6

Country by country review

The impact of regulation and tax

Founder philosophy, technical DNA, and the maturity of the local startup ecosystem can all have a big impact on a startup’s approach to employee ownership. But on a practical level, the tax and regulatory framework they operate in makes a huge difference, too.

Governments use tax as a lever, and many use it to support entrepreneurs. In the UK, the SEIS scheme offers a 50% tax break for those investing up to £100,000 in early-stage startups, and startups in several countries can use R&D tax credits to offset software engineering costs. As well as helping startups in general, some countries’ tax policies also make employee ownership more attractive.

Which countries are favourable for stock options?

Different countries, different policies

Each country in Europe has its own legal framework and tax code, as well as a unique set of cultural norms. There is no common EU standard. That means the situation needs to be considered country-by-country.

We have reviewed and compared stock option treatment across 20 European countries, plus a further 4 outside of Europe.

To make things simpler, we’ve given each country a score for stock option ‘friendliness’, as well as summarising various rules and regulations. We’ve identified six factors that contribute, scoring each on a five-point scale (5 = the most positive and beneficial).

  1. Plan scope

    Can all employees and company types benefit from favourable treatment of stock options?

  2. Strike price

    Can options be offered at a strike price below last-round valuation, without adverse tax treatment – reflecting that they are illiquid, high-risk, and non-preferred?

  3. Minority shareholders & bureaucracy

    When option holders exercise, they become minority shareholders, who may need to be consulted on various company decisions; does this make stock options unattractive to companies? How does this affect the treatment of leavers? And how much administrative burden and cost is associated with creating and maintaining the plan?

  4. Employee tax (timing)

    Are employees taxed only when they sell shares, or when they exercise – or even at the point of grant?

  5. Employee tax (rate)

    Which rate is applied – income, capital gains, or something else? Are employee social contributions payable, and if so, how much are they?

  6. Employer taxation

    Is there any financial impact for companies using stock options? If so, when is it incurred? What rate is applied? Are employer social contributions payable, and if so, how much?

We’ve done our best to provide correct and current information, but you should do your own research, and take legal, tax and investor advice. The best approach for your company may be influenced by other factors beyond the scope of this handbook.

When are employees taxed?

This is a critical factor impacting the attractiveness of stock options. The later they are taxed, the better. Not only for the employee – but in our opinion, also for governments, because tax-receipts are maximised by targeting the point of greatest financial upside.

There are four points at which stock options may be taxed:

  1. Grant

    A few countries treat the issue of options as a taxable benefit, with tax based on the fair market value of those shares. This is a strong disincentive for both employers and employees.

  2. Vesting

    Some countries tax option holders when their options vest, even if they don’t exercise immediately. However, this is more common with other equity-based incentives (for example, RSUs) than with stock options.

  3. Exercise

    Many countries tax employees when they exercise options and buy shares. Tax is applied to the spread between strike price and fair market value at the time of exercise, and is treated as income (rather than a capital gain).

  4. Sale

    Almost all countries tax employees when they sell their shares, but the tax rate applied varies. Some countries treat the profits as income; others, as a capital gain.

In practice, exercise (3) and sale (4) often happen simultaneously. This is important because employees may have to pay higher income tax rates attached to exercise, than lower tax rates attached to sale. The two most common circumstances where this could happen are:

  • Employees with vested options, when the company exits through a trade sale (this is much more common than exit through IPO).

  • Former employees with vested options, where the company has a policy where leavers retain options, but cannot exercise until an exit (this is common in Europe as we saw in chapter 4).

Understanding taxation of share options
Average FDE (in %)

Our analysis

In our analysis, countries fell into four groups. Unsurprisingly, practice mirrored policy – companies operating in ’friendlier’ countries were more likely to have all-employee option schemes.

Table with points per factor per country 5=best, 1=worst
Total score Plan scope Strike price Minority
s’holders,
bureaucracy
Employee
tax (timing)
Employee
tax (rate)
Employer
taxation
Ranking
Latvia 30 5 5 5 5 5 5
WINNERS
Estonia 30 5 5 5 5 5 5
Lithuania 30 5 5 5 5 5 5
Israel 27 5 4 5 5 4 4
Canada 27 5 4 5 5 4 4
France 26 5 4 5 5 3 4
HIGH RANKING
UK 25 3 5 3 4 5 5
Portugal 24 3 3 5 5 4 4
US 24 4 4 5 4 3 4
Poland 23 4 3 3 5 4 4
RUNNERS-UP
Italy 22 3 3 3 5 4 4
Sweden 21 2 3 3 5 4 4
Ireland 20 2 3 4 4 3 4
Australia 16 1 4 1 4 3 3
RIPE FOR CHANGE
Denmark 15 1 2 3 3 2 4
Netherlands 15 1 3 3 3 2 3
Switzerland 14 1 3 3 3 1 3
Norway 14 2 3 3 3 2 1
Czech Republic 14 1 4 2 5 1 1
Finland 13 1 2 3 3 2 2
Austria 13 1 2 3 4 2 1
Spain 11 1 2 2 4 1 1
Germany 10 1 1 2 3 1 2
Belgium 10 1 2 1 1 1 4

Winners

The Baltic States, Israel, Canada

These countries have policies which strongly support the use of stock options by startups: at all stages of growth, and for all levels of employee. Programmes are simple to implement, with minimal cost to companies. Strike prices can be heavily discounted from previous-round valuations, applying US 409A valuations or better. Employee taxation is deferred to the point of sale, and taxation on upside is 25% at most.

These countries scored between 27 and 30, out of the maximum score of 30.

High ranking

France, UK, Portugal, USA

These countries have implemented programmes to support the use of stock options and similar schemes to reward startup employees.

They adopt at least two of the following policies: deferring when tax is payable; reducing the effective tax rate on sale; allowing strike prices significantly below previous-round valuations, and reducing the burden on companies to pay tax or social charges on stock option awards.

So long as the UK government maintains the most entrepreneur-friendly policies, including those around stock options, it will retain its position as the leading European startup hub.

Jan Hammer

Partner, Index Ventures

These countries all scored 24 to 26.

The UK government’s EMI scheme, first introduced in 2000, is particularly worthy of mention. It has created one of the most startup-friendly environments in the world, and has undoubtedly contributed to the county’s leading position in Europe.

