Details about the proposal for changes in taxation of options for employees in start ups

| Innsikt

A new scheme regarding taxation of options for employees in start-ups is something which has been requested by the Norwegian tax and start-up community for a long time. The narrow criteria for qualification and limited benefits of the existing arrangement has entailed very limited use. In the revised budget for 2021 more details have been published regarding the proposal for new rules that will be put forward by the government.

Before going into the details of the proposal it should be mentioned that the actual rules of the proposal were not presented in the revised budget. The government stated that they aim to present the rules in the budget for 2022. The rules will also be subject to a hearing round and since the scheme constitutes state aid in accordance with the rules in the EEA Agreement, they will also require notification to and approval from ESA before implementation. This means that there will be some time before we are able to see what actually comes out of this.

The main highlights of the new option tax scheme are:

  • Taxation only takes place when the share is realized (not the option), and then fully as share income as opposed to salary income.
  • There is no taxation before the sale of shares, even if the employee leaves the company after option exercise.
  • The max limit for the company’s age in the option allotment year is increased from six to ten years.
  • The option may, as under current rules, be exercised in shares no earlier than three and no later than ten years after the option grant.
  • The «size-restrictions» are increased so that a company may have up to 50 man-years and NOK 80 million in turnover and balance sheet total, against 25 man-years and NOK 25 million in turnover and balance sheet total under the current scheme. If the company is part of a group, the restrictions apply to the group as a whole.
  • The shares associated with the option must be valued at the time of option grant and exercise price must be at least as high as the market price of the shares at the time of option grant.
  • There will be limits at company and employee level on the value of the underlying shares, measured at the time of allotment.

The biggest change in the new scheme is related to the model of taxation. In the new scheme there is no taxation of the employee upon grant or exercise of the option. Taxation only takes place when the employee realizes the shares. In addition the financial benefit that the employee in the end receives is fully taxed as share income. This makes the scheme more favourable and more manageable than the current scheme. Under the current scheme the value increase from grant until exercise of the option is taxed as salary income, and total benefits and gains over NOK 1 million is taxed at exercise. This is in practice very significant limitations and restrictions e.g. seeing as an employee’s ability to actually sell shares thereby converting the shares into cash, hereunder to pay taxes triggered at exercise, may be limited.

In the proposed new scheme, the shares must be valued when the option is granted, and the exercise price for the option cannot be set lower than the market value of the share at the time of the grant. There will be an upper limit for the company on the total value of the underlying shares related to the issued options under the scheme and there will similarly be an upper limit on the value of the underlying shares related to the issued options under the scheme for the individual employee. In relation to these limits it is the share value at the time of the option grant which is considered. If the total value of the underlying shares at a later time increases due to the shares increasing in value, this does not affect the limits that apply to the company or the employee.

The government also mentions more broadly that the experiences and findings from this new model for employee stock options in companies in the start-up and growth phase may be useful also when in the future assessing the tax rules for employee stock options more broadly.