Context

As stressed in previous HRS headlines, stock options offered as of 10 January 2003 are taxable on the 60th day following the date they are offered, subject to a formal written acceptance of the beneficiary no later than on that 60th day. Stock options that are not properly accepted (accepted after the 60-day deadline or not explicitly accepted at all) qualify as deemed refused options (below “DROs”), thus not taxable on that 60th day. The question was then how and when DROs should be taxed, and it has been raised to the Minister of Finance by Mr François Bellot (Vraag/Question n°228- DO 2003200410680 – QRVA 51 021- p 3037).

News

Based on contacts we have had with the Cabinet of the Finance Minister, the Minister answered Mr François Bellot’s question. Its official publication is expected for early April 2004. Based on the information in our possession, the Minister would have adhered to the first thesis expressed in Mr François Bellot’s question (see link below). Hence, if this is the case, DROs would be taxed at exercise. The taxable amount is then expected to be the difference between the stock fair market value upon exercise and the exercise price and will be taxed as earned income.

Under the aforesaid first thesis, DROs would, from a tax perspective, never have been attributed to the beneficiary and could thus not be taxed as an option; since an option can only be taxed as earned income at its attribution date. As a result, the purchase of shares as provided by DRO agreements will, from a tax perspective, be regarded as a purchase of shares operated outside the scope of a stock option agreement. The operation is therefore regarded as a mere acquisition of shares at a discounted price.

It is important to note that the tax treatment of DROs would then be totally separate from the tax treatment of non-qualifying pre-1999 options (see notably HRS headline no 85*). It is then not expected that the tax treatment of DROs would be altered by the fate that Courts will eventually reserve to those pre-1999 options. Conversely, it is unlikely that the tax treatment of DROs would affect the position of the Courts in litigation on non-qualifying pre-1999 options.

So, subject to the condition that the Minister of Finance effectively subscribes to the aforesaid first thesis, if an employer sets up a process authorising acceptance of the stock option offer during a period exceeding 60 days, employees could elect for:

- an immediate tax charge on their option by accepting the offer in writing no later than on the 60th day following the offer, or
- a tax charge on the spread at the purchase date of the shares by accepting the options after the 60-day deadline.

Parliamentary question: http://news.hrservices.be?lk200403251

(*) http://news.hrservices.be?200402111807