A stock option gives the holder the right to purchase a predetermined number of shares of a company, at a fixed price (the strike price), on or before a fixed date (the expiration date). To be given this right, the holder must normally pay something (the premium). However, when the stock options are given to the employees of a company as compensation for the services rendered, they are normally given for free. The employee stock options tax in Spain is quite complex, but is a key consideration to be considered when implementing a stock options plan. The concession of stock options of a company to its employees to retain them and increase their loyalty is still not very common is Spain.
The concession by a company of options on its own shares to their employees for no consideration is not a taxable event unless the options are freely transferable, which is very rare. Therefore, in most cases the taxation is deferred until the time when the option is exercised, and the shares acquired. Then, the taxable income is the difference between the market value of the shares on the expiration date and the amount paid by the employee (the strike price). This amount is included as employment income in the Personal Income Tax of the employee as compensation in kind.
Once acquired, the subsequent sale of the shares would trigger a capital gain (loss), for the difference between the market price of the shares the date of acquisition and the sale price. This capital gain or loss would be included in the savings baskets and taxed at the reduced rates applicable to savings. However, in case of loss, it could not be offset against other ordinary income.
An employee is given an option to buy 100 shares of the company at 10 EUR each in two years’ time if he remains employed. The day of expiration of the option, the shares are valued at 17 EUR. The employee exercises the option and pays the strike price for each share (10 €), thus 1,000 EUR to buy the 100 shares (10 EUR * 100). Six months after the acquisition, the employee sales the all the shares for 19 EUR.
Under this scenario, the employee will have an employment income for the difference between the strike price (10 €) and the market value of the shares on the acquisition date (17 €). Thus, the taxable income would be 700 (100 * 7 €). The subsequent sale of the shares would trigger a capital gain of 2 € per share (19 €- 17€), which would be taxable within the savings income basket.
It is important to remark that the Spanish Personal Income Tax Act establishes that, within the limit of EUR 12,000 per year, the taxable income derived from the exercise of the stock options by the employees is exempt, as long as the following conditions are met:
- That the option is granted under the same conditions for all the employees of the company. However, the company can restrict the option plan to employees with a minimum seniority, as long as the seniority required to enjoy the option plan is the same for all the staff
- The option holders, together with their spouses or relatives up to the second degree, do not have a direct or indirect shareholding in the company greater than 5%
- That the shares acquired upon the exercise of the option are kept for a minimum of three years.
The exemption will not be applied if, at the time of exercising the stock option, the option holder is no longer an employee of the company.
When the taxable income triggered by the exercise of the option is not exempt (for instance, an option plan addressed only to a group of employees) or, in any case, for the amount exceeding the exemption threshold of 12,000 EUR, the tax payer would normally be entitled to apply the reduction of 30 % of long term income. For this reduction to be applicable, the following conditions must be met:
- The lifespan of the option, that is, the timeframe between the granting of the options and the exercise thereof must be, at least, two years
- During the five tax periods preceding the exercise of the option (the lookback period), the taxpayer should not have obtained any other long-term income to which the 30 % reduction was applied.
This may be tricky, because if the employee received during the lookback period, among others, a long-term bonus or a severance payment for unfair dismissal from a previous employer, he would not be allowed to enjoy the 30 % relief on their option plan. The rationale of this rule is not easy to grasp.
Finally, the long-term relief of 30 % will be limited to the first 300,000 euros of income. The excess will be fully taxable.