How can stock options under Spanish law be used as an alternative employee compensation?
Stock Options under Spanish law are a modality of compensation by which employees are
granted a call option on the company’s shares for a limited time lapse, free of charge or at an inferior price than the shares’ market value, provided the employees’ commitment to remain in the company for a certain time period.
It can be an attractive part of a compensation plan on the company’s side, as it encourages the employees’ involvement in the company’s growth and, ultimately,
the rise of the company’s share value.
Insofar as it consists on a call option and not a share transmission per se, the employee shall only be taxable at the moment the call option takes place.
What is the stock options’ Spanish taxation regime?
From the employee’s standpoint, there are
three different taxable stages:
- At the time of the call execution and subsequent share acquisition, the employee will be taxable for the difference between the share market value at the time and the price by which the shares are acquired.
In this case, the first €12,000 (on a yearly basis) are tax-exempt, insofar as all of the following requirements are met:
- The call option must be offered to all of the company’s employees (with some exceptions) in identical conditions. All of the employees who are offered the call option must be active employees.
- The employee, jointly with his spouse and family members up to the second degree, shall not hold more than 5% of the company’s shares, or shares of another company within the same group, at the time of the call option’s execution.
- The employees must hold full ownership of the shares for a minimum of three years.
Moreover, as it is considered irregular income from a taxation point of view, it may be eligible for a tax reduction of 30% on the employee’s taxable income.
- During the period of ownership, the employee will be taxable only in the event he receives dividends.
- When the employee sells his shares, he will charge the difference between the sale Price and acquisition Price in his personal tax return as a capital gain/loss.
Finally, the company shall withdraw the corresponding percentage according to the
IRPF tables. From a labor and social security standpoint, it consists of compensation in kind, so the employer must bear in mind there is a percentage limit on this kind of compensation on the total gross salary of each employee.
Also, the shares shall be valued at the moment the call is executed, and the employee and company will comply with their respective contribution obligations to the social security system in the month of the year in which the shares are acquired, at market value.
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