succeeds in demonstrating that the expected return is not commensurate with the invested capital or the accrued risk, the scheme falls under this scheme. Therefore, in some cases it may be important to agree in advance with the tax authorities whether the participation scheme will be considered a lucrative interest. ‘
News about box 3
For the time being, the tax authorities will not impose wealth assessments in box 3 of the income tax. This is the result of a judgmental judgment from the Supreme Court on Box 3. According to the Supreme Court of our country, the system that has been in force since 2017 is in violation of European fundamental rights. It’s a headache for the brand new Secretary of State for Finance, Marnix van Rij. He wrote to the House of Representatives that “a workable solution for the implementation” of the Supreme Court ruling is being worked on with all its might. Until then, no final assessments will be imposed.
When should taxable value be included?
Rens van Oers, an expert in payroll taxes, adds his colleagues. ‘The payroll tax is pretty much the same for all forms of employee participation,’ he says. ‘There are a number of points of attention. For all types of employee participation, this essentially involves two factors. First: What value should be taxed? Second: What is the taxable time? In other words: When should the taxed value be included in the wage bill? Very generic is the value in economic traffic leading in this regard. But it is easier to read in everyday life with a listed company than with a non-listed company. This means that the last companies must ensure that the valuation corresponds as closely as possible to the time of acquisition. Any remuneration from an employee, eg if he himself part-finances the acquisition, is deductible. The Danish Tax Agency usually assesses on the basis of the discounted cash flow method. Preliminary coordination and registration with the tax authorities on the valuation method is strongly recommended. This is to avoid discussions afterwards. ‘
Do not get in trouble
It is also wise not to let the employee get into trouble as a result of the participation. ‘Suppose he has a cash flow problem to be able to pay the tax due. Then there are two solutions. The first is sales to cover tax, where part of, for example, the shares to be acquired are sold immediately. Actually very undesirable because you would tie the employee to you and now fewer shares are acquired because he is forced to sell. The alternative is only later to collect payroll tax from the employee. In that case, there is a possible risk that the Tax Authorities will qualify as a non-commercial staff loan. This incurs an additional fee. That is often Skat’s position when it comes to financing employees. ‘
It is also important for organizations to register the participation agreements in an employee participation plan correctly. It is about how and when valuation takes place, but also, for example, how to handle participation when employees leave the organization, including any differentiation for ‘good leavers’ and ‘bad leavers’. For example, you can prevent a former employee from still owning shares with the previous employer. Recording the appointments and explaining the consequences of participation is also very important in communication with employees who can potentially participate, in order to avoid surprises or discussions along the way.
A bill for startups has been announced in the tax plan for 2022. Van Oers: “In addition, employees of start-ups when acquiring stock options will have the option of not paying tax when exercising an option and acquiring the shares, but only when they actually is able to trade or sell the acquired shares. It is a tax deferral scheme. However, this bill was withdrawn in November 2021. The Ministry is examining the possibility of such a scheme and whether it should not apply more broadly than just to start-ups. More clarity is expected this year. ‘
More ties to key employees
Employee participation can also be an important part of getting the company ready for sale. It creates more ties for key employees. In addition, employee participation can be structured in many different ways. The economic, tax and legal implications vary considerably from method to method. So start on time and let us help you where needed.
Author: Ronald Bruins
This article was published in cm: 2022, ep. 4.