Employment Incentives Comparative Guide

1. Legal and enforcement framework

1.1 Which legislative and regulatory provisions govern employee incentives in your jurisdiction?

Various legislative and regulatory provisions are relevant to employee incentives in the Netherlands. Typically, their application depends on:

• the qualification of the participant (employee or contractor);
• the characteristics of the company; and
• whether the financial instruments of the company to which the incentive plan relates are listed or traded on a financial market.

For Dutch tax purposes, the qualification of the participant and the place of work are decisive criteria in determining which Dutch tax rules apply:

• If the company implements an employee incentive that is available to employees who work in the Netherlands, the Wage Withholding Tax Act and the Social Security Contributions Act will apply; and
• If the incentive plan is also available to private contractors working in the Netherlands, the Personal Income Tax Act must be considered, as the incentive is included in the contractor's taxable business profits.

In addition to the Dutch tax rules, the employment law provisions in the Civil Code will apply if the incentives are granted to Dutch employees.

Finally, more specific rules may apply if the company is regulated or listed. Regulated companies must consider the Financial Supervision Act when implementing an employee incentive plan. Furthermore, if the awards under the employee incentive plan qualify as a 'security' under Dutch law, an approved prospectus may be required.

If the company to which the employee incentive plan relates is listed and trades shares or any other financial instruments to which the employee incentive plan relates on a regulated market, a multilateral trading facility or an organised trading facility, the EU Market Abuse Regulation may apply.

1.2 Do any special regimes apply in specific sectors?

A special wage tax facility applies for highly skilled employees who have been recruited from abroad and who meet certain conditions. This facility – the so-called '30% ruling' – enables employers to provide up to 30% of the employee's gross annual salary tax free, to compensate the employee for the extraterritorial costs incurred in maintaining homes in multiple countries for up to five years. Taxable benefits generated by employee incentive schemes must also be considered in calculating the tax-free allowance.

The 30% ruling was amended as of January 2024. The maximum salary to which the 30% ruling can be applied is now capped at €233,000 gross annual salary. Another change as of 1 January 2024 is that the tax benefit from the 30% ruling will be reduced over the five-year term as follows:

• In the first 20 months of the 30% ruling, 30% of the salary can be provided tax free.
• This rate will be reduced to:
• • 20% in the following 20 months; and
  • 10% in the final 20 months.

On Dutch Budget Day 2024, a proposal to reverse the limitation of the 30% ruling was made. Starting from 1 January 2027, it is proposed that the option of granting a tax-free allowance be retained, but with a reduced flat rate of 27% of an employee's Dutch-source income for the entire duration of this special regime. For 2025 and 2026, the tax-free allowance would be kept at 30%. This proposal was not included in the legislative draft published on Budget Day, but it will apparently be included in an amendment to the draft which is anticipated shortly.

Furthermore, a bonus cap applies to regulated companies that are active in the financial sector and are therefore subject to the Financial Supervision Act. Based on Section 1:121 of the Financial Supervision Act, a company is not permitted to grant variable remuneration to an individual that exceeds 20% of his or her fixed annual remuneration.

1.3 Which bodies are responsible for enforcing the legislation? What is their general approach in doing so?

The Dutch tax authority is responsible for enforcing all tax-related legislation that applies to employee incentives. For all other legislation, the civil court system is responsible for enforcing the legislation.

The Dutch Authority for the Financial Markets (AFM) and Dutch National Bank (DNB) jointly supervise the financial markets and in that capacity are responsible for enforcing the legislation that applies to financial and/or listed companies. In certain cases, financial and/or listed companies must publish certain information with the AFM/DNB. Please see question 8.1.

2. Providers

2.1 What types of companies typically provide employee incentive schemes in your jurisdiction?

Employee incentive schemes are widely adopted by companies in the Netherlands as they are considered an efficient way to attract and retain talent, regardless of the company's stage of operation or whether it is a startup, a privately held company or a listed company.

The establishment of employee incentive schemes is driven by a range of factors, with the primary motivations often contingent upon the nature of the company and its current stage of operation. For instance:

• startups utilise these schemes to offer competitive compensations to employees during periods of liquidity constraints, facilitating further growth; and
• more established companies utilise such schemes as tools for incentivising their employees and creating alignment of interest.

2.2 Can overseas employers provide employee incentive schemes in your jurisdiction?

Overseas employers can provide employees incentives to employees who are working and/or living in the Netherlands. However, they must consider the applicable Dutch law and tax law when offering incentives to employees in the Netherlands and ensure compliance therewith.

3. Participants

3.1 What kinds of employees are typically invited to participate in employee incentive schemes in your jurisdiction?

Employees incentive schemes are offered in all layers of companies in the Netherlands. In practice, it will depend on whether companies only offer the incentive scheme to management or extend it to a broader selection of the workforce.

3.2 Can overseas employees participate in employee incentive schemes in your jurisdiction?

Overseas employees can participate in employee incentive schemes established by Dutch companies. For tax purposes, it is relevant to consider the place of work of the employees who are participating in the employee incentive plan. If a Dutch tax resident company provides an employee incentive to an employee working abroad, the local tax rules must be considered and a potential tax obligation may arise there. However, if the employer provides the employee incentives to a foreign employee working in the Netherlands, the Dutch tax rules will apply.

3.3 Can contractors participate in employee incentive schemes in your jurisdiction?

Contractors are eligible to participate in employee incentive schemes in the Netherlands, but different rules may apply which must be considered. As noted in question 1.1, the Dutch business profit rules apply to contractors, potentially leading to differences between the tax aspects of employees and contractors.

In some cases, specific rules apply where employee incentives are provided to employees which are not available for participants that are not employed by the awarding company. One example is a share option plan, whereby specific tax rules under the employee share option regime apply to employees to whom share options are granted (please see question 7.1). These rules do not apply to contractors, who must consider the regular business profit rules.

4. Types of incentives

4.1 What types of employee incentives are typically offered in your jurisdiction? What factors influence the decision on which incentives to offer?

