Tuesday 9 April The main problem is the way stock options are taxed. It is really awful in Spain. Any remuneration from stock options is considered as ordinary income rather than capital income. And you get taxed twice. And you get taxed twice, when you exercise the option and when you later sell the shares.
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Tax is triggered when the options are exercised. The difference between the fair value of the stock and the strike price is considered ordinary income, but at this point you have only received shares with no market to sell them, so you are in a dry income situation, where you are required to pay taxes but you have no cash to pay them. Then you get taxed again on any gains you make when you sell the shares. In the US, in contrast, employees may benefit from so-called incentive stock options where, subject to certain requirements, you are taxed only once, when you sell the shares, and the income qualifies as long term capital gains.
But, further to the tax issue, there is also a problem with corporate law, which is usually overlooked. SAs are like public limited companies and typically bigger. Issuing stock options for SLs is complicated.
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When SLs were created in stock options were almost unheard of so corporate laws were not written to enable them to do this. All the references in Spanish law to shares are for SAs. In fact, SLs do not have authorised capital that can be allocated by the board of directors, for example, so every time they want to issue shares they need to get approval from the general shareholders meeting. Besides, SLs, unlike SAs, are generally prevented from holing portfolio shares, which makes it almost impossible for an SL to have a pool of shares to be delivered to employees upon exercise of their options.
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As a result, a stock option plan would require a SL to hold periodical shareholders meetings to approve the corresponding share capital increases each time stock options are exercised, which is completely inefficient from a legal cost perspective. And the last thing a startup needs is to increase their legal costs because of an inefficient regulation.
But phantom stock options means employees never really become shareholders and, for instance, in case of an IPO, the employee will lose the potential upside of remaining as a shareholder.
Phantom Stock
The existing framework is the result of a legal reform approved in , following a controversy with stock options awarded to managers of certain formerly public companies that had been recently privatised. After that, stock options regulations were tightened and they became very unpopular.
There is a good summary here. They started to become popular again in the last 10 years as startups started to become trendy. Before that, no one really knew what a startup was. Now there is more of an understanding that startups create jobs and boost the economy and that stock options are key to attract talented people, when you cannot pay market salaries. There are some benefits to issuing phantom shares.
Companies keep their cap table very manageable because people given phantom shares never become shareholders. But on the other hand, employees never become shareholders in the company and, therefore, they have no political rights and cannot benefit from shareholders distributions such as dividends , which may also impact their economic rights. Because phantom shares are so usual in Spain most of the people simply accept that this is how it is. But if they are hiring people from other countries this can be a problem because of tax inefficiencies.
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You can see that some Spanish companies that start to expand overseas establish a holding company in Delaware or other jurisdictions like the UK , where you have much more favourable stock option regimes. I want to make clear that those jurisdictions are not tax shelters and that having a holding in Delaware or elsewhere does not mean that these companies do not pay taxes in Spain, which they all do as any other company operating in Spain.
For accounting purposes, phantom stock is treated in the same way as deferred cash compensation. As the amount of the liability changes each year, an entry is made for the amount accrued.
A decline in value would reduce the liability. These entries are not contingent on vesting. Phantom stock payouts are taxable to the employee as ordinary income and deductible to the company.
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However, they are also subject to complex rules governing deferred compensation that, if not properly followed, can lead to penalty taxes. From Wikipedia, the free encyclopedia. Categories : Options finance Employee bonus. Hidden categories: All articles with unsourced statements Articles with unsourced statements from November Namespaces Article Talk. Views Read Edit View history. Help Learn to edit Community portal Recent changes Upload file. Download as PDF Printable version. Deutsch Polski Edit links.