Anne-Charlotte Lelièvre, Senior Manager BDO Legal
Nicolas Thémelin, Senior Manager BDO Tax

The COVID-19 crisis has profoundly changed the way we work, but also the way in which employees look at that ‘new way of working’. It is now up to companies to keep their available talent motivated and on board. All means are welcome in this regard. Stock options, for example, are clearly on the rise as an incentive. But there are other solutions too, tailored to large companies and SMEs alike.

The COVID-19 crisis really turned the lives of companies and their employees upside down. For certain companies, such as those in the technology and wholesale distribution industries, the crisis offered opportunities. Many others had to fight to keep their heads above water, not to mention those who were forced to shut down for many months.

At the same time, the measures that governments imposed in the fight against COVID-19 have radically changed professional life. Teleworking received a boost, the interaction between employees decreased and their vision of work changed. To retain the available talent, every company, regardless of its scale, will have to pull out the stops to motivate its employees and keep them on board.

Among other things, this can be achieved by using economic incentives, which offer many advantages. Experience shows that when employees, or a contingent of them, receive a financial participation that is dependent on the operating results, they also perform better and contribute to the results. At the same time, the risks associated with a departure or loss of motivation decrease.

The choice of incentives is wide, but often unknown. This is especially the case with SMEs, many of which wrongly believe that such employee participation increases the administrative burden. Or that it is only meant for large companies. Nothing could be further from the truth. That’s why we will look at a few possibilities in more detail.

By offering stock options to one or more employees, you give them the right to buy existing shares (stock options) at a certain time and at a certain price or to subscribe for new shares (warrants).

The benefit associated with the stock option is taxable for the employee as professional income at the moment the options are granted – legally set on the 60^th day after the date of the offer, insofar as the offer was accepted in writing within this period. This benefit is exempt from social security contributions (and holiday pay on variable pay) if the beneficiary is subject to social security (RSZ). Beneficiaries subject to the social security system for the self-employed (NISSE) are not granted this exemption from social security contributions. For them, the calculation basis for the NISSE contributions corresponds to the amount of taxable professional income, which includes the ‘stock options’ benefit in kind.

The amount of the taxable benefit is fixed at 18% of the value of the underlying shares, unless the options are listed on the stock exchange (which is rare in the case of options on employer shares). This percentage is increased by 1% if the option has a duration of more than 5 years, and this for each year after the fifth year (e.g., 23% for a duration of 10 years). However, when certain conditions are met, those percentages are halved.

If the above conditions are met (such as the acceptance of the options within 60 days after the offer), the subsequent capital gain, realised at the time the options are exercised or the sale of the underlying shares, is not taxed. In that case, the employer does not have to withhold and pay social security contributions.

Stock options and warrants are a perfect solution for motivating employees and retaining them in the company. As an employer, you can allocate them at your own discretion – to the most promising employees, for example – but also to self-employed workers. Moreover, certain mechanisms can be stipulated to protect the employee against any depreciation of the underlying shares.

Please note that the beneficiary is not a shareholder of the company between the time of allocation of the options and the exercise thereof. Therefore, he or she has neither the right to vote nor the right to dividends. If the options give the beneficiary the right to subscribe for new shares (warrants), he or she may participate in the general meetings in an ‘advisory capacity’ only.

The value of a company that has issued 100,000 shares is set at €1 million. So, each share is worth €10.

On 1 October 2021, an employee is given the opportunity to acquire options on 100 shares of the company, which can be exercised between 1 January 2025 and 30 September 2026.

If the employee accepts the stock option before 1 December 2021 and meets certain conditions, he/she will pay €48.15 in taxes. This amount is calculated as follows:

Two scenarios may occur between the end of 2021 and the start of the exercise period:

1. the value of the company has decreased. In that case, the beneficiary is unlikely to want to exercise his or her options. Since he/she will not be able to realise any capital gains, the amount of the tax paid earlier will, in principle, be lost unless the employer has provided for a compensation arrangement (e.g., a cash payment that is tax-free under special conditions);
2. the value of the company has increased. The shares have therefore increased in value (e.g., an increase of 75% -> 100 shares = €1,750). In this case, the beneficiary will exercise his or her options. If he/she sells the underlying shares immediately, he or she will make a profit of €750. Taking into account the tax paid on the allocation of €48.15, that means a net profit of €701.85.

To encourage employees to acquire stakes in the company, a company may also decide, whether or not with conditions, to grant them existing or new shares at a reduced price (or even free of charge, in the case of existing shares).

In that case, the benefit associated with the allocation of the shares as professional income is taxable at the time of the acquisition or subscription of the shares, and the employer must deduct and pay social security contributions accordingly.

In principle, the amount of the taxable benefit (on which social security contributions must also be paid) corresponds to the difference between the market value of the shares (the stock market value if the shares are listed) and the purchase or subscription price paid by the employee. If the shares are listed and the conditions of allocation include a period of non-transferability of at least 2 years, the value of the shares may be reduced by 20/120 for calculating the taxable benefit and they are subject to social security contributions.

Unlike the stock option scenario, the employees now become active shareholders of the company and enjoy all the rights (dividends, votes, etc.) attached to the acquired or subscribed shares.

If, in practice, it is impossible to grant stock options or shares at a discount or free of charge (for example, because the liquidity of the securities cannot be guaranteed), other forms of profit sharing exist for the employees. For example:

In short, for every company, large or small, there is a solution that lets employees share in the company’s capital or profit, thereby motivating and retaining the talent.