The type of employee incentive scheme used in the Netherlands typically hinges on whether it is:

• designed for the management of the company (management incentive scheme); or
• extended to encompass a broader selection of the company's workforce (employee incentive scheme).

Management incentives often entail regular share plans, in which managers are incentivised to co-invest in the company to enable them to profit from future increases in its value. These regular share plans align the company's interests with those of the managers, as the results directly impact on their investment. In some instances, companies further incentivise management by establishing a structure with leverage or share matching plans.

When companies opt to implement an employee incentive scheme for the entire workforce, they typically pursue a structure that does not necessitate a significant investment – or in some cases, any investment at all – from the employees upon grant, vesting or during the holding period when liquidity may not readily be available to fulfil any investment obligations. In such cases, share options, stock appreciation rights (SARs) or long-term bonus schemes are common alternatives for incentive schemes. An overview of the most common alternatives in the Netherlands and the pros and cons thereof is provided below.

4.2 Share option plans

(a) What option plan structures are available in your jurisdiction?

Regular share option plans are available in the Netherlands and are commonly used for employee incentives. Depending on the preference of the company, a share option plan can be structured in a way that gives employees the possibility to acquire shares in the company by exercising the share options. However, it is also possible to ensure that the share options will be settled in cash upon an exit, preventing employees from acquiring shares in the company.

The Wage Withholding Tax Act provides for an 'employee share option scheme', which applies irrespective how the share option plan is structured. This scheme is exempt from the general taxation rules of share options available to employees and provides for a deferral of Dutch wage withholding tax until:

• the moment that the underlying shares become 'tradable'; or
• the moment of exercise, where the employee opted for this alternative taxable moment.

The employee share option scheme does not apply if an employee receives share options in a company that is 'unrelated' to his or her employer company, meaning that the employer company holds less than one-third of the share capital in the company in which the share options are granted. In this case, the general taxation rules on share options will apply and the share options in principle will be subject to Dutch wage withholding tax upon vesting. However, this rarely happens in practice.

Unlike in other jurisdictions, Dutch tax law does not provide for any other tax-facilitated share option plans.

(b) What are the advantages and disadvantages of each?

In certain cases, companies do not want employees to be able to hold shares in the company, as this may impact on its governance structure. In such cases, a cash-settled share option plan is useful, as the employees will not actually acquire the shares but will rather receive an amount of cash upon an exit or liquidity event.

On the other hand, if it is intended that participants can hold shares in the company in the future, a regular share option plan can be structured. The benefit of share options is that the employees can acquire shares for a price that is lower than the fair market value of the shares, making it easier for them to finance the acquisition of the shares.

From a Dutch tax perspective, the employee share option scheme ensures that employees are not subject to Dutch wage withholding tax upon the regular taxable event – that is, the moment of vesting. Instead, the taxable event is shifted to the moment that the underlying shares become tradable. The advantage of this is that the company can defer Dutch wage withholding tax to a point when there is sufficient liquidity available to finance the Dutch wage withholding tax. Furthermore, this avoids valuation questions regarding the share options upon the moment of vesting, which in practice are difficult to answer.

Finally, expenses in relation to share option schemes or the issuance of shares are not deductible for Dutch corporate income tax purposes at the level of the company.

(c) What rules and requirements apply to these structures?

No specific rules apply to the implementation of share option plans. However, the employee share option scheme provided in the Wage Withholding Tax Act can be applied only if:

• a company grants share options on its own shares or shares in a related company (ie, in which it has an interest of at least one-third); and
• the share options are granted to an employee.

As a result of these requirements, the employee share option scheme included in the Wage Withholding Tax Act is not available where share options are granted to contractors. In that case, the regular business profit rules will apply.

4.3 Share purchase plans

(a) What share purchase plan structures are available in your jurisdiction?

Several types of share purchase plans can be established in the Netherlands to incentivise employees. The easiest structure involves companies that have a share capital consisting of one class of ordinary shares that grant employees the opportunity to acquire ordinary shares in the company, but more complex share purchase plans can also be structured.

Companies can provide more attractive share purchase plans to their employees by creating a structure with leverage by using different classes of shares. There are different methods to create a structure with leverage, but one common approach involves a structure that includes both preference shares and ordinary shares. Alternatively, companies can create a special class of shares with more beneficial rights (eg, carried interest shares or hurdle shares). Carried interest shares are a special class of shares in the company with specific rights for the holders, often connected to the achievement of company goals such as revenue or profit growth; while hurdle shares entitle the holders to part of the equity of a company insofar as it exceeds a predetermined hurdle amount.

Finally, Dutch foundations are commonly used in share purchase plans to separate the legal and economic rights to the shares. The Dutch foundation holds the shares in administration and issues a depositary receipt to the employees, which entitles them to the full economic rights to the underlying shares. However, the board of the Dutch foundation holds the legal rights (eg, voting rights) to the underlying shares in the company.

(b) What are the advantages and disadvantages of each?

General share plans provide the strongest incentives and can be structured in the most tax-efficient way compared to other employee incentives schemes, which are typically considered employment income and are therefore subject to the progressive rates of personal income tax. Additionally, the fact that it is possible to create a structure in which the employees have no voting rights or the right to attend shareholders' meetings by using a Dutch foundation is useful in employee incentive structures.

One disadvantage of a regular share participation is that the employees must pay the fair market value of the underlying shares to prevent a taxable benefit in kind from arising for the employee. The difficulties here are that companies must undertake a proper valuation to determine the fair market value of the shares. If such a valuation is not conducted, this may lead to a structure in which the employees pay less than the fair market value, causing difficulties in substantiating the fair market value in potential discussions with the Dutch tax authority. In more complex structures where companies work with different classes of shares or shares with special rights attached to them, it may be even harder to determine and substantiate the fair market value of the shares.

(c) What rules and requirements apply to these structures?

No specific rules apply to these structure and companies can freely decide to implement share participation structures for their employees.

4.4 Phantom share plans

(a) What phantom share plan structures are available in your jurisdiction?

