The Dutch Supreme Court recently ruled on the scope of the deduction limitation for equity-related employee remuneration (Deduction Limitation). It confirmed that a cash bonus in return for surrendering conditional stock options remains a tax-deductible payment for Dutch corporate income tax purposes.
Background
Between 2013 and 2015, the French parent of a Dutch taxpayer granted five employees conditional stock options to acquire shares in the French parent. These options would vest after four years of continued employment and satisfaction of certain performance conditions.
Following a sale of a majority stake in the French parent, each employee was offered a cash bonus (payable in 2016 and 2018) in exchange for surrendering the conditional stock options. All five accepted, so: (i) the stock options never became unconditional; and (ii) no shares were ever granted. Later, it also became apparent that none of these employees would ever have satisfied the vesting conditions.
The Dutch taxpayer (employer) sought to form a tax-deductible provision in 2015 for the cash bonus payments. However, the tax inspector argued that the Deduction Limitation applied.
Legal framework
The Deduction Limitation of article 10(1)(j) of the Dutch Corporate Income Tax Act 1969 (CITA) in short prohibits the deduction of costs connected to the granting of shares (or rights to acquire shares) to employees. Introduced in 2007, it reversed case law allowing such tax deduction.
Dutch civil law also plays a role, which stipulates that rights granted subject to a condition precedent only take effect once the conditions are fulfilled. Hence, legal effect is postponed until unconditionality occurs.
Court of Appeal
The Court of Appeal of 's-Hertogenbosch held that stock options granted subject to a condition precedent are not in scope of the Deduction Limitation. Only after vesting, the employees become a pseudo-shareholder meaning that from then on, the employee occupies a position vis-à-vis the company that should be treated in the same way as a shareholder. Since the stock options were bought out before vesting, the taxpayer (employer) should not be restricted in forming a provision for these bonus payments.
Supreme Court
The State Secretary for Finance appealed in cassation, but the Supreme Court rejected the appeal. It held that: (i) Dutch civil law governs when the stock options would have become unconditional; and (ii) nothing in the Dutch CITA, its legislative history or its purpose suggests a departure from this starting point. So, before the condition precedent is fulfilled the Deduction Limitation is irrelevant. The Supreme Court thus concludes that the Dutch taxpayer was entitled to form a tax-deductible provision in 2015.
Other developments
Recently, the internal knowledge group of the Dutch Tax Authorities (DTA) also published two positions, relevant to the Deduction Limitation of Article 10(1)(j) of the Dutch CITA.
Wage taxes for the employer’s account
The first position relates to a Dutch entity granting shares in its own capital to employees for free. Under the Deduction Limitation, those costs are non-deductible. For the employee, the value of the shares is a wage (in kind). Rather than recovering the wage taxes from the employee, the employer took these as a cost for own account. Doing so is also a wage element, requiring the employer to gross-up the wage tax due.
The question then is whether these taxes are in scope of the Deduction Limitation. The DTA confirm that that should not be the case. Covering such taxes leads to an impoverishment (cash out) for the employer, and a tax deduction should be available for such costs.
Bonus payments referencing equity values
The Deduction Limitation (in short) also applies to rights granted to employees that can be assimilated to shares, stock options or profit certificates in the employer, provided the employee earns an annual wage exceeding EUR 728k (2026). A common example is a stock appreciation right (SAR), which is a bonus entitlement connected to the value development of (a group entity of) the employer.
For the Deduction Limitation to apply, it should be determined whether the value of such right is, directly or indirectly, primarily determined by changes in value in the equity of the employer. If not, these bonus payments in principle remain tax deductible. In the case at hand, cash bonus entitlements were connected to: (i) a percentage of the employer’s EBITDA, times a multiple; or (ii) a percentage of the capital gain realized on the shares in the employer.
In the published position, the DTA conclude that if the metrics used are a means to determine the value of an underlying equity instrument, then the Deduction Limitation applies. According to the DTA, it should not matter whether the instrument directly references the value of equity, or indirectly through the use of a valuation method or formula.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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