Can you give shares to an employee?
Yes, but. If an employee receives shares for free, the tax authorities consider this as disguised remuneration or a bonus. Therefore, income tax must be paid on the market value of the shares. If you do not pay this, you risk a fine. Therefore, it is better to make use of one of the options in this article.
Benefits of Giving Shares to Employees
Let’s start with the benefits of giving shares or share certificates as a bonus. Firstly, it increases employee loyalty. They feel more connected to the company. Secondly, it improves motivation and productivity. Employees work harder because they know their efforts directly affect their shares. Finally, it is attractive to new employees. Companies with share schemes attract more talent.
The downside of giving shares is that employees have not paid anything and thus have not made any "offer." They will not feel the pain if the shares decrease in value. As the saying goes in English, there is no "skin in the game."
Tax Aspects
When giving shares, there are legal and tax aspects to consider. Firstly, companies need to understand the tax implications. The tax authorities see the giving of shares as a bonus or disguised remuneration. When you, as an employer, pay wages to employees, income tax must be paid on this. The same applies when giving shares. Income tax must be paid on the value of the shares that have been given.
Therefore, it is more common for employees to buy the shares at the actual value of the shares. For this, it is important to have a solid and external valuation done. If the tax authorities disagree with the valuation, they will see the difference between the purchase price and the actual value as a gift. And that difference is taxed as income.
How can the employee receive shares from the employer?
As we have mentioned, you can give shares to employees for free or have them buy shares. This is called a share plan. But there are other options that may be relevant for your situation. We describe them all:
- Share Plan: In a share plan, employees get or buy real shares in the company, which often gives a strong sense of entrepreneurship. Despite the initial desire of many employers to provide shares, we often advise against this. This is because employees will gain direct influence and may participate in the shareholders' meeting. To avoid this, you can also consider providing a SAR or share certificates (see below for more information).
- Certificate Plan: Share certificates resemble ordinary shares but offer different rights. Employees receive profit rights but no voting rights (see image). This means they benefit from the change in value of the company without having voting rights during the shareholders' meeting. They cannot influence the company's course.
- SAR Regime: A SAR regime (which stands for Stock Appreciation Right) is an agreement that states that the employee is entitled to a cash amount equal to a certain percentage of the company. Upon exit, for example, the employee receives 1% of the business value. The employee does not receive this in shares but in cash. This is taxed as income for the employee, but the costs are deductible for corporate tax for the employer. This makes it very popular for employers. You also do not need a notary to set up a SAR regime, which significantly reduces costs.
- Profit Sharing: A profit-sharing arrangement gives employees the right to a percentage of the company's profit. Unlike a SAR, which is based on the increase in share value, profit sharing is based on the actual company profit. This makes it attractive for employees because they directly benefit from the profitability of the company. The amount received is taxed as income but is deductible for corporate tax. No notary is required for this either.
- Option Scheme: Options give employees the right to buy shares at a predetermined price. If the value of the shares increases, employees can exercise the options and make a profit. This profit is considered income by the tax authorities. Therefore, a SAR is often more attractive: in both cases, the employee pays income tax, but a SAR is deductible for corporate tax, and no notary is involved.
- Bonus Scheme: A bonus scheme is straightforward and involves the employee receiving a cash amount upon achieving specific goals, KPIs, or results. These goals are set in advance to ensure that everyone understands what is expected.
How to give shares?
If you decide to give shares to employees, you must create a good plan. First, you need to determine which employees will receive shares and how much. Next, you need to establish clear rules about how the program works. It is important to communicate well with employees about the program. Explain why you are giving shares and how it works. You should also think about how you will manage the program.
We will assist you in setting up the contracts and providing workshops for your employees so they understand the implications for them.
Possible Challenges and Solutions
Giving shares to employees also has challenges and risks. One risk is that the value of the shares for existing shareholders can decrease. It can also be complicated to determine the value of the shares and manage the program. If the share price falls, employees may become disappointed. This can lead to reduced motivation. It is important to think about these risks and make a plan to deal with them.
Conclusion
Giving shares to employees can have many benefits for both the company and the employees. It can enhance involvement, motivation, and growth. But there are also challenges and risks to consider. It is important to think carefully about the method you choose and to communicate clearly with employees. With a good plan and the right approach, giving shares to employees can be a tremendous success for your company.
We can guide you in choosing the right employee participation plan. Feel free to contact us.
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Veelgestelde vragen
You can give shares to your employees, but there must be income tax paid on the benefit that the employee receives. The benefit is the difference between the market value of the shares and the price paid for them. If a share is worth €100 and the employee pays €40 for it, then the benefit is €60. This must be taxed as income.
You can give shares to your employees. However, income tax must be paid on the difference between the value of the shares and the price the employee has paid. Ensure you have a solid valuation report so that you do not face questions later on.
An employee can receive shares from the employer. If the employer gives shares for free (or at a discount), income tax must be paid on the difference with the market price. A good, external valuation report must also be created to avoid potential issues with the tax authorities.
In general, you cannot give employees something for free tax-free, as this gives the employee a benefit. However, there may be possibilities for your company under the Work-related Expenses Scheme (WKR). Contact us to discuss how you can use the WKR scheme.
If you own less than 5% of shares privately, shares fall under box 3. If you own more than 5% of shares, they fall under box 2. Additionally, if you hold the shares in a holding company, they will also be taxed in box 2.
When considering becoming a co-owner of a company, it is important to understand the value of the company, consider financing options, and be aware of the legal aspects of the transaction. Ensure you feel good about your future business partners and can negotiate business without harming the relationship.
There are several ways to finance the purchase of shares, such as personal savings, loans from banks or other investors, or through stock options and profit-sharing arrangements. Discuss the possibilities with a financial advisor (like RoundE) to determine the best option for your situation.
A shareholder agreement is a contract between shareholders that is not included in the articles of association of a BV, such as the sale of shares upon departure. With a shareholder agreement, all shareholders know where they stand.
A shareholder agreement lays down important agreements between shareholders that are not included in the articles of association of a BV, such as the sale of shares upon departure. This agreement provides clarity and protects the interests of all shareholders.
The Discounted Cashflow method is a technique to determine the value of a company by estimating future cashflows and discounting them back to the present value. This takes into account the cost of capital and risk premiums.
Drag Along: An arrangement that allows majority shareholders to require minority shareholders to sell if they wish to sell their shares. Tag Along: An arrangement that gives minority shareholders the right to sell under the same conditions as the majority shareholder. Also, read our article on Drag Along and Tag Along arrangements.
There are several ways to buy yourself in without immediate cash, such as receiving stock options or profit-sharing arrangements, or by taking out a loan from the current owner. It is important to make good agreements about the financing and repayment of any loans. Borrowing carries additional risks, so be sure to seek good advice.
The process involves negotiating the price and terms, drafting a shareholder agreement or a partnership agreement, and formally documenting the agreements with a notary. It is crucial to involve legal and financial advisors in this process.
Yes, as an employee, you can buy yourself into a company. Many companies offer shares as a bonus or at reduced prices to employees. For a significant share, it may be necessary to invest personal funds or take out a loan.
To become a partner in a VOF, you must be included in the existing partnership agreement. This may require revising certain provisions to facilitate your entry. You must then register with the Chamber of Commerce.
You can borrow money from a bank, provided you meet the collateral requirements. An alternative option is to obtain a loan from the current owners of the company, as they have a vested interest in your joining as a co-owner. Note that borrowing carries additional risks.
Disguised remuneration is when an employer gives the employee money but does not pay income tax on it. To prevent this with regard to employee participation, it is important that the employee pays the market value for the shares.
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