SARs are a kind of phantom shares that are commonly used in the Netherlands as an alternative to share purchase plans. These are contractual rights that are connected to the value development of the shares of the company, which enable the employees to profit from the value increase of the company. SARs are not actual shares in the company and thus do not include rights to dividends or voting rights. From a Dutch tax perspective, SARs are contractual bonus rights.

Other types of quasi-equity instruments that are commonly used in other jurisdictions can also be implemented in the Netherlands (eg, phantom shares, restricted stock units).

(b) What are the advantages and disadvantages of each?

The main advantages of SARs are as follows:

• They are relatively easy to implement;
• They provide flexibility to the company in respect of the rights attached thereto and when there is a payout to the employees; and
• Payments under SARs are in principle deductible for Dutch corporate income tax purposes at the level of the employer, except if the employee's taxable remuneration in the calendar year preceding the year of grant exceeded €699,000 (2024). The deductibility for Dutch corporate income tax purposes is an advantage compared to share option plan, as these costs are not deductible for Dutch corporate income tax purposes at level of the employer company.

The disadvantages are as follows:

• Employees cannot acquire shares, which have a stronger retention element compared to SARs; and
• As the payments under SARs qualify as taxable wages for employees, the total income is subject the progressive rates of Box 1 of the Dutch personal income tax regime (ie, employment income), with a maximum rate of 49.5% (2024). The taxation for employees is similar to that for share options.

(c) What rules and requirements apply to these structures?

As SARs are flexible and discretionary, few rules and requirements need be considered in this regard. The rights of the SARs are laid down in a SAR plan and both the employer company and the employee sign a contract to formalise the grant of the SARs.

4.5 What other types of long-term incentives are available in your jurisdiction? What are the advantages and disadvantages of each?

Regular bonus schemes are another type of long-term incentive that is commonly used in the Netherlands. Similar to SARs plans, these are flexible and discretionary and relatively easy to implement.

The entire bonus paid to an employee qualifies as taxable wage for Dutch tax purposes and is subject to the progressive rates of Box 1 of the Dutch personal income tax regime (ie, employment income), with a maximum rate of 49.5% (2024).

Bonus payments are in principle deductible for Dutch corporate income tax purposes at the level of the employer, except for bonuses that have a direct and causal link to the acquisition or sale of a company to which the Dutch participation exemption applies.

4.6 What rules and requirements apply to discretionary incentives? In the case of recurring discretionary incentives, is it possible to argue under any circumstances that these have become mandatory contractual entitlements?

Discretionary recurring incentives may qualify as regular salary payments. If these incentives are paid regularly, this remuneration must be taken into account for the calculation of any severance payments and in some cases also other salary-based benefits (eg, holiday allowance, other bonuses, pensions or pension premiums). In order to prevent this, wording is typically included in the agreements confirming that the incentives are excluded from the calculation of these entitlements and should not qualify as regular salary for employment purposes.

4.7 Are any types of incentives prohibited in your jurisdiction?

No types of incentives are prohibited in the Netherlands. However, in some cases, additional legal and regulatory rules apply – for instance, in relation to incentives granted by financial companies (please refer to question 1.2).

5. Awards

5.1 Can awards be subject to the following in your jurisdiction? What key concerns and considerations should be borne in mind in relation to each?

(a) Deferral

The Netherlands provides for no tax deferrals for employee incentive schemes.

(b) Performance or time-based vesting conditions

Awards may be subject to performance and/or time-based vesting schedules and these schedules can affect taxation.

Awards of shares may be subject to a lock-up period during which the shares cannot be transferred or sold by the employees or participants. As the shares cannot be transferred, it may be argued that the shares have a lower fair market value, potentially reducing the taxable basis for the employee as result of receiving the shares. This has also been acknowledged by the Dutch state secretary for finance in a decree setting out guidelines on the impact on the value of listed shares for Dutch tax purposes. An overview of the decrease in value that may be considered for different lock-up periods on the basis of these guidelines is set out in the following table.

Vesting schedules are typically used to retain employees in employee incentive schemes. Given that the vesting is generally the taxable event for Dutch tax purposes, the vesting schedules may lead to a situation in which employees are subject to tax while the value of the shares increases (leading to a higher tax base). A more tax-efficient structure can be achieved through reverse vesting, as it prevents the employee from paying tax on a higher taxable basis realised upon the moment of vesting in the future. In short, reverse vesting enables the employee to acquire the full legal and economic rights in the shares immediately upon structuring the share participation, creating a taxable event only at that moment (ie, the start of reverse vesting). If the employee stops working for the company, he or she is obliged to offer (part of) the shares against the nominal value, depending on the reverse vesting schedule.

Thus, a time-based vesting condition alone, without a condition to remain employed, will not postpone the taxable event for Dutch tax purposes. In such case, the grant of the shares will be considered the taxable event.

Performance-based vesting clause could lead to the qualification of a lucrative interest. Please see question 7.2.

(c) Forfeiture

Awards can be made subject to forfeiture. However, in certain circumstances, the forfeiture of awards may be deemed unreasonable and unfair, and therefore invalid.

(d) Post-vesting/post-employment holding periods

Awards may be subjected to post-vesting and/or post-employment holding periods. Post-vesting holding period provisions are typically included in management incentive plans, particularly when the exercise of the awards is tied to an exit event. Post-employment holding period provisions, however, are relatively uncommon in the Netherlands.

(e) Malus and clawback provisions

Certain management incentive plans incorporate malus and clawback provisions. Certain mandatory provisions outlined in the Civil Code make it possible to retract bonuses or grants under specific circumstances. Additionally, distinct remuneration regulations are applicable to employees of financial institutions and in top management positions at public and semi-public institutions. Payments that contravene these regulations are deemed null and void and must be reimbursed.

6. Formal and regulatory requirements

6.1 What reporting, filing or other administrative requirements apply to (a) the rollout of and (b) participation in an employee incentive scheme?

