Stock options and RSUs
The trees, the forest, the forester and the regulator
Doctors have an unenviable position at parties. People bombard them with dozens of medical questions about their ailments, possible medication and corresponding prescriptions, let alone the situation in which and uncle or grandchild makes an unfortunate movement or breaks something. As a lawyer, fortunately, I have always boasted I could be spared all this hassle. In recent times, however, I have had to review this claim. Lately, I’ve consistently been approached at parties by someone or other who wants to talk about a friend or acquaintance in a senior executive position in a multinational company. After a few minutes of compulsory “small talk”, the subject always shifts to the remuneration they received in the form of Restricted Stock Units (RSUs).
The tangle of tax regulations: the forest for the trees
In layman’s terms, those Restricted Stock Units are shares that are awarded to employees as a bonus. In this case, the agreement is that the stocks are acquired by achieving future targets. You may automatically associate these to “stock options” which are also granted to employees as a bonus or component of a remuneration package. It is true that RSUs and stock options are in some way comparable. In fiscal terms, however, there is an essential difference between the two, i.e. the moment when their value is taxable. The recipient of a stock option is taxable at the time the option is granted. He or she is charged a standard fee for the option at that time. In principle, this amounts to 9% or 18% of the value of the shares on which the employee has an option. If the option becomes worthless later, that is just bad luck for him or her. On the other hand, if the share value rises and the beneficiary makes sizeable profit when exercising the options, the gain is entirely tax-free. Things are different with RSUs. While no tax is charged at the time the RSUs are granted, it is applied when the employee actually receives the shares. Where the employee always pays tax in the case of stock options, even when the options turn out to be worthless, RSUs are only taxable if the employee actually benefits from vesting the shares.
The forester
In practice, these RSUs are declaration sensitive, however. This is because the RSUs don’t have to be declared in the employee’s tax return at the time they are granted. In addition, the employer who assigns the RSUs is not required either to report this in any way to the tax authorities. They simply don’t know which employees have received RSUs in the past or have gained from vesting those RSUs in the present. Finally, it is true that RSUs are often granted by parent companies abroad and the income from vesting the RSUs cannot be paid in any other way than on foreign securities accounts that employees must open in order to be able to take advantage of the RSUs.
The complexity of the regulations and the lack of legal framework weigh heavily on the correct assessment of the tax on the RSUs payable by the employees. Furthermore, in all honesty, we must acknowledge the temptation among multinationals to create a certain vagueness around the taxation regime for RSUs and, in so doing, convince a group of employees that the revenues from the RSUs are tax-free for them.
RSUs are a matter of fiscal debate, because the tax authorities are subjecting multinationals and their employees to more and more scrutiny in this regard. And employees are now worried. If employees failed to declare the RSUs, they are at risk of facing a tax re-adjustment imposed by the tax authorities. Ideally, the tax authorities should be lenient, as it would be unfair to sacrifice these employees on the altar of excessive tax penalties. They should be excused to a large extent by the complexity of the regulations and the absence of legal framework.
The employees themselves should also be given the advice to report to the Central Point of Contact (CPC) foreign securities accounts on which the shares are paid out. This is a legal obligation for every account held abroad. These employees should take into consideration that, when the assets of these foreign securities accounts are transferred to Belgium, Belgian banks may question the origin of the funds. The banks have this obligation under the money laundering laws.
The regulator
The RSUs have also stirred up debates in the Council of Ministers and the Belgian Budgetary Conclave. The latter has decided to introduce an obligation of declaration for domestic companies. From now on they will have to create and fill in a form for shares, stock options and RSUs granted to their employees from 1 January 2018 by a foreign parent company. The government would even like to go one step further by requiring domestic companies to withhold payroll tax on this award or payouts from 1 January 2019. And, eventually, this will create a clearer framework, which will benefit the tax authorities as well as employees.
Voilà! There you have it: a short and practical update on RSUs. Unfortunately, columns have to be written a week in advance, which means that this column will not be published in time for the party of this coming weekend. If, during a good friend’s garden party on Saturday evening, I am asked about RSUs, I will not be able to refer to this article. I will, however, for all the subsequent parties. A win for me on two levels: a positive impact on both Trends and my party mood…