Five employees are granted conditional share rights by their employer’s French parent company. They will only receive these shares if they are still employed after four years and have met certain performance targets. Before the conditions are met, a takeover takes place. The new owner makes the employees an offer: surrender the conditional share rights and receive a cash bonus in return. The cash bonus is not linked to continued employment, performance or any other conditions. All employees accept this offer. As a result, they ultimately do not receive any shares, but a bonus totalling just over €630,000, to be paid out in 2016 and 2018. It later transpires that none of the five employees would have met the conditions for the share rights to become unconditional.
Facility
The Dutch employer wishes to account for these future costs as early as 2015 by creating a tax provision. The tax inspector has rejected this request. In his view, the scheme falls under the statutory deduction restriction for share and option schemes. That provision prevents a company from deducting the costs of shares or option rights granted to employees from its profits. According to the tax inspector, it is irrelevant that the rights have been granted subject to conditions.
Deduction limit
The Supreme Court takes a different view. According to the Supreme Court, an actual share or option right only arises once the conditions precedent have been met. Until that happens, employees cannot enforce their rights. In this case, the conditional rights are exchanged for a cash bonus at an earlier stage. The conditions are therefore never fulfilled. Consequently, from a tax perspective, a share or option right to which the deduction restriction applies never arises.
Cash bonus
The cash bonus is therefore not a non-deductible shareholder expense, but an ordinary business expense. The employer may set aside a provision for this and charge it to the profit.