The employer is generally required to withhold Dutch wage withholding tax and social security contributions on the taxable employment income received by an employee as a result of an employee incentive scheme. Dutch wage withholding tax is a pre-levy of Dutch personal income tax. However, it will depend on the structure of the employee incentive scheme whether a taxable benefit is realised upon implementation of the incentive, which may be the case with a share incentive scheme. If the employees pay the fair market value of the shares upon acquisition, no taxable benefit should be realised. As noted in question 7.1, no taxable benefit is generally realised upon the structuring of other employee incentive schemes in the Netherlands, such as share options or SARs.

In addition, an employer is generally required to pay social security contributions on remuneration paid to employees. This amount is capped at a maximum annual wage for the calculation of the social security contributions. The maximum annual wage for social security contributions is €71,628. This means that no (additional) social security contributions are due insofar the annual wage exceeds this threshold.

Finally, cross-border share purchase plans that effectively convert income into capital or other categories of revenue that are taxed at a lower rate or are exempt from tax may have to be reported to the Dutch tax authority under the Dutch rules based on the EU Mandatory Disclosure Directive.

6.2 What formal and substantive requirements apply to (a) the rollout of and (b) participation in an employee incentive scheme?

From a Dutch tax perspective, no other relevant formal and/or substantive requirements apply to the rollout of and/or participation in an employee incentive scheme in the Netherlands.

7. Tax and social security issues

7.1 What are the tax and social security implications for the company

When determining the Dutch tax and social security consequences of employee incentive schemes for companies, it is important to consider the different employee incentives schemes, as each may have different Dutch tax consequences. Therefore, a distinction has been made between the most common employee incentive structures in the Netherlands – that is:

• share purchase plans;
• employee stock ownership plans (ESOPs);
• stock appreciation rights (SARs); and
• bonus schemes and other quasi-equity incentives.

Share purchase plans: If employees who are working in the Netherlands are given the opportunity to acquire shares in the employing company or a related company, the first question to answer is whether the employees or participants will receive a taxable benefit in kind upon the acquisition of the shares. If the employees or participants pay the fair market value of the shares upon acquisition, there is no taxable benefit in kind for the employee. Hence, only if employees can acquire shares with a discount or receive free shares will a taxable benefit in kind arise. For the remainder of this question, we assume that an employee is granted free shares or shares with a discount, as only this may lead to Dutch tax consequences for the company.

(a) On grant?

The taxable event for Dutch wage withholding tax purposes is the moment that an employee has a right on the company that is directly claimable and collectable. Therefore, the grant can be considered the taxable event for Dutch wage withholding tax purposes if the employee receives the shares unconditionally – that is, without any conditions precedent such as vesting and leaver conditions. Please see further below for an overview of the Dutch tax and/or social security consequences for the company upon vesting.

However, shares are typically granted to employees subject to conditions precedent to promote retention. In that case, no Dutch tax and/or social security consequences for the company arise upon the grant of shares.

(b) On vesting?

In most instances, the vesting of the shares is considered the taxable event for Dutch wage withholding tax purposes and the total benefit in kind received by the employee at the moment of vesting is subject to Dutch wage withholding tax. The total taxable benefit in kind is equal to the difference between the fair market value of the shares upon vesting and the acquisition price of the shares multiplied by the total number of shares that vest.

The employer is the withholding tax agent for Dutch wage withholding tax purposes and has the primary obligation to withhold Dutch wage withholding tax on the taxable benefit in kind. As the Dutch wage withholding tax is a pre-levy of Box 1 of the Dutch personal income tax regime (employment income), the same progressive rates apply for Dutch wage withholding tax. Simultaneously, the employer must also pay Dutch social security contributions, whereby a maximum annual wage for the calculation of the Dutch social security contributions of the employer must be considered (please see question 6.1).

Any cost in relation to the issuance of shares is considered non-deductible for Dutch corporate income tax purposes at the level of the company.

(c) On exercise?

N/A.

(d) On the acquisition, holding or disposal of underlying shares or securities?

After the taxable event upon the vesting of the shares, the Dutch tax consequences for the employee will depend on:

• the percentage that the employee holds in the company; and
• whether the shares qualify as a so-called 'lucrative interest' for Dutch personal income tax purposes (please refer to question 7.2).

No additional Dutch tax and/or social security consequences for the company arise at the moment when the employee acquires, holds and/or disposes of the shares.

(e) In relation to any loans provided to participants within the framework of the employee incentive scheme?

The company can provide employees with loans to finance (part of) the acquisition price of the shares. However, it is important that the employees finance part of the acquisition price with their own funds to ensure that it is not fully leveraged, because this may lead to a taxable benefit in kind for the employee. Furthermore, a market interest rate should be applied to the loan, as a lower interest rate may also lead to a taxable benefit in kind for the employee.

ESOP: New legislation on the Dutch taxation of share option entered into force on 1 January 2023. Under these new rules, the taxable moment of share options has changed from the moment of exercise, disposal or transfer to the moment at which the underlying shares obtained through exercising the share options become 'tradable'.

(a) On grant?

The grant of a share option is not considered a taxable event for Dutch tax purposes and thus no Dutch tax and/or social security consequences for the company arise. Employers can decide what the exercise prices of the share options granted to the employees will be, without leading to any adverse Dutch tax consequences if the exercise price is below the fair market value of the underlying shares. From a Dutch legal perspective, the employee must pay at least the nominal value of the underlying share upon exercise of the share option.

(b) On vesting?

No Dutch tax and/or social security consequences for the company arise upon vesting of the share options.

(c) On exercise?

Employees who are working in the Netherlands and who are granted share options can choose to be taxed upon exercise of the share option. The employee must inform the employer in writing that he or she wishes to have the share options taxed upon exercise of the share options, whereby the written notice to the employer must ultimately be made by the employee at the exercise of the share options. The employer must keep an administrative record of the employee's desired taxable event.

If the employee has opted correctly for a taxable event upon exercise of the share options, the share option benefit will be subject to Dutch wage withholding tax upon the moment of exercise. As a withholding agent, the employer must:

• withhold Dutch wage withholding tax against the progressive rates of Box 1 of the Dutch personal income tax regime; and
• pay Dutch social security contributions.