However, the scheme is showing its limitations. The maturing London ecosystem now has at least 50 tech startups which have exceeded the company size criteria for EMI (including 250 employee limit). These companies are being forced to adopt much less employee-friendly approaches, damaging their ability to effectively reward talent. Policymakers are advised to broaden the scope of the EMI scheme, to protect the UK’s advantage in European tech.

Runners-up

Poland, Italy, Sweden, Ireland

These countries scored between 20 and 23 points in our analysis. They have implemented specific policies to support the use of stock options and similar incentives for startup employees. They defer taxation to the point of sale, and apply capital gains tax rates instead of income tax.

The main problem with these schemes is their scope – they are not available to all startups. They often only apply at very early-stage. Once a company outgrows the scheme, the alternatives become much less attractive.

We hope to see the scope of these schemes extended in the years ahead, by forward-thinking governments. Encouragingly, in October 2018, the Irish government proposed to broaden its KEEP programme to allow for larger employee option grants.

Ripe for change

Australia, Denmark, Netherlands, Switzerland, Norway, Czech Republic, Finland, Austria, Spain, Germany, Belgium

These eleven countries scored 16 or lower, placing them at the bottom of our grid. Most lack any specific programmes supporting stock options; administrative barriers make the use of stock options a serious headache for companies, even where there is a specific programme.

Even so, startups often do use stock options or similar instruments anyway. They often prevent employees from being able to exercise vested options until a change of control. This avoids the complexities of having minority shareholders on the cap table.

Alternatively, startups (particularly in Germany, Spain, Austria, and the Czech Republic) have resorted to offering ‘virtual options’, which mimic stock options, but don’t offer ownership in the same way. These are simple to implement and administer, and avoid some of the tax burden. But there are disadvantages.

Unlike real stock options, VSOPs are generally structured as an employee benefit, which companies can choose to remove without-cause. Leavers often forfeit all rights to virtual options. These differences make savvy hires sceptical. Because of this, virtual options don’t bring the same benefits in terms of attracting and retaining talent.

We encourage startups using VSOPs in these countries to allow employees to ‘exercise’ or retain vested virtual options if they leave the company.

But we also encourage governments to change policy and make ‘real’ stock option schemes more viable. Whilst virtual option schemes may mirror some of the economic benefits of real stock options, they are conceptually very different – employees cannot truly be considered ‘owners’ if they hold virtual options.

The policy priority for these countries is to reduce tax rates for stock options, which is often in excess of 50% (including social contributions) for employees, and 20% for companies. This should be followed up with moves to defer employee taxation to the point of sale rather than exercise.

Such changes would create more ‘winners’ amongst employees at successful startups. These individuals would then act as advocates, drawing more top talent into these startup ecosystems.

The Belgian challenge

Belgium ranked lowest amongst all the countries that we reviewed, with a score of 10 out of 30. Employees are hit with a tax at the moment they accept an option grant – currently 18% (sometimes discounted to 9%) of the stock’s assumed value. Consequently, Belgian startups issue few stock options.

Few early hires stay with a startup all the way through to IPO. If leavers require a lot of cash to exercise their options, including taxation at exercise, they probably won’t bother, unless the company is clearly nearing a successful exit. Meanwhile, virtual schemes often offer nothing for leavers. Without the right policies in place, stock options can therefore seem worthless to employees. This can damage a company’s talent brand and is bad for the local startup ecosystem as a whole.

Dominic Jacquesson

Director of Talent, Index Ventures

Take-aways

Across Europe and the rest of the world, approaches vary widely. Several countries are in fact at least as ‘friendly’ as the US. In Europe, these include Latvia, Estonia, France, the UK, and Portugal. A few European governments are experimenting with startup-friendly policies, including Sweden, Italy, and Ireland.

I’d welcome a new and more inclusive approach to ownership of startups in Germany. Awarding at least early team members is crucial – they will eventually start their own companies, or end up investing in the new generation of startups. Ownership and participation in success are much more than making individuals better off: it is the foundation for further entrepreneurship and innovation.

Philipp Moehring

Europe, AngelList

These need to be bolder. Other countries, including Germany and Belgium, lag further behind with no specific schemes to support startups.

Policies drive practice. The onus is on policymakers to work with entrepreneurs, and foster a better environment for both startups and talent.

A message to policymakers

How you can help

Vibrant startup ecosystems can bring enormous economic benefits in terms of innovation, job creation, and productivity growth. As a policymaker, your actions can be the crucial difference between an ecosystem that thrives, and one that fails.

Over the past decade, policies designed to support startups have focused on the lack of investment. The good news is there is no longer a shortage of capital for truly ambitious founders. There are more seed and venture capital firms active in Europe than ever before, and many of them are flush with funds and eager to invest.

Today, the availability of talent, not the lack of capital, is the biggest bottleneck to growth of European startups.

Europe’s excellent educational institutions produce a large proportion of the world’s most promising software engineers, data scientists and designers. These individuals are in high demand from the largest and most deep-pocketed corporations, including those of Silicon Valley and Wall Street.

Startups are unable to compete for this talent with salary and benefits alone. But they can offer employees a meaningful ownership stake, in the form of stock options – rewarding the risk employees take with a young unproven business with a promise of a payout should the startup succeed.

While employee ownership is routinely used in Silicon Valley to attract and retain talent needed by startups with limited cash, but near limitless potential, in Europe it is offered inconsistently and at far lower levels. On average, employees of US startups own twice as much of the companies they work for compared to their European counterparts.

Furthermore, European policies all too often penalise businesses and employees for such incentives, with wide variation between national policies and tax frameworks creating a highly fragmented picture across Europe.

We believe that closing this disparity, and creating a level-playing field across Europe, will boost the growth prospects of startups and help entrepreneurs secure the best talent. While entrepreneurs and investors need to do their part to increase the stake given to employees, policy changes are critical to making such incentives feasible and attractive.

The treatment of stock options varies widely across Europe. Some countries, such as Estonia, the UK, and France, have regulatory and tax regimes which are at least as favourable as those in the US. The majority, however, including Germany and Spain, lag behind.

Current policies discourage stock options on two levels:

  • For companies

    It can be complicated and expensive for employers to grant stock options to their employees, with different schemes required for each European country.

  • For employees

    Tax policies can make it cost-prohibitive for employees to acquire their equity.

