Negative wage income in case of share transfer triggered by bad leaver clause

On 14 April 2025, the Dutch Tax Authorities published a Knowledge Group opinion on the recognition of negative wage income due to the triggering of a bad leaver clause. The Knowledge Group holds the view that a capital loss arising from the mandatory sale of shares to the former employer may be recognised by the employee as negative wage income.

Bad leaver

In certain employment relationships, employees are granted the opportunity to acquire shares in their employer. In practice, this is accompanied by additional arrangements concerning share ownership, such as a so-called ‘bad leaver’ clause: upon termination of employment under certain circumstances, the employee is obliged to offer their shares to the employer at a predetermined price. If this price is lower than the fair market value (“FMV”) at the time of transfer, this may result in a loss.

Case

In the case considered by the Knowledge Group, employee X acquires shares in year 1 in their employer at a cost of €0. The FMV of the shares at that time is €100. The employer withholds wage tax on €100. Based on the agreement between the employer and employee, the employee is required to offer their shares to the employer for €500 if the employee is classified as a ‘bad leaver’. In year 4, employee X leaves employment and is classified as a bad leaver. At the time of termination, the FMV of the shares is €800.

The employer purchases all of X’s shares for €500. X realises a gain of €500, whereas without the bad leaver qualification, the shares could have been sold at FMV, resulting in a gain of €800. Due to the bad leaver clause, employee X has incurred a loss of €300. The question arises whether this amount can be recognised as negative wage income, and whether the answer would be different if X had acquired the shares for €100 instead of €0.

Knowledge Group’s position

The Knowledge Group states that the bad leaver risk is dependent on the continuation or termination of the employment relationship, and therefore falls within the sphere of the employment relationship. For this reason, the bad leaver risk does not affect the FMV at the time the shares are acquired by employee X. The Knowledge Group adds the caveat that, for example, a ban on disposal of shares, may, under certain circumstances, affect the FMV.

Finally, the Knowledge Group notes that if employee X had acquired the shares for €100 instead of €0, this would not alter the conclusion set out above.

Conclusion

We agree with the reasoning of the Knowledge Group in this opinion. The above case illustrates the importance of carefully considering the implications of bad leaver provisions, among other things, when structuring employee participation schemes. These considerations are not limited to potential wage tax implications, but may also include, for example, the application of the lucrative interest regime in personal income tax. In some cases, it may be advisable to obtain confirmation of the tax consequences from the Dutch Tax Authorities.

Questions?

If you have any questions regarding employee equity participations, their tax treatment, or the possibility of obtaining a tax ruling, please feel free to contact Frederik Mulder or Joël van de Sluis for tailored advice.