The share option benefit is equal to the difference between:

• the fair market value of the shares upon the exercise; and
• the exercise price and purchase price (if any).

(d) On the acquisition, holding or disposal of underlying shares or securities?

As a default, the share options received by employees who work in the Netherlands are subject to Dutch wage withholding tax upon the moment that the underlying shares obtained through exercising the share options become 'tradable'.

The shares are 'tradable' once any trading restrictions are lifted and the shares can be sold to a third party or other employees. Contractual and legal transfer restrictions are also relevant for this purpose. For listed companies, the underlying shares are generally tradable immediately after exercise of the share option. However, certain contractual limitations (eg, a lock-up period) or legal transfer limitations may apply. To prevent a prolonged deferral of taxation, shares in listed companies are deemed to be tradable after a period of five years.

The taxable event could potentially arise while the employee holds the underlying shares in the company. As a withholding agent, the employer must:

• withhold Dutch wage withholding tax against the progressive rates of Box 1 of the Dutch personal income tax regime; and
• pay Dutch social security contributions at the moment that the underlying shares become tradable.

A sell-to-cover mechanism can be included in the employee share option plan, which allows employees to sell part of the underlying shares in the company at the moment of exercise to finance the Dutch wage withholding tax.

(e) In relation to any loans provided to participants within the framework of the employee incentive scheme?

Although it is not common to use a loan in an employee incentive scheme with share options, the employee may potentially be given the opportunity to finance part of the exercise price or the Dutch wage withholding tax, if there is no sell-to-cover mechanism, with a loan. In that case, the same conditions must be considered as when providing a loan in a regular share plan.

SARs, bonus schemes and other quasi-equity incentives: SARs, bonus schemes and other quasi-equity incentives generally lead to a payment in cash upon the fulfilment of certain conditions. The Dutch tax and social security consequences are comparable for these employee incentive schemes and are therefore collectively described below.

(a) On grant?

No Dutch tax and/or social security consequence for the company arise upon the grant of SARs, bonus schemes and other quasi-equity incentives.

(b) On vesting?

No Dutch tax and/or social security consequence for the company arise upon the vesting of SARs, bonus schemes and other quasi-equity incentives.

(c) On exercise?

Generally, SARs, bonus schemes and other quasi-equity incentives lead to a payment in cash upon exercise or upon the fulfilment of certain conditions. At that moment, the payment qualifies as taxable wages for the employee and Dutch wage withholding tax and social security contributions are due for the employer. As a withholding agent, the employer must:

• withhold Dutch wage withholding tax against the progressive rates of Box 1 of the Dutch personal income tax regime; and
• pay the employer social security contributions upon this taxable moment.

In principle, the payment in cash under all these incentives is deductible for Dutch corporate income tax purposes at the level of the company. Notwithstanding the foregoing, the cash payment is not deductible if:

• a structure with SARs is used; and
• the employee's employment income exceeded €699,000 in the preceding year of grant of the SARs (a one-time test that is relevant only on grant).

(d) On the acquisition, holding or disposal of underlying shares or securities?

The employee does not acquire any shares or securities in the company in the case of SARs, bonus schemes or other quasi-equity instruments and thus no tax implications arise for the company.

(e) In relation to any loans provided to participants within the framework of the employee incentive scheme?

Given that generally no purchase price needs to be paid to exercise the SARs, bonus schemes or other quasi-equity instruments, no loans need be provided to finance an exercise price.

7.2 What are the tax and social security implications for participants:

Share purchase plan: An employee is considered to receive a taxable benefit in kind if he or she receives free shares in the company or acquires shares in the company with a discount. The benefit in kind must be considered when determining the total employment income of the relevant employee for Dutch personal income tax purposes. As the Dutch wage withholding tax is a pre-levy for Dutch personal income tax purposes, the total amount of Dutch wage withholding tax withheld by the employer can be credited against the personal income tax of the employee.

(a) On grant?

The grant of shares may result in a taxable event for Dutch tax and social security purposes, depending on whether the shares are granted unconditionally – that is, without any conditions precedent, such as vesting and leaver conditions.

If the shares are granted unconditionally, the grant is considered the taxable event and the employer must withhold Dutch wage withholding tax on the difference between the fair market value of the shares upon the grant and the purchase price. However, no additional tax and/or social security obligations for the employee should arise, as the Dutch wage withholding tax can be credited against the Dutch personal income tax.

(b) On vesting?

The vesting of the shares is considered the taxable event for Dutch wage withholding tax purposes and the total benefit in kind received by the employee upon the vesting is subject to Dutch wage withholding tax. The total taxable benefit in kind is equal to the difference between the fair market value of the shares upon vesting and the acquisition price of the shares multiplied by the total number of shares that vest.

Besides the withholding obligations of the employer, no additional tax and/or social security obligations for the employee arise, as the Dutch wage withholding tax is a pre-levy of Dutch personal income tax.

(c) On exercise?

N/A.

(d) On the acquisition, holding or disposal of underlying shares or securities?

On acquiring the shares, the employee holds shares in the employer company. From that moment, the Dutch personal income tax rules apply and will depend on the shareholding of the employee in the company. Shares in a company are in principle included in Box 2 (income derived from substantial interests) or Box 3 (income derived from savings and investments) of the Dutch personal income tax regime.

If an employee holds 5% or more of the total issued share capital or a class of shares in the company (ie, a substantial interest), the shares are included in Box 2 of the Dutch personal income tax regime (substantial interest tax). Income derived from shares in a substantial interest (dividends and capital gains) is subject to a progressive tax rate:

• Income up to €67,000 is subject to tax at a rate of 24.5%; and
• Any income in excess of this threshold is subject to tax at a rate of 33% (2024).

