Equity & Options in Europe
Companies in Europe have historically had trouble distributing Stock Based Compensation (SBC) to its employees. Each country has its own laws and regulations governing stock. The UK has its own set of rules. France offers RSUs and options, each of which is complex to administer. Some countries have no clear legislation on SBC. This article explores SBC across several countries in Europe.
Competition for talent between European-based companies and American-based companies has intensified. As a result, calls to simplify the rules governing SBC have increased in recent years. In January 2019, over 700 founders, executives, employees, and investors published a letter to European policymakers entitled Not Optional calling for simpler rules on SBC to encourage talented individuals to join European startups.
The article below is not a call to action. Instead, it provides information on the status quo of SBC in Europe, or what things are like today. After reading, you will understand why the calls for reform exist.
SBC is less common in Europe than in America. There are cultural and logistical reasons why. Most importantly, you have over 40 countries in Europe, each with its own tax policy. If you operate an office in two countries, you add one layer of complexity to paying employees. As your company grows and expands throughout Europe, the complexity intensifies. Much has been written on why companies use SBC so we will not cover that. If you want to understand the basics of SBC and how it operates in the US, you can read our article on this topic. Instead, let’s go country-by-country to understand some of the particular rules of SBC in Europe.
United Kingdom (UK)
There are four types of approved employee equity plans in the UK:
- Enterprise management initiatives (EMI)
- Company share option plans (CSOP)
- Share incentive plan (SIP)
- Save as you earn (SAYE)
EMIs are a common type of share ownership scheme, reportedly used by over 10,000 companies in the UK. Companies with less than £30 million of assets in industries outside of banking, farming, property development, legal services, and ship construction can set up an EMI scheme. Employees can receive up to £250,000 worth of options in a three-year period. Whether you are subject to income tax or national insurance will depend on whether the value of your shares is at the market share price or at a discount to the market share price. Like other forms of SBC, you will be subject to capital gains taxes if you sell your shares for a profit.
A CSOP is another type of option plan. Employees in a CSOP can receive options to purchase up to £30,000 worth of shares in their employer. The exercise price of your options will be at market value and not at a discount. You will avoid some income tax and national insurance when you exercise your options, and you will still be subject to capital gains taxes at sale.
SIPs are less common for early stage businesses but are tax advantaged. SIPs are a form of share grant, not option grant. Employees may receive up to £3,600 of shares in any tax year for no cost. If an employee chooses to hold their shares for at least five years in the company plan, then they pay no income tax or national insurance. They will still be subject to capital gains taxes.
SAYE programs are also less common for early stage businesses. An employee in a SAYE program can save up to £500 per month in a savings account for between three to five years at which point they can buy shares in their employer. The benefit to a SAYE scheme is that while you pay capital gains taxes when you sell your shares, you do not pay income tax or national insurance on a portion of the share value.
There are also a few other types of SBC in the UK, including unapproved share option plans and restricted stock units (RSUs). Each has its own set of rules, and we would encourage you to ask a professional with experience in UK equity compensation schemes to learn more.
There are three types of employee equity plans in Ireland:
- Approved profit sharing schemes (APSS)
- Save as you earn (SAYE)
- Key employee engagement programme (KEEP)
Before we cover APSS, SAYE, and KEEP, the relevant taxes in Ireland are income tax, Universal Social Charge (USC), and Pay Related Social Insurance (PRSI). Click the links to see the tax rates in Ireland.
APSS is a common form of SBC at public companies, whereby employers grant up to €12,700 a year in tax-free options in place of a standard cash bonus. APSS options are still subject to USC and PRSI, and they vest over three years. You will need to pay to exercise your APSS options, though the difference between your sale price and your exercise price (assuming there is a profit) will be taxed at the Irish capital gains tax rate of 33%.
The SAYE program is a bit more complex because it has multiple steps. The first step with a SAYE scheme is you save between €12 and €500 each month in a savings account. Any amount saved above €500 is subject to tax. The savings period is somewhere between three and seven years. After the savings period, employees can use the savings balance to purchase shares at a fixed price, which is set at the start of your SAYE scheme. The added benefit of SAYE is that your share purchase price is 25% lower than the price of your options. For instance, if you have an option to purchase a share at a €100 price, you could use your SAYE balance to purchase that share for €75. When you exercise your option to purchase the shares, you will pay USC and PRSI. When you ultimately sell your shares, you are subject to capital gains taxes on the spread between your purchase price and your sale price.
