Employee equity in the Netherlands

For startups, a strong employee equity scheme is a critical growth lever. As talent pools shrink, big businesses are inflating their compensation packages to attract the best employees. Startups can’t compete: they don’t have the resources to match salaries, or the brand identity to win talent away from big-name competitors.

But as a startup, you can offer equity. Making employees shareholders in the business performs a number of important functions. Not only does it help attract top talent, it helps retain them, too. Tying personal outcomes to the outcomes of the business increases employee engagement, and incentivises better performance. That drives growth for the business, which in turn drives value back to employees, creating a virtuous circle.

As startups become scale-ups, leadership teams need to think carefully about what a good employee equity scheme looks like. It won’t be one-size-fits-all: each geography has its own legal, tax and cultural context, and equity schemes have to be adapted to fit.

Below, we’ve outlined what you need to know about employee equity in the Netherlands, and how to get started with your share scheme.

The state of employee equity in the Netherlands

In  Not Optional’s ranking of the ‘friendliness’ of employee stock options in 24 European nations, the Netherlands came in 16th. It’s not a terrible result, but it’s perhaps a surprising one for a country with among the highest workplace happiness in Europe.

Not Optional judges the treatment of employee stock options against six key criteria, and the Netherlands ranked especially poorly on two of them:

1. Plan scope: Can all employees and company types benefit from favourable treatment of stock options?

2. Employee tax rate: Which rate is applied – income, capital gains, or something else? Are employee social contributions payable, and if so, how much are they?

Part of the issue with plan scope is that the structure of incentive plans in the Netherlands varies widely. There are different rules for ‘all employee’ and ‘management only’ plans, and different rules for publicly and privately held companies. If you’re managing your company’s employee share scheme – whether you sit within finance, legal or HR – that can mean a lot of work to understand the different legal and tax implications for the business, and how to comply with them.

The good news is that recent changes made by the Dutch government to the way that stocks are taxed are about to make life easier. The new legislation is more inclusive of all company types (though particularly beneficial for startups), and offers more attractive tax rates for employees.

Changes to stock option taxes in the Netherlands

Employees in the Netherlands have to pay income tax on their stock options. Stock options are considered a ‘benefit in kind’ under the Dutch Wage Tax Act, and are taxable at a rate of up to 49.5%. The amount of tax owed is calculated as the fair market value of the stock option at the point of taxation, minus what the employee paid for the stock option.

Under previous rules, the ‘taxable moment’ (the point at which tax is due) on stock options was the point of exercise. This caused problems for employees, especially startup employees for whom there was no immediate market for their stock options. It meant they were being taxed for stock options before they could sell and realise cash value from them, a problem known as ‘dry taxation’. In worst case scenarios, it resulted in employees actually losing money, since the tax wasn’t repaid if the value of the stock options later decreased. As the average startup employee has no control over their liquidity horizon, they aren’t able to manage the risk of a negative outcome in this scenario, and therefore unlikely to participate.

This unfavourable tax landscape made it very difficult for Dutch startups to attract and retain talent with equity – one of the most important weapons in their recruitment arsenal could actually end up costing rather than benefiting employees. In recognition of this, the Dutch government introduced a beneficial rule for startups. It stipulated that, subject to certain parameters, employees would only be taxed on 75% of the fair market value of their stock options. But because the parameters were so limited (only stock options worth under €50,000, only for certain businesses and only within a set timeframe), very few startup employees took advantage of the easement.

As of January 2022, new rules have been introduced. They move the ‘taxable moment’ from the point share options are exercised to the moment they become tradable, so employees aren’t paying taxes on an illiquid asset. Employees can still choose to be taxed at the moment of exercise if they make a written request to their employer, however. This can be an attractive option, because the taxable amount is based on the fair market value (FMV) of the stock options when they are taxed. If stock options increase in value over time (which is likely for growth companies, especially those fundraising, scaling or approaching IPO), the amount of tax due will increase, too.

Why startups in the Netherlands choose Share Appreciation Rights (SARs)

The new legislation is beneficial for employees of all business types. Though it aims to support startups specifically, it’s not limited to them, and is therefore more expansive and inclusive than the previous setup.

But the Dutch tax landscape still isn’t entirely favourable for startups. While deductions have been put in place for employee tax, no corporate income tax deductions are available for Dutch companies on stock options. There's one workaround for this. If stock options are settled in cash, they can be considered a cash bonus.  Cash bonuses are tax deductible for the business unless the employee made over €598,000 in the preceding year.

SARs offer employee compensation based on the business's stock price during a predetermined period of time. If the stock price rises, the SARs become more valuable – just like stock options. The difference is that employees do not have to pay an exercise price for SARs. Instead, they receive the value of the price increase in cash. It works like this: an employee is offered SARs for 100 shares worth €10 each. Over time, the shares increase in value to €50 each. The employee receives the appreciation amount (100 x €40) in cash.

Besides the tax break, SARs are also useful for businesses because they offer the same incentive as equity, but don’t require them to dilute their cap table, or reduce the percentage holding for investors.

How Carta supports customers in the Netherlands

Carta enables you to offer employees a range of equity types, and the platform supports SARs through our virtual shares functionality.

There are two main differences between SARs and virtual shares. SARs are excisable and can be paid out whenever the employee chooses, whereas virtual shares are usually cashed on exit only. Additionally, the value of SARs is solely appreciation based, while the value of virtual shares can be based on appreciation or the full value of the shares.

With Carta, you can issue SARs to employees via virtual share plans, select whether value is based on appreciation or total share price, and select a valuation to use for that calculation. You can also select the vesting schedule and payment type, including when payments happen. Carta also enables you to model SARs by setting aside an allocation of 'shares' to help with calculations.

But that’s not the only way we help scaling businesses in the Netherlands and beyond. Carta supports a range of currencies, so your stakeholders can manage investments in their preferred currency. If you’ve got employees on share schemes across jurisdictions, that’s no problem either. Simply set up a share scheme for each different plan and issue the security type accordingly.