In the context of acquisitions, it is common for the new owners to grant stock options to managers and employees. Under current tax laws, tax is levied at the time the options are exercised.
At the end of June this year, a new bill was passed by the House of Representatives to shift the moment of taxation to the moment when the acquired shares are tradable. On Jan. 1, 2023, the bill will take effect.
The bill is aimed at facilitating the issuance of stock option rights for start-ups and scale-ups, but applies to all entrepreneurs who grant stock options. In this post, we will elaborate on what will change as far as the taxation of stock options is concerned.
Time of taxation current law
Employers often grant stock option rights to their employees to tie them to the business. This is a right to buy shares in the employer's company under certain conditions or after the expiration of a certain period of time, at a price set in advance.
Payroll tax should be withheld on the benefit from those stock options because the grant arises out of employment. Under current law, tax is levied at the time the stock option is exercised, regardless of whether the shares are disposed of or may even be disposed of. In the latter case, a cash flow problem arises for the manager or employee: tax is already payable, but no sale result is yet in hand.
Taxation timing based on bill
Under the bill, the moment of taxation will shift to the moment when the acquired shares are negotiable. However, taxation will then take place on the profits obtained up to and including the deferred date. The idea behind the bill is that cash will be available at that time to pay the taxes due.
The bill introduces an option scheme. If the shares are not immediately tradable, an election can nevertheless be made to tax the stock options upon exercise. The advantage of this is that taxation (box 1) is due on the profit up to and including the date of exercise. This will often be lower than the gain at the later trading date.
The bill aims to match when cash is available (pay tax only once shares are tradable). For the employee, the option scheme is attractive.
