Employee stock options in Sweden and their tax consequences
Employee stock options - have you received an offer of employee stock option as a supplement to your salary? Then it can be good to know how you and your employer are affected by taxation. Employee stock options are fairly common in Groups with a foreign parent, but the knowledge of the Swedish tax rules are sometimes inadequate. In 2018, tax relief was introduced for certain employee stock options. However, these rules apply to a fairly limited number of companies.
What is an option?
An option means a right to buy a share in the future for a predetermined price. If you receive the option in connection with an employment, it is usually classified as a employee option, which entails special tax rules. For tax purposes, there are two different types of options: those classified as warrants and securities. An employee stock option is defined by the fact that it is conditional. The definition is not crystal clear, but an assessment is made on a case-by-case basis. The Swedish Tax Agency has stated that these conditions are typical of an employee option:
- The employee cannot sell the option
- The option has a certain vesting period
- The option disappears or is restricted if the employment is terminated
Options that cannot be assessed as stock options are classified as securities. For example, warrants, a security that gives the holder the right to buy a newly issued share at a certain price during a certain period of time. The biggest difference between an employee stock option and securities lies in the time of taxation for the employer and you as an employee. Employee stock options are taxed when you exercise the option to purchase shares.
Securities, on the other hand, are taxed when they are sold. Exercising the option to buy shares does not trigger taxation. The acquisition cost consists of the premium paid for the option together with the purchase price for the share.
Taxation of employee stock options
Benefit of employee stock option can be either tax-free or taxable. The main rule is that the benefit is taxable.
Benefits in the form of an employee stock option shall, in accordance with rules from 1 January 2018, in certain cases not be taken up for taxation. An option also called a qualified employee stock option. These rules provide the opportunity to grant employees employee stock options without them being taxed as on income from employment. Taxed in the income category capital, 30%. The rule also means that the company does not pay social security contributions. But this requires that a large number of conditions are met.
As the requirements are numerous and extensive, the consequence for most companies will be that both benefit taxation (= payroll tax on income from employment) and taxation in the income category capital (30%) will be relevant if employee stock options that are converted into shares at the exercise date are not sold on the same day. This is provided that the share rises in value after the exercise/vesting date occurs. A description of how the benefit of the employee stock option is to be handled for tax purposes according to the main rule can be found in the following:
Benefit taxation shall be made based on the difference between the market value that the underlying share has at the time of acquisition and the exercise price that the option holder pays for the underlying share, including any compensation for the option right.
If the employee (option holder) does not have to pay the exercise price when converting the employee stock option into shares and has not paid anything in connection with the allotment of the employee stock option right, the benefit amount is the market price for the shares at the “exercise date”.
Benefit taxation takes place in the income category service.
Note that when the taxable benefit arises, your employer is also obliged to pay social security contributions, make tax deductions and establish PAYE tax returns for it.
When you choose to sell the share, the increase in value that occurred during the holding is also taxed. This is done in the income category capital.
The most common approach of employee stock options is that the transaction is done according to the same day sale-principle, ie you exercise the option to buy and sell the share on the same day. In this way there will be no difficulty in estimating the market value at the time of sale.
Qualified employee stock options
There is a type of employee stock option called qualified employee stock options that provides more generous tax rules. It is an interesting Swedish first attempt to achieve the same taxation as they have in the UK and USA. However, there are many restrictions in the Swedish rules, see requirements according to the list below, which means that they can in principle only be applied by a few percent of the companies that want to introduce incentive programs in Sweden.
When unlisted shares that meet all the requirements for taxation as qualified employee stock options (=no benefit taxation) by a private person (the employee) are sold, taxation is normally 25% to be declared via income from capital, unless the acquired units are classified as "qualified holdings" in a close company.
NOTE! In the case of an incentive programs that for tax purposes are to be regarded as employee stock options, but do not fall within the definition of qualified employee stock options, there will be a benefit taxation upon the “exercise date” (options are converted into shares) and on the sale of these shares (if listed - employee of a listed company) for the employee. Taxation will be 30% of the capital gains that may arise from this sale.
10 requirements which must be met
Requirements for the company, the employee stock option and the employee stock option holder that must be met in order for the generous tax rules that apply to qualified employee stock options to be possible to exercise:
1. Limited size (applies to the entire group). Maximum 150 employees and partners (average number) and a maximum of SEK 280 million net sales or balance sheet total. (maximum employees and maximum net sales updated January 2022)
2. Amount limit for options. Maximum SEK 3 million per option holder. Maximum SEK 75 million in total in employee options.
3. The company's operations must not be older than 10 years.
4. Conduct operations that are not primarily (applies to the Group) - asset management, banking or financing operations, insurance operations, coal or steel production. trade in land, real estate, commodities, or financial instruments., long-term rental of premises or housing., provision of services relating to legal advice, accounting or auditing ("excluded activities").
5. Non-public ownership interest ≥ 25% of the capital or voting shares may not be controlled directly or indirectly by public bodies (applies to all companies in a Group).
6. Not listed on the stock market. No share in the company may be admitted to trading on a regulated market or equivalent outside the EEA (applies to the entire Group). Does not include trading platform (FirstNorth, Nordic MTF).
7. Do not be in financial difficulties - (applies to all companies in a group).
8. Limited scope of past ownership. Registered or affiliates may own a maximum of 5% of the capital or voting shares (in the company or another group company).
Valid 2 years before the option acquisition year up to and including the time of the acquisition.
9. Employment requirements and work to a significant extent
- The option holder is employed.
- Work an average of 30 hours / week (total for the company and / or other group companies).
Board members and deputy board members are also covered by the rules since January 2022.
10. Wage requirements
Minimum salary = 13 income base amounts during the vesting period (3 years) (for the company and / or other group companies collectively).
Is it advantageous with an employee stock option when compared to salary?
Employee stock options are intended to get people to stay long in the company and invest in it. Thus, the employee stock option as a form of compensation includes a certain amount of risk. Decisive for whether the employee stock option is advantageous is your salary level, the company's development, the stock market, and the terms of the option agreement (employment agreement) and the willingness and motivation to remain in the Company offering employee stock options until the employment requirement is met.
It is only when the employment time requirement is met, possibly combined with the fulfilment of certain performance targets, that a fair value for the employee arises and a benefit amount can then be determined to an exact value. An employee stock option that is granted in accordance with an incentive program does not have any tax consequences until it can be converted into shares in accordance with the terms / requirements of the employee stock option program. As these shares can be sold on a market, there is a market value that forms the basis for benefit taxation.
If the employee chooses not to apply “same day sale” at the excersize date, but chooses to sell converted options to shares at a later time, the benefit value previously taxed under income from employment (shown by salary spec) can be used as acquisition cost for shares sold.
The capital gain or loss that arises from a sale at a later time, ie time after the “excersize date”, when options are converted into shares, must then be included under income from capital in the private income tax return (INK1).
How can we help you?
At Accountor we can help you assess the tax consequences if you are offered an employee stock option or securities, or if your company is considering setting up an option program in Sweden. Welcome to contact us.