We have six specific policy recommendations to encourage employee ownership in startups:

  1. Create a stock option scheme that is open to as many startups and employees as possible, offering favourable treatment in terms of regulation and taxation. Design a scheme based on existing models in the UK, Latvia or France to avoid further fragmentation and complexity.

  2. Allow startups to issue stock options with non-voting rights, to avoid the burden of having to consult large numbers of minority shareholders.

  3. Defer employee taxation to the point of sale of shares, when employees receive cash benefit for the first time.

  4. Allow startups to issue stock options based on an accepted ‘fair market valuation’, which removes tax uncertainty.

  5. Apply capital gains (or better) tax rates to employee share sales.

  6. Reduce or remove corporate taxes associated with the use of stock options.

The remainder of this chapter reviews the policies of 22 different countries, scoring them for their treatment of stock options. We hope that you find it a useful resource for supporting employee ownership, and startup ecosystems, in your own country.

We believe that making these changes is critical to attracting talent to startups, and will result in profound and lasting impact on the prospects for European entrepreneurship and innovation.

‘Leavers’ are an overlooked part of this discussion. The most successful startups now take 10–12 years between founding, and becoming publicly-traded multi-billion dollar corporations. The employees in the early years of this journey take the most risk, and sacrifice the most in terms of salary. Few will stay with the company the whole way through. But they are the lifeblood of any startup ecosystem; most likely to join another startup, or to become founders themselves. Policies that punish these leavers with prohibitive upfront costs and taxes to exercise their stock options, will drive them out of the ecosystem.

Latvia

Current Situation:

In January 2021, a very favourable new approach to stock options was introduced, which applies to all private limited companies. It is slightly more flexible than Estonia’s (already existing) scheme.

Preferred employee scheme:

Stock options

Score: 30

Stock options

Plan scope:

Applies to all limited liability companies, for all employees and supervisory board members employed by the company. Not applicable to advisors or consultants who are not employed

Strike price

The company can choose a strike price, even at a nominal value, without creating any tax liability upon grant. No requirement to do any formal valuation analysis

Minority shareholders & bureaucracy

Straightforward to set up. Non-voting shares can be issued for stock options

Companies have to declare all option grants to tax authority within 2 months of grant date

Employee tax (timing)

At point of sale, so long as options are held for at least 1 year prior to exercise

Leavers are required to exercise their options within 6 months of departure

Employee tax (rate)

Capital gains tax is applied, on the difference between the sale and strike price. This rate is currently 20%

Valuation upon sale needs to be based on an independent valuation assessment, which the company needs to organise (assuming not publicly traded)

Employer taxation

No employer taxes so long as options are exercised more than 1 year after grant

Estonia

Examples of an Index-backed company with significant presence in Estonia:

Transferwise

Current situation:

There is no specific scheme for startups, but the tax regime which applies to all private companies is exceptionally flexible and favourable

Preferred employee scheme:

Stock options

Score: 30

Stock options

Plan scope

No specific tax-favoured scheme

Strike price

No assured valuation

Company can choose strike price, even heavily discounted, without creating any tax liability upon grant

Minority shareholders & bureaucracy

Usually straightforward to set up

Companies typically prohibit employees from exercising options for at least 3 years after grant, to avoid triggering tax liabilities

Employee tax (timing)

At point of sale

Employee tax (rate)

Income tax (flat-rate 20%) on spread between strike price and sale price

Employer taxation

No employer taxes (so long as options are exercised more than 3 years after grant)

Lithuania

Current Situation:

In February 2020, new tax-favourable legislation came into effect for the treatment of stock options. This applies to all private and public limited companies.

Preferred employee scheme:

Stock options

Score: 30

Stock options

Plan scope

Applies to all limited liability companies, for all employees and supervisory board members employed by the company. Not applicable to advisors or consultants who are not employed

Strike price

The company can choose a Strike price, even at a nominal value, without creating any tax liability upon grant. No requirement to do any formal valuation analysis

Minority shareholders & bureaucracy

Fairly straightforward to set up. Non-voting preferred (but not ordinary) shares can be issued for stock options, meaning they have priority over distributed dividends. Else ordinary shares can be used with voting rights assigned over

Employee tax (timing)

At point of sale, so long as options are held for at least 3 years prior to exercise

Options must be exercised before an employee’s last day of employment by the company

Employee tax (rate)

Capital gains tax is applied, on the difference between the sale and strike price. This rate is currently 15% or 20% depending on bandings

If options are exercised less than 3 years after grant, they are taxed as income at the point of exercise, with social contributions

Employer taxation

If options are exercised more than 3 years after grant, no company taxes

If less than 3 years, then a social contribution of 1.77% is levied (only on income up to €81,162)

Israel

Examples of Index-backed companies founded in Israel:

MyHeritage, Adallom

Current situation:

Tax beneficial schemes allow for employees to be taxed at capital gains rates at the point of sale. There are no assured valuations, but startups often use US 409A valuations.

Preferred employee scheme:

Stock options

Score: 27

Stock options

Plan scope

Tax beneficial schemes apply if options are held in an approved trust scheme for 2 years following grant. These schemes do not apply to employees or directors who hold more than 10% of the company’s issued shares

There are no specific limitations in terms of size or stage

Strike price

No assured valuations

For companies with a US presence, 409A valuations are generally accepted by Israeli tax authorities (frequently 60% below last round valuation)

Minority shareholders & bureaucracy

Usually straightforward to set up

Compliance is required with a few rules including:

  • No grants made for a 30 day period following adoption of 102 Capital Gains Plan

  • Each grant must be reported to the trustee within 45 days of grant

  • The grant notice, option agreement and employee consent must be submitted to trustee within 90 days of grant approval

Employee tax (timing)

At point of sale

Employee tax (rate)

Capital gains tax (currently 25%) on spread between strike price and sale price

Employer taxation

No employer taxes

Canada

Examples of an Index-backed company founded in Canada:

Slack

Current situation:

There is no specific scheme for startups. The tax regime which applies to all qualified small business corporations (QSBC), private companies controlled by Canadian residents, is very good. In 2017 the Canadian government tried to roll back some of the tax-benefits, but backed down following strong resistance, particularly from the tech sector.

