An investigation into the Belgian tax issue of whether stock options are taxable at exercise under certain conditions and the implications this will have for expats with stock options received before they started working in Belgium.

Based on the answer of 2 April 2004 from the Belgian Minister of Finance to a parliamentary question, stock options can be taxed at exercise under certain conditions. Stock options granted as of 10 January 2003, which are not accepted in writing before the expiration of the 60th day following the offer of the option, are taxable at the moment of exercise.

Such options are qualified as an advantageous share purchase plan. As a result, an expat who is working in Belgium at the moment that he exercises an option granted to him as from 10 January 2003 could be taxable on the spread; the difference between the fair market value of the underlying shares at the moment of exercise and the strike price (the price he has to pay to exercise the options).

Stock options offered as of 2 November 1998

The current stock option tax treatment in Belgium was introduced by a law passed on 26 March 1999. The taxable moment of the benefit resulting from the stock options granted as from 2 November 1998 was situated on the deemed date of attribution; the 60th day following the offer.

Up until 9 January 2003, a beneficiary was deemed to have accepted the options offered unless he refused his options in writing at the very latest on the 60th day following the offer date.

An expat who had received stock options in the period from 2 November 1998 up to 9 January 2003 was taxable in Belgium on the 60th day following the offer under the condition that he had not explicitly refused the options in writing before that date and if he was taxable in Belgium at that moment.

Even an expat who had received stock options less than 60 days before he started working in Belgium had to pay Belgian income tax over the benefit in kind resulting from these options.

For options not listed on a stock exchange, the taxable basis in principle amounted to 15 percent of the fair market value of the underlying shares at the time of the offer, to be increased with 1 percent for each year or part of a year exceeding the first five years (under the condition that there is no discount and no certain benefit at the moment of the offer). Under certain conditions, the taxable basis could be reduced to 50 percent.

In case of granted options that expire after 10 years, the benefit in kind in principle amounts to 20 percent of the fair market value of the underlying shares at the moment of the offer. Based on a fair market value of the underlying share of EUR 100 - the benefit in kind per option amounts to EUR 20 and is taxed at the marginal income tax rates (45 percent for taxable income between EUR 16480 and EUR 30210 - 50 percent as from EUR 30210 - to be increased with 7 percent local taxes for expats and other non-residents of Belgium).

A lot of beneficiaries have paid Belgian income tax at the deemed date of attribution, but the options have become worthless afterwards (caused by factors such as the economic downturn). Unfortunately, there was no legal possibility to recover the income tax paid at the moment of attribution.

Stock options offered as of 10 January 2003

The Programme Law of 24 December 2002 (published in the Belgian Official Gazette on 31 December 2002) has reversed the deemed presumption of acceptance. As of 10 January 2003, a beneficiary is deemed to have refused his options, unless he accepts them in writing at the very latest on the 60th day following the offer date.

Taking into account the formal written acceptance within 60 days following the offer, several questions arose regarding the income tax treatment of stock options that were formally accepted after the 60th day following the offer (such as the so-called 'Deemed Refused Options'). In his parliamentary question of 20 January 2004, Mr Bellot asked the Minister of Finance to clarify the income tax treatment of options accepted after the 60th day.

On 2 April 2004 the Minister of Finance stated in his answer that he adhered to the position in which taxation of deemed refused options would take place at the moment of exercise. In that scenario the option grant would be regarded as an "advantageous share purchase plan". The law of 26 March 1999 (taxation at the moment of attribution) would certainly not be applicable to this kind of stock options.

Taking into account this position, it could be argued that beneficiaries of stock options have a choice between taxation at the moment of attribution (as in the case of a formal written acceptance within 60 days following the offer) or exercise (as in the case of an acceptance after the 60th day following the offer).

Reflecting on the issue

We would like to point out that the above only reflects the position of the Minister of Finance. The local tax authorities do not have to agree with this point of view and may therefore apply a different reasoning in respect of the taxation of deemed refused options.

Offering a choice in respect of the taxable moment regarding stock options on the basis of the mere parliamentary question seems possible, but includes certain risks. In the past we have already experienced that several (succeeding) ministers have changed their point of view regarding a certain matter (for example the attraction principle for directors).

Furthermore, whether the Minister of Finance is fully aware of the consequences of his position can be questioned. As foreign stock option plans mostly do not require a formal written acceptance of the options offered, stock options offered to individuals prior to the start of their assignment to Belgium will, based upon this position, in principle be taxed in Belgium at the moment of exercise.