The KEEP program is Ireland’s attempt at SBC for early stage companies. Under a KEEP share ownership program, you have one year after receiving options to exercise them. At the time of exercise, you pay no tax. You pay to exercise your options, and if you sell your shares for a profit, then you pay capital gains taxes on the spread between your purchase price and your sale price. To be eligible for options under a KEEP scheme, you need to be a full-time employee who has been with the company for more than one year. Your employer must also be a qualified SME with less than 250 employees and either less than €50 million in sales or less than €43 million in total balance sheet value. You can read more about KEEPs here.
France is one of the friendliest countries in Europe with regard to SBC and stock options. The French have a section of their tax code dedicated to SBC called Bons de Souscription de Parts de Créateur d’Entreprise (BSPCE). French companies will often grant BSPCEs. If you are in a position where you are being offered BSPCEs, you should spend time understanding how they operate because each French stock plan is unique. Companies based or operating in France can issue SBC to their employees, and like the US and Israel, employees can be granted options at a Fair Market Value (FMV) which is at a discount to the valuation investors ascribe to a company. As one would hope, BSPCEs are taxed at sale with favorable tax rates on gains between the sale price and exercise/strike price. You will pay 15.5% social tax and a capital gains tax of 19% if you have been employed for over three years when you sell your shares or 30% if you have been employed for less than three years.
In Germany, SBC has been nearly non-existent historically. This is because of a dry income problem, as employees are taxed at the moment options are granted versus at exercise or at sale. Instead, German companies have opted to used phantom stock plans, which we cover in the basics of SBC article and below with reference to SBC in Spain. Phantom equity is a workaround and not a lasting solution. Phantom equity plans are costly to set up and they have unfavorable tax treatment. You will pay your standard income tax on any gains, which can be in the 50% range in Germany, while in other countries you may get favorable tax rates on gains accrued over many years.
In Spain, it is common for stock ownership plans to take a long time to set up. There is a business to be built solving this problem! Some companies have opted to set up phantom stock plans in lieu of true equity plans. If you have read our article on the basics of SBC, you will recall that phantom shares are simply cash bonus plans that have nuanced requirements around it. In the case of phantom equity plans in Spain, you may receive shares which grant you a cash bonus in the event a company is acquired or goes through some other change of control. Ultimately, we would expect the tax favorability to be low and your proceeds from phantom shares to be taxed like your wages.
Like France and the UK, Estonia is one of the more progressive countries in Europe when it comes to SBC. You can read about the stock plan at the cross-border payments company, TransferWise, here. You can mimic a stock plan that is somewhat similar to those in the US if you are an Estonia company. For instance, you will not have to pay taxes on your options when they are granted like in Belgium or Germany. You will have a tax burden when you sell your shares, and any gains between the sales price and strike/exercise price will be taxed at a flat 20% rate. As with TransferWise, a company does not incur any employer taxes if options are exercised at least three years following the grant date.
SBC in Belgium is unfavorable to employees. You are taxed on your SBC (options and warrants) when it is granted, not after you vest and not when you choose to exercise your options. In Belgium, you pay 9% to 18% when you are granted options. Though you pay tax upfront, your shares have the possibility of being worth nothing. If you join a company early, the tax obligation may be in the hundreds to low thousands. As your company matures and its value increases, the tax obligation becomes more material.
Having produced a number of successful technology companies, Israel has favorable treatment of SBC. If you are given an option package, you will not have a tax burden at the grant date or when the shares vest. You will incur a 25% tax on the difference between your sale price and the strike/exercise. Companies (i.e. employers) do not incur any tax burden due to SBC.
Exercise Windows in Europe
Historically iin the US, companies gave employees 90 days to exercise their vested options upon departing a company. This is called the Post-Termination Exercise window, or PTE window. We write more about that here. There have been a number of examples of American companies extending their PTE window in the interest of fairness and being competitive when hiring.
European companies can set their own PTE window. If you are an employee at a European company who gives you options or other SBC, please ask about your PTE window upfront. If you are a founder, discuss with your advisors and lawyers how to set up your PTE window. Do not automatically decide 90 days is best. In Europe, the tax obligations of SBC are often more punitive than in the US.