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Lietuvių kalba Several of our clients want their employees to be offered the opportunity to buy shares in the company they work for. This is called a share incentive model. The idea behind such a model is to create loyalty and added value. If the purchase is made at less than the market price, the employee may have to pay tax on the benefit as if it were earned income. Conditions for when this is relevant are reviewed below.
- About the equity incentive model
When the employee is offered the opportunity to buy shares in the company, a cash amount is paid that is often significantly lower than the market value of the shares. The remainder of the purchase price must be settled by sale and/or by a dividend from the company. Any gain on the sale or dividend from the company will be subject to taxation. It is important for the employee to know whether the gain on the sale of the shares will be taxed as capital income or earned income. It will be most favourable if the gain is taxed as capital income. The tax rate is then only 22 % of the gain. When taxed as earned income the tax rate will normally be higher, because earned income is taxed by means of graduated tax.
2. Judgement in the area
There are two key Supreme Court judgements that deal with the question of whether employees' gains should be taxed as earned income, cf. Rt-2000-758 (Kruse Smith) and Rt-2000-1739 (Pre Finans).
Kruse Smith:
In Rt-2000-758 (Kruse Smith), the case concerned an incentive scheme in which employees subscribed for shares in the company at a nominal value of NOK 10. Nothing was paid in excess of the subscription price. A specially regulated mathematical value per share in the company after the subscription was NOK 143.02. At the same time as the subscription, an agreement was entered into with the main shareholder concerning future redemption of the shares. If the acquirer left the company, he was obliged to sell the shares to the main shareholder. The sale price was to be set at a specially regulated mathematical value, and a deduction of NOK 133.02 (the difference between the subscription price of NOK 10 and the mathematical value of the shares after the subscription of NOK 143.02) was to be made at this time. The shares were realised at a profit, and the difference was settled. The Supreme Court ruled that the employees had to be regarded as shareholders in the company at the time of subscription, even though the capital risk did not relate to the full market price at the time of acquisition. The Supreme Court concluded that the gain on sale had to be regarded as capital income.
Pre Finance:
In Rt-2000-1739 (Pre Finans), the outcome was different. The Supreme Court pointed out that gains from ordinary ownership of shares in the employer company should in principle not be taxed as earned income, even if the employment is an important condition for the shareholding. At the same time, it was clarified that it is certain law that benefits in the employment relationship in the form of free shares or shares at a discount constitute a benefit that is taxed as employment income. The Supreme Court was of the opinion that special benefits that the employee receives due to the employment relationship in connection with the purchase of shares are taxable. The same must apply to the sale of shares. In the specific case, the Supreme Court found that the absence of risk in the purchase in that case represented a marked deviation from market conditions. The consequence was that the share gain had to be regarded as a benefit gained through work, and was taxed as earned income.
3. The Norwegian Tax Administration's statement of principle
On 28 March 2022, the Norwegian Tax Administration issued a statement of principle to clarify its assessment of share incentive models. The Norwegian Tax Administration states that the main rule is that dividends from shares are taxed as capital income. The prerequisite is that the shares are owned directly by the employee.
On the issue of taxation of gains on the sale of shares, the Norwegian Tax Administration refers to the Supreme Court decisions Rt-2000-758 (Kruse Smith) and Rt-2000-1739 (Pre Finans).
If the agreement means that the employee has not made a real capital investment, or that the employee is secured against loss, in whole or in part, the assessment may be different. The Norwegian Tax Administration considers that such a gain on sale is regarded as a taxable benefit gained through labour. The decisive factor for the characterisation seems to be the risk element in the share incentive scheme. If the employee actually risks a loss on the investment, it will be easier for the Norwegian Tax Administration to consider a gain to be taxed as capital income. If there is no risk associated with the employee's investment, the Norwegian Tax Administration will decide that a gain on the sale of the shares should be characterised as earned income. The reason for this is that the capital investment is risk-free and therefore has clear similarities with an ordinary bonus.
4. Conclusion
In light of the statement, it is recommended that a thorough review of the company's share incentive scheme is carried out, with the aim of ensuring that there is an awareness of how a gain or loss will affect the employee's financial position. The preparation of clear and concise documentation will weigh heavily in the Tax Administration's assessment.