Preferred employee scheme:

Stock options

Score: 27

Stock options

Plan scope

No specific tax-favoured scheme

However, if sale is more than 2 years after exercise, up to first C$850k is entirely tax-free

Strike price

US 409A compliant valuations are commonly used (frequently 60% below last round valuation)

Minority shareholders & bureaucracy

Usually straightforward to set up with standard templates

Startups issue non-voting common shares to avoid minority shareholder complexities

The majority of startups allow 90 days for leavers to exercise options

Employee tax (timing)

At point of sale

Employee tax (rate)

Income tax at 50% of employee’s marginal income tax rate

Tax is calculated at point of exercise based on fair market value, but is not payable until sale

If sale is more than 2 years after exercise, up to first C$850k is entirely tax free

Employer taxation

Minor taxes, deferred to sale

France

Examples of Index-backed companies with HQ in France:

Criteo, BlaBlaCar, Alan

Current situation:

For smaller private companies, the most tax-efficient way to reward employees with equity-based incentives is the BSPCE scheme. It was introduced in 2000 and amended a few times since. In effect, it is more like an RSU instrument than a pure stock-option, but is tax advantaged.

Eligibility for the scheme is fairly broad, has major advantages, and is used by almost all French tech startups. Employers don’t need to pay any tax or social security contributions, and employees don’t pay any tax until a sale of shares.

A few startups also use a tax-advantaged Free Shares scheme, but mostly for employees based outside France. Rules are complex and have changed frequently.

In January 2020, the French government announced very positive enhancements to the BSPCE scheme, after listening to calls from the #NotOptional campaign kicked off by Index Ventures. First, they immediately widened the scope of the scheme so that non-French companies could also issue BSPCE's to their employees in France. Second, they intend to introduce a 'fair-market valuation' system that will allow startups to offer BSPCE's with a strike price significantly below last-round valuation. Detailed guidance is unlikely to be issued before Summer 2020.

Preferred employee scheme:

BSPCE (Bons de Souscription de Parts de Createur d’Entreprise)

Score: 26

BSPCE

Plan scope

Company requirements:

  • Less than 15 years since company formation

  • Privately held

  • 25% of the share capital held by individuals as opposed to institutions

  • Pays corporate income tax in France

Only available to employees

Strike price

No assured valuation

Most startups set strike price at last round valuation, although moderate 20–30% discounts can be justified later-stage on the basis of prefs structure

The January 2020 government announcement offers an assured valuation mechanism. However, detailed guidance will not be issued until Summer 2020.

Minority shareholders & bureaucracy

Minority shareholders have rights to be informed, but not consulted, if there is already majority support for corporate decisions

Employee tax (timing)

At point of sale

Employee tax (rate)

Gains subject to special taxation rates (19% if the employee’s tenure has been more than three years at the date of sale, else 30%) and social tax (15.5%)

Employer taxation

No employer taxes

United Kingdom

Examples of Index-backed companies with HQ in the United Kingdom:

Deliveroo, Farfetch, Funding Circle, Revolut

Current situation:

Introduced in 2000, and modified a few times since, the Enterprise Management Incentive scheme or EMI, is a highly advantageous stock option scheme which is used by almost all UK tech startups.

For larger startups and private companies, the situation is more complex. There are other tax-advantaged schemes available, such as the CSOP (Company Share Ownership Plan) as well as Growth Shares. However, these are complex to setup, and usually only suitable for senior employees. The SIP (Share Incentive Plan) is a tax-advantaged RSU-like program which can offer zero tax rates, but it must be offered to all employees, and has quite low limits.

Preferred employee scheme:

EMI Options

Score: 25

EMI Options

Post EMI

Plan scope

Company requirements:

  • Less than 250 employees globally

  • Independent – i.e. not controlled by a larger parent, or spun-out from a larger parent or corporate incubator where control is retained

  • Gross assets under £30m for the group

Employee requirements:

  • Employees working 25+ hours a week or 75% of their working time

  • Maximum £250k strike price value of unexercised options for a single employee (determined by the unrestricted market value on date of option grant)

  • Aggregate limit of £3m strike price value of EMI options can be granted

Unapproved scheme:
The default scheme for larger companies. Available to both employees and non-employees

CSOP:
£30k maximum grant per employee every 3 years (options must be exercised before new grants made)

Growth shares:
Individually-designed RSU-like grant dependent upon company hitting sufficiently high hurdles to satisfy tax authorities, e.g. 20% increase in valuation

SIP:
Tax-advantages apply to £3,600 free shares per employee per year, plus up to £1,800 of shares purchased out of pre-tax salary. Companies can match up to two additional free shares for each that is bought

Strike price

Assured valuations can be agreed with the tax authorities which are frequently 70% below last round valuations, and for pre-profitability startups, can be as low as the nominal value of the shares

Unapproved:
No assured valuation. Company can choose price, but usually at last-round valuation to avoid additional tax

CSOP:
Assured valuation available with similar methodology as EMI, but usually lower discounts at later-stage

Growth shares:
No assured valuation. Independent valuation is critical for plan to be defensible to tax authorities. Nominal value will need to be paid for the shares themselves

SIP:
Shares not options, but grant limits are based on fair market valuation which is similar to CSOP

Minority shareholders & bureaucracy

Minority shareholders have rights to be informed, but not consulted if there is already majority support for corporate decisions

EMI plans are relatively easy to set up and to maintain with standard templates and online registration and submissions. Independent valuations are strongly recommended, but not legally required.

Unapproved:
Straightforward to set up and to administer

CSOP:
Rules more rigid than EMI, but relatively straightforward. In practice rarely used in all-employee schemes

Growth shares:
Complicated, particularly with valuation issues. Only realistic for execs

SIP:
Fairly complex and expensive, requiring a trust and shares, so not always used

Employee tax (timing)

Only at point of sale

Unapproved:
At point of exercise and at point of sale

CSOP:
Capital gains tax on spread at sale, so long as 3+ years after grant

Growth:
Capital gains tax on spread at sale

SIP:
No tax, subject to shares being held in trust for 5+ years (or certain other criteria). Tax clawback is otherwise possible

Employee tax (rate)

Gains in excess of an employee’s annual capital gains allowance (£11,700) are subject to capital gains tax of 20%

If EMI options are held for more than 2 years between grant and sale, reduced 10% tax rate applied (Entrepreneurs’ Relief)

Unapproved:
At exercise, income tax (0–45% rate) on the spread, plus national insurance (2% for higher-earners, 12% for lower-earners) At point of sale (if later than exercise), gains in excess of capital gains allowance (£11,700) are subject to 10–20% capital gains tax

CSOP & Growth shares:
Capital gains tax (10–20%) with £11,700 annual allowance

SIP:
No tax, subject to criteria and holding period

Employer taxation

No employer taxes

Corporate tax deduction equal to gains made by employees. The costs of setting up and administering the scheme can also be deducted

Unapproved:
At exercise, employer national insurance tax due (13.8%) on the spread. This is sometimes transferred to employees

CSOP, Growth shares & SIP:
No employer taxes so long as within criteria and holding period

Portugal

Example of an Index-backed company founded in Portugal:

Farfetch

Current situation:

Virtual stock option plans are almost always used because there is no tax-favoured scheme, and non-voting shares are not possible. However, virtual options are taxed as capital gain at the point of sale.

