Higher downward revaluation for lock-up of shares granted to employees
Higher downward revaluation
Shares granted to employees within the framework of their employment must be valued for the purposes of the payroll tax/national insurance contributions to be withheld. The Tax Administration has announced that it will apply higher downward revaluations for listed shares granted to employees which are subject to a lock-up. This is the result of a judgment of the Amsterdam Court of Appeal of 29 March 2012 and applies to both current and new cases.
Value reducing effect of lock-ups
The subject matter of this case before the Amsterdam Court of Appeal was the amount of the downward revaluation of listed shares granted to employees due to a lock-up. The fact that the employee is not allowed to sell the granted shares during a certain period (lock-up period) has a value reducing effect. As a practical rule of evidence, in such instances the Tax Administration used to apply a 2.5% downward revaluation for each year of the lock-up period, to be deducted from the value of the shares in order to calculate the payroll taxes due. In the present case, the employees were not permitted to sell their shares during a period of 2 years. The Tax Administration thus set the downward revaluation at 5% (2.5% per annum). However, based on another calculation method the employer in this case had set the value reducing effect at 22.5%. The Amsterdam Court of Appeal held that both the Tax Administration and the employer had failed to convincingly quantify the value reducing effect and in reasonableness determined this effect at 10% for two years.
Practical rule of evidence
The State Secretary for Finance did not challenge this Court of Appeal judgment before the Supreme Court. He requested the Tax Administration to start applying a new practical rule of evidence that is in line with the Court of Appeal judgment. The new rule of evidence implies that for current and new cases where listed shares are granted to employees which are subject to a lock-up, a 5.5% downward revaluation is applied for the first year of the lock-up period, 4.5% for the second year, 3.5% for the third year and 2.5% for both the fourth and fifth year. These rates apply for the entire year and are applied proportionately if the downward revaluation only concerns part of the year. A condition for application of the downward revaluations is that the shares cannot be sold de jure and de facto and this prohibition cannot be avoided in whole or in part. The employer must demonstrate that the prohibition is enforced. The downward revaluation does not apply to the part of the shares which may be sold directly to pay the payroll taxes due.
If he believes that the effective value reducing effect was higher than the downward revaluation rate used, the employer is free to demonstrate this.
If a lock-up period lasts longer than five years, an aggregate downward revaluation of 18.5% may be applied for (total of the above percentages), or the employer can fully quantify the downward revaluation relating to the lock-up himself.
Source: Valuation of lock-up shares granted to employees, Explanation by the State Secretary of 31 May 2012, no. DGB 2012-3214 following judgment of the Amsterdam Court of Appeal of 29 March 2012, no. 2009/00340, period July 2005 (published 8 August 2012)