Government makes share-based compensation more tax-attractive for startups

The Dutch government is working on a tax reform that will allow startups to reward their employees more favourably with shares or stock options. This decision follows intense lobbying from the tech sector and is currently being further developed in budget discussions.

Current tax barriers

Currently, shares granted to employees as part of their compensation are immediately taxed as income. This means that employees must pay income tax on the value of the shares at the time of allocation, even though these shares are not yet tradable. This creates a complex valuation issue at the time of grant and results in a tax burden of up to nearly 50%, discouraging many Dutch startups from offering shares to their employees.

For stock options, the current regime is slightly more favourable. The tax liability is deferred from the grant date to the moment the options are exercised or, under certain conditions, when a lock-up period ends. This allows taxation to align better with liquidity events. However, as the value of the shares increases over time (in a positive scenario), so does the tax burden, diminishing the incentive effect of providing shares as compensation. In any event the Dutch tax system puts Dutch startups at a disadvantage compared to other countries, such as the United States and the United Kingdom, where schemes are more tax-friendly.

Proposed change

The government aims to improve this situation by shifting the tax moment from grant to liquidity, ensuring that taxes are only due when the shares are sold and actual cash becomes available. This change makes it more attractive for employees to accept shares or stock options as compensation and gives startups more flexibility in attracting and retaining talent.

Importance for the startup sector

Startups often operate with limited financial resources, particularly in their early years when they are not yet profitable. Offering shares or stock options as a form of compensation helps them attract and retain talented employees without straining their cash flow. This is crucial for the growth and competitiveness of Dutch startups, particularly in the technology and innovation sectors.

According to Dirk Beljaarts, Minister of Economic Affairs, it is essential that startups can attract top talent and allow employees to benefit from their growth. Under the current tax rules, many skilled workers move abroad or join larger companies offering higher salaries. Easing the tax burden of these regulations could strengthen the Dutch startup ecosystem.

Remaining uncertainties

While the government has decided in principle to implement this reform, the exact details of the new scheme have yet to be finalised. It remains unclear which companies will qualify, whether the new rules will apply to both shares and stock options, and what tax rate will apply upon realization. These details are expected to be announced later this spring.

For startups and their employees, this tax change could have a significant impact. We are closely monitoring developments and will provide updates as more information becomes available.

Do you have questions about the tax implications of equity compensation? Contact Ivo Kuipers, Lyda Stone, or Vera Melsert for personalised advice.