Preferred employee scheme:

Virtual Stock options

Score: 24

Virtual stock options

Plan scope

No specific tax-favoured scheme. However, virtual options are treated very favourably. Whilst this makes them economically valuable, they do not represent true employee ownership

Strike price

No restrictions apply to a virtual scheme

Typically use the valuation from last funding round, to avoid potential liability for employee

Minority shareholders & bureaucracy

Virtual plans are fairly straightforward to set up

Most startups allow leavers to retain vested virtual options. Some require exercise within 90 days. Others allow leavers to retain, but not exercise until exit

Employee tax (timing)

At point of sale

Employee tax (rate)

Capital gains tax on spread between strike price and sale price
(28% or 14% for many small companies)

Employer taxation

No employer taxes

United States

Examples of Index-backed companies with HQ in the US:

Robinhood, Slack, Dropbox, Roblox

Current situation:

Companies can choose between two main forms of stock option: incentive stock option (ISO) and non-qualified stock option (NSO). The differences are outlined in the table below.

For early-stage companies starting in, or expanding into the US, we recommend setting up an ISO from the outset. This option is more favourable to employees if held and exercised within specific time frames. The benefits of an ISO outweigh the slightly higher setup costs.

Preferred employee scheme:

Incentive stock options (ISO)

Score: 24

ISO

NSO

Plan scope

Limitations:
  • Available to employees of the company, any parent or subsidiary

  • Maximum $100,000 combined fair market value of stock that become exercisable in a calendar year

  • Maximum 10 years to exercise after issue

  • Maximum 3 months to exercise after termination of employment

Available to anyone

Strike price

Assured valuation

409A valuations every 6 months provide assurance, and are frequently 60% below last round valuation. Varies according to prefs structure and closeness to exit

Minority shareholders & bureaucracy

ISO and NSO plans are usually straightforward to set up and maintain, with standard templates

Minority shareholders have rights to be informed, but not consulted if there is already majority support for corporate decisions

Employee tax (timing)

At point of sale although in practice execs and senior staff also often taxed at point of exercise

New 2018 tax code Section 83(i) allows employees (except most senior) to exercise and defer tax up to five years, or until shares become tradeable

At point of exercise and at point of sale

Employee tax (rate)

At point of exercise, may be an income adjustment for alternative minimum tax (AMT) purposes, up to 39.6%, only affects senior staff

At point of sale, if held more than one year after exercise and two years after grant, treated as long term capital gain tax (0–20% based on size of gain and filing status)

If holding requirements not met, treated as a NSO, and taxed as income at point of exercise (see detail opposite)

At point of exercise, subject to income tax (10–39.6% rate), and social security (6.2%) and Medicare (1.45–3.8%)

At point of sale (if later than exercise), subject to short term or long term capital gains tax depending on how long share held. Short term capital gains tax rate is the same as income tax rates

Employer taxation

No employer taxes

Generally not allowed any tax deduction

No employer taxes

Deduction equal to the amount of ordinary income recognized by the option holder

Poland

Examples of Index-backed companies with significant presence in Poland:

Collibra, Base

Current situation:

There is no specific scheme for startups, but the tax regime which applies to qualifying private companies is quite good. It defers tax to sale and at capital gains rates.

Preferred employee scheme:

Stock options

Score: 23

Stock options

Plan scope

To qualify for treatment as capital gains rather than income tax, the entity must be an EU/EEA Joint Stock company, or from a jurisdiction where Poland has a tax treaty (this includes the US)

Strike price

No assured valuation

Typically use the valuation from last funding round

Minority shareholders & bureaucracy

Fairly straightforward to set up, but startups need to incorporate as Joint Stock companies and not Limited Companies to qualify

Minority shareholders have rights to be consulted on a range of issues. Options can convert to non-voting shares to avoid complexities

Employee tax (timing)

At point of sale

Employee tax (rate)

Gains on sale subject to capital gains tax of 19%

Employer taxation

No employer taxes

Italy

Example of an Index-backed company with HQ in Italy:

Moleskine

Current situation:

A tax advantaged scheme for innovative startups was launched in 2012, and extended in 2015. Under the scheme, options are taxed only at point of sale and at capital gains tax rates.

Preferred employee scheme:

Innovative startups scheme

Score: 22

Innovative startups

Innovative SMBs (PMI)

Plan scope

Company requirements:

  • Developing innovative technology

  • Private and not spun out

  • HQ in EU, with at least branch operations in Italy

  • Less than €5m turnover and not distributing dividends

The company must also meet minimum R&D investment criteria, with licence or ownership of IP or software rights

The team needs to be at least 2⁄3 graduates or 1/3 PhD (or equivalent)

Company requirements:

  • HQ in EU, with at least branch operations in Italy

  • Less than 250 employees

  • Less than €50m turnover and €43m total assets

The company must also meet minimum R&D investment criteria, with licence or ownership of IP or software rights

The team needs to be at least 1/3 graduates or 1⁄5 PhD (or equivalent)

Strike price

No assured valuation

Typically use the valuation from last funding round. Discount offered at company’s discretion

Minority shareholders & bureaucracy

It is usually necessary to get tax and legal advice while setting up plans, but they are relatively easy to maintain

Minority shareholders have extensive rights to be consulted on corporate decisions so most startups use non-voting shares to avoid complexity

Employee tax (timing)

At point of sale

Employee tax (rate)

Gains on sale subject to capital gains tax of 26%

Employer taxation

No employer taxes

Sweden

Examples of Index-backed companies with HQ or significant presence in Sweden:

King, iZettle, KRY

Current situation:

Following sustained pressure from local tech entrepreneurs, the Swedish government introduced a tax-favoured scheme (QESO) in January 2018. This scheme allows capital gains tax to be applied to stock options granted by smaller startups (up to 50 employees). Employees must remain with the company for 3 years after grant.

