Shares granted to employees, as part of an employment package, constitute a payment of salary for an amount equal to the fair market value of the shares.
The stock exchange rate is used for shares listed on a stock exchange.
The employer can stipulate that the shares are not allowed to be traded for a specified period after they have been granted— i.e., the lock-up. The Dutch Revenue’s policy has been that such a lock-up period will result in a decline in the shares’ value of 2.5% per annum for tax purposes.
A recent judgment by the Amsterdam Court of Appeals concludes that a two-year lock-up period causes a 10% decline in shares’ value.
The case involved a public limited liability company (naamloze vennootschap—NV) that had issued its own shares to the members of its board of directors. The shares could only be traded after the expiration of a two-year lock-up period.
The NV assumed a reduction in the value of the shares of 22.5%. The tax inspector, however, allowed only a 5% decline in value (in accordance with Dutch Revenue’s policy to allow 2.5% per year for a lock-up imposed on the shares). According to the tax inspector, the NV had withheld insufficient payroll tax in respect of the issued shares and, as a result, was assessed for the difference.
The District Court held for the tax inspector. On appeal, the Amsterdam Court of Appeals concluded that neither the NV nor the tax inspector had convincingly quantified the exact write-down amount of the shares resulting from the lock-up and thus set this figure at 10%.
The Deputy Minister of Finance recently announced that the tax administration does not expect to appeal the case to the Supreme Court. Thus, the Dutch Revenue has been asked to amend its policy, so that it will be more in line with the decision of the Court of Appeals.
Read an August 2012 report prepared by the KPMG member firm in the Netherlands: Valuation of shares with lock-up granted to employees