Norway has become the first major country to enact legislation with respect to the taxation of stock options that will result in income tax consequences both at date of grant and at date of exercise. This new legislation is retroactively effective to January 1, 1996. However, the new rules will not affect the taxation of restricted stock or stock appreciation rights.
Under previously-existing law, stock options were taxed at date of exercise on the excess of the market value of the stock at date of exercise over its exercise price. However, there may now be two taxable events for individuals subject to tax in Norway. The new rules operate as indicated below:
Employee is granted options to acquire 1 000 shares of XYZ stock at an exercise price of $20 per share. The term of the option is 10 years and the market value of XYZ stock on date of grant is $20 per share. On the date of exercise, XYZ stock is worth $50 per share.
3. DATE OF GRANT TAX CONSEQUENCES
The value of the option, less the price that is or will be paid for the stock by the employee, is subject to income and social security taxes. The maximum income tax rate is 41,7% (local-28%; top tax-13,7%), while the social security tax rate is 7,8%. (In addition, employers will pay 24,1% social tax where compensation exceeds approximately $98,000.)
The value of options listed on the stock exchange is deemed to be the quoted price of the option. For other options, valuation is based on the quoted price of the underlying shares plus an estimated increase in value of 1% per month for the exercise period of the options. This, assuming that the option is not quoted on the stock exchange, the deemed taxable benefit for the 1,000 options is calculated as follows:
Free market price of the share at date of grant of the option ($20,000) times 120% (1% per month for 10 years) +24,000 free market price of the shares at date of grant +24,000 employee's cost price at date of grant - 0 employee's cost when converting the options to shares -20,000 NOK 1,000 ($150) per employee - 150 Total taxable amount at date of grant 23,850
4. DATE OF EXERCISE TAX CONSEQUENCES
The value of the shares less the exercise price of the shares to the employee at date of exercise plus the deemed taxable value at date of grant is subject to tax. In the example, the taxable amount is calculated as follows:
Value of shares at time of exercise + 50,000 employee's cost price when converting - 20,000 taxable amount at date of grant - 23,850 NOK 1,000 ($150) per employee - 150 Total taxable amount at date of exercise 6,000
As in the case of taxation at grant, income tax plus social tax of up to 49,5% will be payable on the taxable amount at exercise.
Obviously, the above example potentially places an onerous cash burden on the employee at date of grant for the tax on the taxable amount of $23,850. Thus, stock options may now be perceived less positively than before.
Moreover, if the value of the stock were not to appreciate sufficiently in price subsequent to the date of grant, the individual could incur a deductible capital loss. If, let us say, the exercise took place when the market price of the stock is $25 per share, the negative consequences of this would be (1) a deductible capital loss, recoverable only at a rate of 28%, (2) no recoupment of any of the employee social taxes paid at grant, and (3) no recoupment of any of the employer social taxes paid at grant.
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.
For further information contact Unni Bjelland, Ernst & Young, Tel: +472 203 6000 or Fax: +472 203 6370.
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