Context

There is much legal uncertainty associated with the tax treatment of employee stock options in cross-border situations because countries tax options in different ways, and because international tax treaties do not provide clear answers to all the tax-related questions.

On 11 March 2002 the Organization for Economic Cooperation and Development (OECD) issued a report mapping out the tax issues that may arise from awarding stock options as remuneration to employees in an international employment situation, and taking the first steps towards answering these issues (see Tax Newsletter, Issue 14 of June 2002). The Netherlands did not wait for the OECD’s initiative and published on 21 February 2002 a new policy statement on the taxation of employee stock options in cross-border situations (see our PTX headline of 18 April 2002). Both emphasise the importance of there being a causal link between the grant of stock options and the duties that have been fulfilled as from that date onwards. In both documents, a distinction is made between conditionally and unconditionally granted stock options.

News

On 18 December 2001 the Administrative Court of Versailles decided on the basis of the French-UK tax treaty that the employee stock option benefit may only be apportioned in accordance to the time spent in France and the UK during the year of the tax-generating fact. The Court concluded that in the absence of a specific tax treaty provision, the year during which the tax-generating fact occurred should be determined according to French tax law. As a result, the stock option benefit resulting from the stock option exercise before the termination of the fiscal blocking period of 5 years (4 years under the new legislation of 15 may 2001) is considered as taxable remuneration for the year of sale or transfer of the shares acquired upon exercise. In the case at hand the employee exercised the stock option and immediately sold the acquired shares in 1993. As a result, he was only allowed by the Court to apportion the stock option benefit in accordance with the time spent in France and the UK during the year 1993.

By doing this the Administrative Court of Versailles does not follow the draft principles of the above-mentioned OECD report. The advice of the OECD is that each case should be considered based on all the facts and circumstances including the relevant contractual arrangements to which services the stock option relates. Where the employment services to which the stock option relates have been provided in more than one state, the OECD report advises that the stock option benefit be attributed to services performed in a particular country in the proportion of the period when services are provided in that country to the whole period of services to which the stock option relates. This OECD report is however not binding for its member States but only sets out a guideline for its members.