At the moment that the formal written acceptance of stock options was introduced, it has been envisaged to introduce a formal system in which the taxpayer would have a choice between taxation at the moment of grant or the moment of exercise. Further to informal contacts at that moment we have understood that this system was not introduced because of budgetary reasons. Because of the economic downturn, most of the beneficiaries would have opted for taxation upon exercise implying a decreased income for the Belgian Treasury.

Furthermore, it should be noted that the position of the Minister of Finance, even if adopted by the tax authorities, could be disputed before court (for example when a beneficiary who initially opted to be taxed at the moment of exercise later on argues that his options were taxable at the moment of attribution or vesting).

In that scenario a new discussion regarding the taxable moment of stock options not governed by the Law of 26 March 1999 may arise (similar to the discussions with respect to the 'old' stock options).

Taking into account the last judicial decisions of the Supreme Court ('Hof van Cassatie' / 'Cour de Cassation') 'old' stock options are taxable at the moment of 'attribution'. It is however not clear how this term should be interpreted (depending on the provisions of the stock option plan, the taxable moment could be situated at grant, vesting or even exercise).

The taxation of the deemed refused options at the moment of exercise has the benefit that the beneficiary only has to pay Belgian income taxes on a benefit in kind that he has realised.

It is not triggering income tax on a lump sum value, without questioning whether the beneficiary can realise a gain or not. But, the taxable basis of deemed refused options at exercise can exceed the lump sum taxable basis at attribution many times.

Case studies

The following example illustrates this point:

On 20 January 2003, John received 2000 options that can already be exercised after one year against an exercise price of EUR 30. At the moment of grant, the fair market value of the underlying shares was EUR 25. John did not accept the option offer in writing. Today he exercises his options and the fair market value of the shares amounts to EUR 60.

The benefit in kind per option amounts to EUR 30, which is the fair market value at exercise of EUR 60 minus the exercise price of EUR 30. The total taxable benefit amounts to EUR 60000, which are 2000 options multiplied by EUR 30.

If he had accepted the options in writing within 60 days after the moment of grant, the benefit in kind taxable at the 60th day following the offer would only have amounted to EUR 10000 (for example 2000 options - 20 Percent - fair market value at grant of EUR 25) instead of EUR 60000 in the case at hand.

As indicated above, the Minister of Finance has said that options accepted in writing after the 60th day should be regarded as an 'advantageous share purchase plan'.

Please note however that for a stock purchase plan, a tax favoured treatment is available under certain conditions. The Belgian tax authorities accept for quoted shares (in Belgium or abroad) that the taxable value of the shares is valued at 100/120 (83.33 percent) of the stock quotation if the shares are made as not transferable for a period of at least two years with the consent of the parties involved.

Therefore, if the shares acquired by John after the exercise of his options are blocked for at least two years as from the moment of acquisition of the shares, the taxable benefit only amounts to EUR 40000 (based on 2000 options and a fair market value at exercise of EUR 60 - 100/120 minus exercise price of EUR 30) instead of EUR 60000. In this way, the taxable basis is in principle reduced with EUR 20000.

In an international framework, double taxation issues will arise. Let us take the case of Marc, a UK resident who received stock options on 20 February 2003 while he was working in the UK.

No written acceptance procedure was foreseen in the stock option plan. He can exercise the options as from the third anniversary. He has been seconded for three years to Belgium as of 15 May 2004.

Let us assume that Marc exercises the options before he returns to the UK. According to the point of view of the Minister of Finance, Belgium will be entitled to claim Belgian income tax over the spread; the fair market value at the moment of exercise minus the exercise price paid.

The UK however will also claim the right to tax a portion of the benefit realised upon exercise of the options. According the draft OECD comments on the cross-border income tax issues arising from employee stock option plans, the UK should be entitled to claim UK income tax over the porting of the gain related to the period from 20 February 2003 (grant date) and 14 May 2004 (the day before the start of the assignment) versus the whole period between the grant and the exercise of the options.

Indeed, for UK income tax purposes, stock options that are not formally accepted within 60 days remain stock options and are not reclassified into a stock purchase plan. The double taxation that arises from this difference in tax treatment in the two countries should be resolved based on the double tax treaty between Belgium and the UK.

Finally, the question rises whether Belgian social security contributions are due for options that are not accepted in writing or that are accepted after the 60th day following the offer. The current social security principles only accept that no social security contributions are due for stock options falling within the scope of the Law of 26 March 1999 (which is not applicable in case of deemed refused stock options according to the Minister of Finance).

July 2004

Carlos Gouwy is a senior tax consultant at PricewaterhouseCoopers in Belgium. He can be contacted at carlos.gouwy@pwc.be