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TAX & BUSINESS
Timing of the accrual of tradable share options
The Administrative Court (VwGH) had to determine whether tradable share options that were granted before the employment relationship began and acquired at an arm's‑length price constitute a benefit from the employment relationship and when they would, if at all, be regarded as having accrued.
The appellant was involved in the restructuring of Y‑AG. Because of his special expertise, he was granted an option that was not made available to third parties. The option could, however, be sold by him to third parties at any time and was therefore unrestrictedly tradable. The appellant ultimately acquired the option at an arm's‑length price. Instead of the transfer of the shares, the appellant received a cash settlement. This was taxed as income from employment under wage tax.
Decision of the VwGH
The VwGH followed its established case law on the question of the accrual date and explained that an employee who is granted such a share‑option right merely obtains a tax‑irrelevant opportunity. The monetary benefit arising from the option accrues to the employee only upon the exercise of the option. The decisive factor is whether the option would have been granted to a third party in its design; the transferability to third parties is irrelevant.
With regard to the benefit from the employment relationship, the VwGH stated: In view of the fact that the employee is afforded only a tax‑irrelevant opportunity by the granting of the option, the benefit from the employment relationship does not arise at the moment the option is granted, but only through the discounted acquisition of the shares as a result of exercising the option. If the option, in this design, would not have been granted to a third party, the conditions of the remuneration for the granting of the option are no longer relevant.
Conclusion
The VwGH surprises with its finding in two respects: on the one hand it relies on older decisions concerning non‑tradable option rights and extends that case law to tradable options without further justification. Although there is no explicit statutory provision, various legal sources suggest that a distinction should be drawn between tradable and non‑tradable options.
On the other hand, the VwGH rules that even the acquisition of the option at an arm's‑length price provides the employee only with an insignificant chance. This appears systematically questionable, as the acquisition of the option at an arm's‑length price already constitutes a purchase transaction. No monetary benefit arises at that point; any subsequent increase in value would rather be attributed to private assets.
If one follows this reasoning, the profit from the disposal of the shares or business interests, despite acquisition at an arm's‑length price, constitutes a benefit from the employment relationship and is subject to wage tax. In contrast, an option right that is also offered to third parties at an arm's‑length price would be subject only to capital gains tax at 27.5%.
This divergent treatment does not appear readily understandable from a systematic perspective. It remains to be seen whether the VwGH will continue this case law in the future or will engage more deeply with the systematic objections raised against it.
Decision of the VwGH
The VwGH followed its established case law on the question of the accrual date and explained that an employee who is granted such a share‑option right merely obtains a tax‑irrelevant opportunity. The monetary benefit arising from the option accrues to the employee only upon the exercise of the option. The decisive factor is whether the option would have been granted to a third party in its design; the transferability to third parties is irrelevant.
With regard to the benefit from the employment relationship, the VwGH stated: In view of the fact that the employee is afforded only a tax‑irrelevant opportunity by the granting of the option, the benefit from the employment relationship does not arise at the moment the option is granted, but only through the discounted acquisition of the shares as a result of exercising the option. If the option, in this design, would not have been granted to a third party, the conditions of the remuneration for the granting of the option are no longer relevant.
Conclusion
The VwGH surprises with its finding in two respects: on the one hand it relies on older decisions concerning non‑tradable option rights and extends that case law to tradable options without further justification. Although there is no explicit statutory provision, various legal sources suggest that a distinction should be drawn between tradable and non‑tradable options.
On the other hand, the VwGH rules that even the acquisition of the option at an arm's‑length price provides the employee only with an insignificant chance. This appears systematically questionable, as the acquisition of the option at an arm's‑length price already constitutes a purchase transaction. No monetary benefit arises at that point; any subsequent increase in value would rather be attributed to private assets.
If one follows this reasoning, the profit from the disposal of the shares or business interests, despite acquisition at an arm's‑length price, constitutes a benefit from the employment relationship and is subject to wage tax. In contrast, an option right that is also offered to third parties at an arm's‑length price would be subject only to capital gains tax at 27.5%.
This divergent treatment does not appear readily understandable from a systematic perspective. It remains to be seen whether the VwGH will continue this case law in the future or will engage more deeply with the systematic objections raised against it.