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Top management salaries: stock options

Top management salaries: stock options

Among the different salary concepts that can be used by companies in order to design their salary policy, we can find the “Stock Options”.

This remuneration, mainly destined to top management staff, consists in offering rights to buy shares from the company or from firms of the group for a price inferior to their market value.

From the point of view of the company, the objective of this instrument is twofold: a) to cultivate the loyalty of the manager as, in most cases, the right to buy shares is conditioned to his/her continuance in the company and b) to impulse the efficiency of his/her work, as the market value can depend of the results of the company.

It is a tax planning tool for the employee, as the income earned from the exercise of this right can take advantage of various tax benefits:

On the one hand, it can be considered as an income not submitted to taxation as long as (i) it does not exceed €12,000 per year, (ii) it belongs to the salary policy of the company, (iii) the employee, along with his/her spouse or relatives up to the second degree, do not have any direct or indirect participation exceeding 5% of the company or other companies of the group; (iv) the shares are maintained during at least three years.

On the other hand, a part of the income earned can be left out of taxation thanks to a 40% reduction on the return and up to a limit of €300,000 when (i) it has been generated during a period superior to two years and (ii) it is not obtained periodically or recurrently.

The latter has caused a disagreement between the Spanish Tax Administration and the Supreme Court. The Tax Administration, in the framework of the additional requirement “(…) if, besides, it is not granted annually” foreseen by article 11.3 of the Regulations implementing the Individual Income Tax Law, used to deny the consideration of the income earned this way as an irregular return, and thus to deny the 40% reduction in cases of annual granting of these rights.

On the contrary, the High Court, in a recent judgment rendered on Nov. 16, 2011, has declared that the clause, contained in the Regulations and not in the Law, is null and void, so that the income obtained from the exercise of the right to stock options, even if it is granted every year, can benefit from the reduction for irregular return if it fulfills the aforementioned requisites

Belén Berlanga

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