If the employee does not hold a substantial interest in the company, the shares are in principle included in Box 3 of the Dutch personal income tax regime (wealth tax). Based on the current Box 3 rules, Dutch personal income tax is levied on a deemed annual return on the total net value of the assets of the taxpayer on 1 January insofar the total net value of the assets exceeds a tax-free threshold of €57,000 or €114,000 for tax partners together. The taxpayer's Box 3 assets should be divided into three relevant asset categories, each of which has its own deemed annual return:

• bank balances (1.03%);
• other investments (6.04%); and
• debts (-2.47%).

The total deemed annual income is subject to tax at a rate of 36% (2024). If the shareholding qualifies as a 'lucrative interest' for Dutch personal income tax purposes (Box 1), the rules may differ and careful structuring is advised.

(e) In relation to any loans provided to participants within the framework of the employee incentive scheme?

The company can provide loans to employees to finance (part of) the acquisition price of the shares. However, it is important that the employees finance part of the acquisition price with their own funds to ensure that it is not fully leveraged, as this may lead to a taxable benefit in kind for the employee. Furthermore, a market interest rate should be applied to the loan, as a lower interest rate may also lead to a taxable benefit in kind for the employee.

ESOP: On 1 January 2023, new legislation regarding the Dutch taxation of share options entered into force. Under these new rules, the taxable event for share options has changed from exercise, disposal or transfer to the moment at which the underlying shares obtained through exercising the share options become 'tradable'.

(a) On grant?

The grant of a share option is not considered a taxable event for Dutch tax purposes and thus no Dutch tax and/or social security consequence for the employee arise.

Unlike in other jurisdictions, granting share options with an exercise price that is below the fair market value or 409A valuation (in US employee share option plans) of the underlying shares upon of the grant does not constitute a taxable benefit in kind for the employee.

(b) On vesting?

The vesting of a share option is not considered a taxable event for Dutch tax purposes and thus no Dutch tax and/or social security consequence for the employee arise.

(c) On exercise?

The share option benefit is subject to Dutch wage withholding tax at the moment the underlying shares become tradable or, if opted for correctly, upon the moment of exercise. As the Dutch wage withholding tax is a pre-levy of Dutch personal income tax, the total amount of wage withholding tax withheld by the employer can be fully credited against Box 1 (employment income) of the Dutch personal income tax regime.

(d) On the acquisition, holding or disposal of underlying shares or securities?

Upon exercising the share options, the employee holds shares in the company. The increase in value of the underlying shares realised after the taxable moment of the share option is subject to Dutch personal income tax at the level of the employee; the Dutch personal income tax rules will depend on the shareholding of the employee in the company.

(e) In relation to any loans provided to participants within the framework of the employee incentive scheme?

Although it is not common to use a loan in an employee incentive scheme with share options, the employee may be given the opportunity to finance part of the exercise price or the Dutch wage withholding tax, if there is no sell-to-cover mechanism, with a loan. In that case, the same must be considered as when providing a loan in a regular share plan.

SARs, bonus schemes and other quasi-equity incentives:

(a) On grant?

No Dutch tax and/or social security consequence for the employee arise upon the grant of SARs, bonus schemes and other quasi-equity incentives.

(b) On vesting?

No Dutch tax and/or social security consequences for the employee arise upon the vesting of SARs, bonus schemes and other quasi-equity incentives.

(c) On exercise?

Generally, SARs, bonus schemes and other quasi-equity incentives lead to a payment in cash upon exercise or the fulfilment of certain conditions which constitutes a taxable wage for the employee. At that moment, Dutch wage withholding tax and social security implications arise for the employer. As Dutch wage withholding tax is a pre-levy of Dutch personal income tax and can be fully credited against Dutch personal income tax, no additional tax and/or social security obligations for the employee arise on exercise.

(d) On the acquisition, holding or disposal of underlying shares or securities?

As the employee does not acquire any shares or securities in the company with SARs, bonus schemes or other quasi-equity instruments, no tax implications arise for the employee.

(e) In relation to any loans provided to participants within the framework of the employee incentive scheme?

As generally, no purchase price need be paid to exercise SARs, bonus schemes or other quasi-equity instruments, no loans need be provided to finance an exercise price.

7.3 What other key concerns and considerations in relation to employee incentive schemes should be borne in mind from a tax perspective?

In the Netherlands, there is a key distinction in the deductibility of expenses between regular share plans or share option schemes and SARs or other bonus schemes. Expenses relating to the issue of shares and share options are not deductible for Dutch corporate income tax purposes; whereas regular bonus schemes and SARs are generally deductible for Dutch corporate income tax purposes. Exceptions to this rule include:

• bonuses that are directly linked to the acquisition or sale of a company that qualifies for the Dutch participation exemption; and
• a SARs payment made to an employee with a taxable employment income that exceeded €699,000 in the year preceding grant (a one-time test that is relevant only on grant).

This makes SARs potentially more attractive for Dutch companies as employee incentives. However, companies might still prefer share options or share plans for other reasons, such as a greater perceived alignment of interest and lower income tax compared to SARs.

Valuing a company's shares can be challenging and improper valuations can lead to disputes with the Dutch tax authority. The Dutch tax authority prefers valuations based on the discounted cashflow method. Companies can request a tax ruling to obtain certainty on the tax implications of a share participation; but the Dutch tax authority will typically grant such a ruling only if a proper valuation is provided based on the discounted cashflow method.

Finally, shares may qualify as a 'lucrative interest' for Dutch personal income tax purposes (carried interest structures) if:

• specific rights are attached to the shares; or
• a significant leverage is created.

In principle, income derived from a lucrative interest is subject to Box 1 of the Dutch personal income tax regime but can be structured in the more favourable Box 2 if certain requirements are met.

8. Corporate governance issues

8.1 What corporate governance rules and requirements apply to employee incentive schemes in your jurisdiction?

With regard to corporate governance rules and requirements, a distinction must be made between:

• regular share plans whereby the employees actually hold shares in the company; and
• other employee incentives whereby the employees do not actually hold shares in the company.

If the employees hold shares in the company, they may be able to participate in the shareholders' meeting and may have voting rights (depending on the rights attached to the respective shares). In addition, the employees must in principle become a party to the shareholders' agreement of the company and, in that capacity, are subject to the agreement and rules included in the shareholders' agreement.

