New Tax Rules for Employee Options proposed for (some but not all) Growth Companies

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On 15 March 2016, a special report on taxation of employee options  was presented. Current tax rules for option based incentive programs have been heavily criticized for not being startup-friendly enough, especially having reqard to Sweden’s emerging tech-industry’s pressing need to attract and retain competent personell both from Sweden and abroad. The report, which is the result of a review of current tax rules ordered by the Swedish government in March 2014, will in general make incentive programs much more favourable from a tax perspectice – but the fast growing fin-tech industry seem to be excluded and the new rules only apply for startups, leaving many companies in the growth-segment behind.

Taxation of income from an incentive program is generally a question about when the income is to be taxed and classification of the type of income (which effects how much tax that will be levied). The changes in the taxation of employee stock options are intended to reduce tax burden for both the employer and employee and to postpone the taxation.

Special employee stock options with beneficial tax treatment, so called qualified employee stock options, will be introduced. These qualified stock options will not give rise to taxable benefit at the time of exercise (the acquisition of shares), and instead tax will be triggered once the shares are sold. The total gain will be subject to capital gains tax (and not income tax), thereby reducing the overall tax rate and postponing taxation until realisation of the value. In addition, the employer will not need to pay social security contributions, reducing the tax burden also for the companies.

For the rules to be applicable a number of conditions need to be met, meaning that the rules will only apply to companies (i) that has been up and running for no longer than seven years, (ii) that has an annual turnover of no more than SEK 80 million, (iii) that has less than 50 employees, and (iv) that are not held by a state-owned body (to 25% or more). Additional conditions apply and there are also several limitations and rules concerning which persons within a company can receive these so called qualified employee stock options.

Although bringing long-wanted tax-reliefs for many startups, the proposal has been criticized, for potentially excluding start-ups within the prospering Swedish fin-tech sector due to an exemption restricting companies within the financial sector to benefit from these new benefits. It has also been criticized for giving the very earliest of companies a competitive edge in relation to more established companies within the growth tech sector, which companies are expected to significantly contribute to the Swedish economy and to Sweden’s reputation as a leading tech nation in the years to come, and who compete with startup companies for qualified proffesionals to be able to fuel their continued growth.

The new rules are proposed to come into force on 1 January 2018.

For more information, please contact Oskar Belani.