Above the 50 employee QESA limit, companies usually use a warrants scheme (teckningsoptioner). Employees need to purchase the warrants upfront – a major disincentive. But they then benefit from capital gains tax rates on any upside, deferred to the point of sale.

Standard stock options are less often used by startups, since they trigger (high) income tax and social charges at the point of exercise – and social fees for the company – as well as capital gains tax at sale. Some later-stage startups (including Spotify) do use them, as the cost and complexity of using warrants becomes prohibitive.

Preferred employee scheme:

QESO (Qualified employee stock options)

Score: 21

QESO

Warrants

Plan scope

Company requirements:

  • Less than 10 years old

  • Fewer than 50 employees at time of grant

  • Balance sheet < $8.5m (approximately)

Only available to employees who will be with the company for 3 years

Available to anyone

Strike price

The strike price is either set to the nominal value of the shares or to 80% discount (to be more in line with the US)

The strike price is usually set at the last investment round price. The employee has to pay for the warrant, based on a Black-Scholes formula. Typically, the warrant payment is 5–20% of the last-round valuation

Companies sometimes provide a bonus or loan to help employees pay the purchase price

Minority shareholders & bureaucracy

Usually straightforward to set up and maintain

Warrants schemes involve more bureaucracy and require external advice for setup and valuation

Employee tax (timing)

At point of sale

Employee tax (rate)

Gains on sale subject to capital gains tax (25–30%)

Employer taxation

Not liable to pay employer social security contributions

Ireland

Examples of Index-backed companies with significant Ireland presence:

Intercom, Slack, Dropbox, Squarespace

Current situation:

The international HQ for many tech giants, and home to a burgeoning startup community, Ireland introduced a tax-advantaged share option scheme in January 2018 called KEEP (Key Employee Engagement Program). The scheme defers taxation on stock options to sale rather than exercise, and at capital gains tax rates.

KEEP has not been widely used. It originally limited grants to less than 50% of an individual’s annual salary, and isn’t available for all startups, notably those in fintech. The 2019 Budget has proposed revisions, including in increase in grants to 100% of annual salary. It remains to be seen if the scheme will catch on.

Preferred employee scheme:

Stock options

Score: 20

Stock options

KEEP

Plan scope

No specific tax-favoured scheme

Company requirements:

  • Private company

  • Less than 250 employees globally

  • Annual balance sheet not exceeding €43m

  • Market value of issued, but unexercised qualifying share options limited to €3,000,000

  • Not carrying on an “excluded activity”

Employee requirements:

  • Full time employees or directors

  • Less than 15% ownership of the company

  • Maximum €300k strike price value over lifetime

  • Maximum annual option value equals the amount of the individual’s annual pay in year of grant

Strike price

No assured valuation Typically use the valuation from last funding round. Modest discounts are possible, but are not assured

Strike prices are based on the last-round valuation

Minority shareholders & bureaucracy

Minority shareholders have the right to be informed, but not consulted, if there is already majority support for corporate decisions. Most startups have standard US leavers policy – exercise vested options within 90 days or lose them

Leavers need to exercise within 90 days for KEEP treatment, i.e. taxation only at the point of sale

Employee tax (timing)

At point of exercise and at point of sale

At point of sale

Employee tax (rate)

At point of exercise, gains are subject to income tax (20–40%) plus universal social charge (up to 8%) and employee PRSI (0–4%)

At point of sale, gains in excess of the annual capital gains allowance (€1,270) are subject to capital gains tax of 33%

Gains on sale in excess of the annual capital gains allowance (€1,270) are subject to capital gain tax of 33%

Employer taxation

No employer taxes

No employer taxes

Australia

Examples of Index-backed companies with HQ in Australia:

CultureAmp, SafetyCulture

Current situation:

Tax favourable schemes were put in place in 2015, but require the assistance of lawyers and tax specialists to ensure eligibility.

For startups that are larger, it becomes extremely difficult to grant stock options to more than a handful of senior managers or to more than 20 individuals over a 12 month period without issuing a prospectus or similar offer document.

Preferred employee scheme:

Stock options

Score: 16

Stock options

Plan scope

Company requirements:

  • Less than 10 years old

  • Less than A$50m (c.$35m) turnover

Employees must hold options or shares for at least 3 years, unless they leave or the Australian Tax Office waives this requirement on a liquidity event. Tax benefits only for employees with 10% or less shareholding

A prospectus or similar offer document is required unless the offer raises less than A$2 million, and is either:

  • For fewer than 20 employees in a 12 month period

  • For less than A$5,000 value per employee per year

  • For senior managers

Strike price

Assured valuation with very low strike price possible based on net tangible assets of the company if the company is less than 7 years old and has raised less than A$10m over the prior 12 months

For companies with a US presence, 409A valuations may be accepted by Australian tax authorities (frequently 60% below last round valuation)

Minority shareholders & bureaucracy

Once a startup is over 20 employees, significant specialist advice is required to ensure compliance with the plan

Employees (or leavers) who exercise usually have shares held by a nominee to avoid cap table complexity

Employee tax (timing)

At point of sale

Employee tax (rate)

Gains taxed at 23.5% (discounted from 47%)

Employer taxation

5% tax on the spread between exercise and sale price if Australian wage bill above payroll tax threshold (approx. A$0.5m)

Denmark

Example of Index-backed companies with significant presence in Denmark:

Trustpilot, Just Eat, Zendesk

Current situation:

In Denmark, almost always, startups use warrants as an employee incentive tool, which are taxed as income at the point of exercise, and as capital gains at point of sale.

In 2016, the government introduced a tax-advantaged treatment for stock options in Denmark (Section 7H of the Danish Tax Assessment Act). The new rules means that taxation is now deferred until sale, and subject to capital gains. However, whilst we welcome this change, it is only available to companies with one class of shares, and therefore not catered to VC-backed companies, which usually have two main share classes: common and prefs.

