What is a SAR scheme? And what are the tax benefits?

Are you curious about how to better engage your employees in the success of your company? Stock Appreciation Rights (SAR), or SAR scheme, is an innovative way to achieve this. In this article, you will discover what SARs are exactly, how they work, and why they may be an attractive option for both employers and employees.

What are Stock Appreciation Rights?

Stock Appreciation Rights, or a SAR scheme, are essentially a bonus. While a 'standard' bonus is usually contingent on certain achieved results, the bonus with a SAR depends on the increase in the value of the company. This means that if the company performs well and the stock price increases, employees benefit directly without actually owning shares.

How does a SAR scheme work?

Imagine a company grants SARs to an employee when the stock price is €50. If the stock price rises to €70 after a certain period, the employee is entitled to the difference in value. The difference, in this case €20 per SAR, is paid out in cash. Thus, the employee never owns shares in the company but still benefits from the potential appreciation.

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Advantages of the SAR scheme

The SAR scheme offers various advantages:

1. Simple contract: unlike other employee participation plans, such as shares and certificates of shares, a SAR scheme is merely an agreement. It can be drawn up without the involvement of a notary, making the costs very low.
2. Costs are deductible from corporate tax: since the SAR is a bonus, these costs can be deducted from corporate income tax. This makes this form of employee participation very attractive for employers.
3. No investment costs for employees: employees do not need to invest any amount to receive a SAR. They only pay taxes when they receive the potential profits from the SAR. This makes a SAR very accessible.

Disadvantages of the SAR scheme

Of course, there are also drawbacks to a SAR agreement:

1. Higher taxes for employees: The profits from a SAR are considered wages (just like a bonus) and fall under box 1 for the employee. Box 1 has a relatively high tax burden, compared to box 2 and box 3.
2. Lower ownership: Employees do not receive shares and thus do not become co-owners. This may result in them feeling less engaged.

Implementation of SARs in Your Company

To effectively implement SARs, you should establish a clear plan that outlines the terms, the vesting period, and the payment method. It's also important to be transparent with employees about how the SARs work and what benefits they can offer. You should also consider "good leaver" and "bad leaver" provisions. Of course, we can assist you with this and provide insights into what is customary.

Conclusion

Stock Appreciation Rights offer a unique way for companies to engage and reward employees. By linking employees to the financial performance of the company, you create a win-win situation where everyone benefits.

Would you like to know more about how SARs can help your business? Contact us for more information and tailored advice.