In other employee incentive schemes where the employees do not actually hold shares in the company, the employees do not become a party to the shareholders' agreement and have no voting rights or rights to participate in the shareholders' meeting.

Although this is not prohibited by Dutch corporate law, it is not common to grant shares to supervisory and non-executive board members of listed companies because of the stipulations in the Corporate Governance Code. Virtual and phantom shares are excluded from these principles, but listed companies are still reluctant to grant these to supervisory and non-executive board members, because all remuneration components of the supervisory and non-executive board members must be published. The supervisory and non-executive board members are not prohibited from holding shares as such, but this must be notified to the Dutch Authority for the Financial Markets.

8.2 What other key concerns and considerations in relation to employee incentive schemes should be borne in mind from a corporate governance perspective?

Companies generally implement employee incentives schemes to enable employees to benefit from (potential) value creation of the company rather than to give them voting rights and the possibility to participate in shareholders' meeting. Although these rights are usually attached to shares, shares may still be the preferred alternative for employee incentive schemes for other reasons (see question 4.1 for an overview of the pros and cons of the various employee incentive schemes). To prevent employees from having these rights, the shares can be structured through a Dutch foundation. The use of a foundation leads to a separation of the legal and economic rights of the shares in the company.

A Dutch foundation can be incorporated and hold the shares in the company, issuing one or more depositary receipts for each share (with the same value as the underlying shares) to the employees. The Dutch foundation holds the legal title of the shares and the foundation's board can exercise the voting rights attached to the underlying shares in the company. The depositary receipts entitle the employees to the full economic rights of the underlying shares in the company. Under this structure, the full legal ownership and voting rights of the shares in the company remain at the level of the main shareholders, preventing a major change in governance structure.

9. Employment law issues

9.1 Do any employee consultation or notification requirements apply before an employee incentive scheme can be rolled out in your jurisdiction?

No specific employment law-related consultation or notification requirements apply before an employee incentive scheme can be rolled out in the Netherlands.

9.2 Are participants in share plans entitled to compensation for loss of associated benefits on termination of employment? Does this vary depending on the grounds for termination?

The legal documents and agreements relating to employee share schemes often include leaver clauses that require an employee to offer the shares to other parties in case of termination of the employment agreement. This prevents situations in which the former employees still hold shares in the company after termination of their employment agreements.

A distinction can be made between good leavers and bad leavers, which are each subject to different conditions. Long-term illness and incapacity to work are typical grounds for good leavers, while dismissal on urgent grounds is typical for a bad leaver.

If the participant qualifies as a bad leaver, he or she generally has no right to compensation for the loss of the awards when the employment agreement terminates. Exceptions to this rule occur:

• in certain limited circumstances where forfeiture of the awards would be contrary to the principle of reasonableness and fairness (please see question 5.1(c)); or
• in the event of unfair dismissal. In such case:
• • an employee can claim fair compensation; and
  • the potential value and/or vesting of awards may be considered by the civil court when determining the compensation amount.

9.3 Can the type or amount of incentive award made to one participant potentially affect awards made to other participants?

Companies must ensure that no specific groups of employees are excluded from an employee incentive scheme, as this could violate the principle of equal treatment. Direct or indirect distinctions based on the following grounds is generally prohibited:

• race;
• gender;
• part-time or full-time employment; or
• definite or indefinite term contracts.

Employers must not treat employees in similar positions unequally unless there is an objective justification for this distinction.

9.4 What other key concerns and considerations in relation to employee incentive scheme should be borne in mind from an employment law perspective?

N/A.

10. Securities law issues

10.1 What securities law rules and requirements apply to employee incentive schemes in your jurisdiction? Do any exemptions apply?

First, it is crucial to determine whether the awards qualify as 'securities' under Dutch law. If this is the case, additional securities law regulations and requirements may apply. One such requirement is the publication of a prospectus in accordance with the EU Prospectus Regulation.

However, even if the awards qualify as securities, there are various exemptions that may relieve companies from these additional rules and requirements. Examples include:

• the 'small offering exemption', which applies if the awards are granted to fewer than 150 individuals in a member state; and
• the 'employee share scheme exemption', which applies if:
• • the offer is made to current or former employees (or directors); and
  • the recipients are given a short disclosure document containing specific prescribed information about the offer.

10.2 What other key concerns and considerations in relation to employee incentive schemes should be borne in mind from a securities law perspective?

The European Market Abuse Regulation (MAR) is applicable in the Netherlands and should be considered if there is a listing or trading of shares, or any other financial instrument of the company to which the employee share or share option scheme relates, on a regulated market, a multilateral trading facility or an organised trading facility in any EU member state.

In respect of employee incentive schemes, the provisions of the MAR – including the insider trading prohibition – may be applicable to the grant, exercise and subsequent sale of shares. This can potentially lead to an obligation to notify the transaction to the Dutch Authority of Financial Markets. However, an exemption from the insider trading prohibition may be available under the MAR in case of employee share plan or share option plans.

11. Data protection issues

11.1 What data protection rules and requirements apply to employee incentive schemes in your jurisdiction?

The handling of employee data for employee incentive scheme constitutes data processing under both the General Data Protection Regulation (GDPR) and the Dutch GDPR Implementation Act (UAVG). Hence, companies that implement an employee incentive scheme must consider the GDPR and UAVG and ensure that the processing of the data is compliant with all relevant legal requirements in relation to the GDPR. Certain sensitive data may be subject to additional requirements. Finally, companies cannot retain the personal data of employees for longer than necessary.

11.2 What other key concerns and considerations in relation to employee incentive schemes should be borne in mind from a data protection perspective?

Companies must notify employees about the processing of their personal data within the scope of the employee incentive scheme in compliance with their information obligations. If personal data is collected or processed by companies situated outside the European Economic Area, supplementary measures must be established and adhered to, in order to ensure an appropriate level of protection.