Preferred employee scheme:

Warrants

Score: 15

Warrants

Plan scope

No appropriate tax-favoured scheme for VC-backed startups

Strike price

No assured valuation

Typically use the valuation from last funding round. Modest discounts are possible, but require a valuation exercise

For companies with a US presence, 409A valuations may be accepted by Danish tax authorities (frequently 60% below last round valuation)

Minority shareholders & bureaucracy

Minority shareholders have rights to be consulted on a range of issues

Many startups don’t allow employees to exercise vested options until a change of control, so they don’t become minority shareholders

Few Danish startups use the standard US policy of ‘exercise within 90 days of leaving’. Leavers who are terminated without cause are entitled to all their options, vested or unvested

Employee tax (timing)

At point of exercise and at point of sale

Employee tax (rate)

Gains on exercise are taxed as income at a progressive r

ate (8–56%)

Profits on sale are taxed as capital gain (up to 42%)

Employer taxation

When the employee pays the income tax, the company can deduct some expenses

The Netherlands

Examples of Index-backed companies with HQ or significant presence in The Netherlands:

Adyen, Elastic

Current situation:

With no tax-favoured schemes in place, Dutch entrepreneurs still often grant options to employees, using the standard tax framework. This means that they are taxed as income at the point of exercise.

Despite efforts to position Amsterdam as a startup tech hub, the law has not changed since 2005. A small change in 2018 allows, in certain circumstances, 25% of the gain at exercise to be tax-free up to €50,000. The impact overall is marginal.

Preferred employee scheme:

Stock options

Score: 15

Stock options

Plan scope

No specific tax-favoured scheme

Strike price

No assured valuation

Typically use the valuation from last funding round to avoid additional taxes. Modest discounts are possible, but are not assured

Minority shareholders & bureaucracy

Most startups have standard US leavers policy – exercise vested options within 90 days or lose them

Employee tax (timing)

Only at point of exercise (assuming employee has <5% ownership, otherwise also taxed at point of sale)

Employee tax (rate)

Gains on exercise subject to income tax (8.9–52%) plus social tax (up to 27.65% on annual income up to €33,791)

25% of the gain at exercise is considered non-taxable, on up to €50,000

Employer taxation

On exercise, the company pays about 16% of the gains as social security taxes (only up to employee total income €53,701)

Switzerland

Current situation:

With no tax-favoured schemes in place, Swiss startups still often grant options to employees, using the standard tax framework. This means they are taxed as income at the point of exercise.

Preferred employee scheme:

Stock options

Score: 14

Stock options

Plan scope

No specific tax-favoured scheme

Strike price

No assured valuation

Typically use the valuation from last funding round (with some adjustments taking into account different classes of shares)

Discount offered at company’s discretion

Minority shareholders & bureaucracy

Startups frequently issue non-voting shares to employees to avoid bureaucracy with minority shareholders

Leavers generally given 90–180 days to exercise options

Employee tax (timing)

At point of exercise

Not taxed at point of sale because subsequent gains are capital gains which is tax free for Swiss resident tax payers

Employee tax (rate)

Income tax (up to approx. 40%) on spread between strike price and exercise price (underlying shares fair market value) plus employee social contributions (5.125%) and pension (7.8%)

Employer taxation

Employer social contributions (5.125%) and contribution to pension

Some expenses may be deductible

Norway

Current situation:

Startups may use share purchase plans and/or stock option programs, to issue employee equity. Taxes for both employees and companies are high, so startups often design creative programs that finance employees’ acquisition of shares. Many companies and/or majority shareholders extend employee loans to cover a portion of the share purchase price.

A ‘startup friendly’ approach to taxation was introduced in 2018, but the scheme was so limited that it hasn’t made any difference. Efforts to improve the situation continue.

Preferred employee scheme:

Tailored share purchase plans

Score: 14

Share purchase plan

Stock options

Plan scope

No applicable tax favoured scheme

Very limited tax-favoured scheme. The tax-favoured scheme is limited to startups with:

  • Fewer than 10 employees

  • Revenue and a total balance less than €1.6m

  • Requires 3 year minimum mandatory vesting

For qualifying companies and employees, tax calculated on a taxable benefit of up to NOK 500,000 (appr. €0,5m) can be deferred until sale of the share

Strike price

No assured valuation

Typically use the valuation from last funding round to avoid additional taxes

Shares can be subject to a lock-up period which could justify a reduced market value of about 10–30%

No assured valuation

Typically use the valuation from last funding round

Minority shareholders & bureaucracy

Custom and creative plans are often used, and it is necessary to get tax and legal advice, so costs can be high

Minority shareholders have extensive rights to be consulted on corporate decisions

Although Norway allows the issue of non-voting shares companies do not typically choose to use them. Culturally, companies choose to have clauses that allow buy back of shares/options from leavers

Employee tax (timing)

At point of share acquisition, and sale

At exercise and sale

For the (very limited) tax-favoured scheme, tax calculated at exercise is deferred to sale

Employee tax (rate)

At acquisition:
Shares purchased at a discount from market value (in excess of reduced value due to lock-up) are taxed as income (up to 46.6%)

At sale:
Capital gains tax (30.6%) on spread between acquisition price and sale price

Wealth tax:
Valued at 80% of tax book value and taxed 0.85%

At exercise:
Income tax (up to 46.6%) on spread between strike price and exercise price

At sale:
Capital gains tax (30.6%) on spread between exercise price and sale price

Wealth tax:
Valued at 80% of tax book value and taxed 0.85%

Employer taxation

Social security 14.1% (after deductions 10%) payable on taxable benefit at the time of purchase of shares

Social security (14.1%) (after deductions 10%) payable on taxable benefit at the time of exercise of options

Czech Republic

Examples of an Index-backed company with HQ or significant presence in Czech Republic:

Socialbakers

Current situation:

Virtual stock option plans are almost always used because there is no tax-favoured scheme, and non-voting shares are not possible. These plans are relatively easy to set up, but have not yet stood the test of a liquidity event or been tested in court.

Some startups allow a few senior employees to purchase shares in the company.

Preferred employee scheme:

Virtual stock options

Score: 14

Virtual stock options

Plan scope

No specific tax-favoured scheme

Strike price

No restrictions apply to a virtual scheme. Typically, virtual options are granted at a nominal value

Minority shareholders & bureaucracy

Virtual plans are fairly straightforward to set up. However, it is unclear how they will be viewed by tax authorities or courts in the case of a significant liquidity event in the country

Leavers are typically allowed to retain vested virtual options

Employee tax (timing)

At point that employee receives cash benefit – usually only during a liquidity event

Employee tax (rate)

The benefit is taxed at marginal rates (20–23%) and social security and health insurance contributions (11%)

Employer taxation

Social security and health contributions (about 34%)

Finland

Examples of Index-backed companies with HQ in Finland:

Supercell, Armada Interactive

Current situation:

There is no tax-advantaged scheme in Finland, and no active plans to introduce one. Most startups do set up stock option plans. Options are taxed as income at the point of exercise, and as capital gains at the point of sale (if not simultaneous).