12. Internationally mobile employees

12.1 What are the tax implications if a participant in an employee incentive scheme becomes tax resident in another jurisdiction before a trigger event takes place?

For Dutch tax purposes, there is a difference between Dutch tax resident employees and non-resident employees who work in the Netherlands. Dutch tax resident employees are in principle subject to tax on their worldwide income, while non-resident employees are only subject to Dutch taxation on their Dutch-sourced taxable income (eg, employment activities in the Netherlands). However, jurisdictions may take a different position on the taxation of mobile employees and the taxation of their income, potentially leading to double taxation. In that case, any double tax treaty concluded between both jurisdictions becomes relevant.

Such double tax treaties allocate the taxation rights to both jurisdictions. The taxable benefits realised by employees through the acquisition of free or discounted shares or the exercise of share options are allocated to the jurisdictions in a similar way to the regular payment of salaries to employees who work in more than one jurisdiction. This is also the case for taxable income derived from a bonus or realised with stock appreciation rights or other quasi-equity incentives.

For the sake of completeness, a distinction must be made between:

• taxable benefits realised through the acquisition of free or discounted shares or the exercise of share options; and
• capital gains realised through the subsequent disposal of the shares.

In that case, the capital gains provisions of the applicable double tax treaty must be considered.

12.2 What are the tax implications where a participant in an overseas employee investment scheme becomes tax resident in your jurisdiction event and a trigger event in the overseas jurisdiction subsequently takes place?

Assuming that the employee will also work in the Netherlands after becoming a tax resident of the Netherlands, the system for determining the tax consequences is similar to that outlined in question 12.1.

12.3 What other key concerns and considerations in relation to internationally mobile employees should be borne in mind, from a tax perspective or otherwise?

Dutch tax law provides for a tax facility for employees who are recruited from abroad and whose skills are in short supply on the Dutch labour market. This facility is called the '30% ruling'. According to the 30% ruling, under certain conditions, employees can receive up to 30% of their taxable employment income as a tax-free allowance for a maximum period of five years (60 months). The tax-free allowance is meant to cover extraterritorial expenses such as double housing costs and relocation costs. The 30% ruling has recently come under scrutiny: it was proposed on Dutch Budget Day 2024 that the tax-free allowance should be retained, but that the percentage should be reduced to 27%. This proposal was not included in the legislative draft published on Budget Day, but it will apparently be included in an amendment to the draft which is anticipated shortly. The taxable employment income includes benefits from employee incentive schemes that generate taxable employment income. Hence, the choice of employee incentive structure may have an impact on the 30% ruling.

13. Disputes

13.1 In which forums are disputes over employee incentives typically heard?

In most cases, the parties agree in the documentation of the employee incentive scheme that the competent Dutch court will hear any disputes relating to the scheme.

However, a common alternative is to appoint an arbitrator or an expert (eg, an independently registered valuator) who will hear the dispute and provide binding advice thereon.

13.2 What issues do such disputes typically involve?

Disputes typically involve the valuation of the incentives in situations where the employee must offer the incentives to other parties without any trigger event or exit taking place.

In case of regular share participations, the employee must offer the shares to other parties based on the participation plan against a certain price. That price, however, may fluctuate and depends on whether the employee qualifies as a good leaver or a bad leaver. Typically, the participant can offer the shares against the fair market value if he or she qualifies as a good leaver; while the shares must be offered against a discount if the participant qualifies as a bad leaver or early leaver. If this offer takes place before the occurrence of an exit and thus no third-party price is readily available, a discussion on the fair market value may arise. This sometimes leads to disputes, which can be solved by a registered valuator. To prevent these types of disputes from arising, clauses are often included in the documentation stating that the expenses of a valuator must be borne by the employee if the outcome of the valuation deviates by more than a certain percentage from the offer price based on the documentation (which led to the dispute in the first place).

14. Trends and predictions

14.1 How would you describe the current employee incentive scheme landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

Employee incentive schemes have become increasingly popular as effective tools for attracting and retaining talent in a competitive labour market. This trend is evidenced by the growing demand for advice on the structuring of these incentives. In the Netherlands, there has been a push for more attractive tax rules for employee incentive schemes, inspired by the more favourable tax environments in other jurisdictions. Although the Dutch government is considering these changes, no formal plans have been included in the Dutch budget plans.

Recently, the Dutch Lower House adopted a motion requesting the government to propose new legislation on carried interest structures. The motion suggests taxing carried interests at the progressive rates of Box 1 of the Dutch personal income tax regime (employment income) rather than providing in certain cases for the possible application of the more favourable Box 2. However, this is only a motion and no formal legislative proposal has been made.

Finally, Box 3 of the Dutch personal income tax regime will be amended as per 2027, as a transitional system is currently in place. Although several plans have recently been published, which aim to shift to a system in which the actual return realised on investments is taxed, there has been no formal decision about what kind of new system will be implemented. Recently, the Dutch Supreme Court decided that the current transitional Box 3 system is also contrary to certain provisions of the European Convention for the Protection of Human Rights and Fundamental Freedoms, because the deemed (flat-rate) returns are still being used, which means that the deemed (flat-rate) return may be higher than the actual return. Changes in this regard are thus expected shortly. As employees are subject to Box 3 taxation under certain incentive schemes (ie, share plans or share option schemes after exercise of the share options), the new Box 3 system will also have an impact on employee incentive structures.

15. Tips and traps

15.1 What would be your recommendations for the smooth rollout of employee incentive schemes and what potential pitfalls would you highlight?

In our view, it is crucial to ensure the proper tax structuring of an employee incentive scheme. Failure to do so can lead to disputes with participants or may deter investors from investing in the company. This issue is particularly evident in startups that grant various awards to employees but struggle to manage the impact on their capitalisation table and to clearly explain this to potential investors.

Furthermore, employees must understand the workings of the incentive scheme and the implications thereof. Therefore, it is essential to provide a clear overview of the scheme's mechanics, along with its financial and tax consequences.

To achieve this, it is highly recommended to seasoned legal and tax advisers with experience in structuring employee incentives.

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.