Preferred employee scheme:

Stock options

Score: 13

Stock options

Plan scope

No specific tax-favoured scheme

Strike price

The strike price is usually set at the last investment round

Minority shareholders & bureaucracy

Most startups don’t allow employees to exercise vested options until a change of control, so they don’t become minority shareholders

Employee tax (timing)

At point of exercise and at point of sale

Employee tax (rate)

At point of exercise, gains are taxed as additional income in the year of exercise (7.8% up to 55% – inclusive of municipal, church and broadcaster levies)

At point of sale, profits are taxed as capital gain (30–34%)

Employer taxation

On exercise, the company needs to pay about 20% of the gains as social charges

Austria

Current situation:

As in Germany, most startups use virtual plans, which are not tax efficient for the employee, but are relatively easy to set up.

Preferred employee scheme:

Virtual stock options

Score: 13

Virtual stock options

Stock options

Plan scope

No specific tax-favoured scheme

There is a Free Shares scheme, but it creates minority shareholder consultation rights so is not commonly used

Strike price

No assured valuation

Typically use the valuation from last funding round to avoid additional taxes. Sometimes conduct a new valuation at implementation

Minority shareholders & bureaucracy

Virtual plans are fairly straightforward to set up

Leavers usually entirely forfeit their virtual options, but this is a company decision

Minority shareholders have extensive rights to be consulted on corporate decisions, which makes use of stock options challenging

Companies usually allow exercise only upon exit

Employee tax (timing)

At point that employee receives cash benefit – usually only during a liquidity event

At point of exercise and at point of sale

Employee tax (rate)

Income tax (up to 50%) on spread between strike price and sale price

At point of exercise, gains are taxed as income (up to 50%)

At point of sale, profits are subject to capital gains tax (27.5%)

Employer taxation

Income withholding tax, as well as social security contributions (approximately 30%)

Income withholding tax, as well as social security contributions (approximately 30%) on exercise

Spain

Examples of Index-backed companies with HQ in Spain:

Typeform, Privalia

Current situation:

In 2013, the Spanish government approved the ‘Ley de Emprendedores’, an entrepreneur-friendly law to encourage startup creation. Its impact has been limited, and Spanish entrepreneurs and investors continue to face significant challenges. It is not possible to grant stock options in the most common (SARL) business entity, and as a result Spanish startups usually grant virtual stock options, locally referred to as SARs.

Preferred employee scheme:

Virtual stock options (SARs)

Score: 11

Virtual stock options

Plan scope

No specific tax-favoured scheme

Strike price

No restrictions apply to a virtual scheme

Typically use the valuation from last funding round to avoid additional taxes

Minority shareholders & bureaucracy

  • Simple legal document to be signed by all shareholders

  • Inexpensive to implement and administer

  • No administrative burden of having a long list of shareholders, or legal fees

  • Flexibility to design custom made plans at discretion of Board

Few startups allow leavers to retain virtual options, but this is a company decision

Employee tax (timing)

At point that employee receives cash benefit – usually, only during a liquidity event

Employee tax (rate)

Income tax (19–45%, up to 48% in Catalonia) and social security contribution tax (6.35%). Discounted tax rates are available for SARs held for more than two years

Employer taxation

Social security contributions at 30.9%

Germany

Examples of Index-backed companies with HQ in Germany:

Raisin, Pitch, Personio

Current situation:

The lack of a tax-advantaged scheme, a high administrative burden, and established norms means most German startups avoid issuing real options in favour of a virtual stock option plan. However, several of the German companies in the Index portfolio have still chosen to set up real stock option plans.

Preferred employee scheme:

Virtual stock options

Score: 10

Virtual stock options

Stock options

Plan scope

No specific tax-favoured scheme

Strike price

Typically use the valuation from last funding round to avoid additional taxes

Minority shareholders & bureaucracy

  • Simple legal document to be signed by all shareholders

  • Inexpensive to implement and administer

  • No administrative burden of having a long list of shareholders or legal fees

  • Flexibility to design custom made plans at discretion of Board

Minority shareholders have extensive rights to be consulted on corporate decisions, which makes use of stock options challenging

Employee tax (timing)

At point that employee receives cash benefit – usually, only during a liquidity event

At point of exercise and at point of sale

Employee tax (rate)

Taxed as income (14–45%), plus social security contributions (around 20%). Also solidarity surcharge (equivalent to 5.5% of income tax) and church tax (equivalent to 8–9% of income tax)

Social security contributions to some extent deductible for income tax purposes. Church tax can be avoided

At point of exercise, subject to income tax, social security contributions, solidarity surcharge and church tax

At point of sale, subject to a tax rate of 28%

Employer taxation

Social security contributions tax at 20%

No employer taxes

Belgium

Examples of Index-backed companies with HQ in Belgium:

Collibra, Silverfin, Cowboy

Current situation:

Stock options are very difficult to use. Belgium uses warrants for employee incentives. These are taxed at grant, but are usually not subject to any further taxation at exercise or sale.

These tax laws have stood for 20 years. A new Belgian Companies Code is expected to enter into force in April 2019 which might lead to change. At the moment no further information is available.

Preferred employee scheme:

Warrants

Score: 10

Warrants

Plan scope

No specific tax-favoured scheme

Strike price

No assured valuation

Almost always use the valuation from last funding round to avoid additional taxes. An independent valuation is required

Minority shareholders & bureaucracy

Warrant plans can be complex to set up with advisory fees as high as €15–20k

Warrant holders have extensive rights, including the right to attend shareholder meetings. They are sometimes grouped in a private foundation to mitigate minority shareholder complexities

Employee tax (timing)

At point of grant

Employee tax (rate)

If warrants are held for more than 3 years before sale: 9% of the value of shares is taxed at income rates (up to 50%) and social contribution is waived

If held for less than 3 years, 18% of the value of shares is taxed at income rates

Employer taxation

No employer taxes

Going International
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