A standardised stock option plan does not guarantee
right to expense deduction

January 2023 – A company offers a stock option plan to its manager. In doing so, it calls on a specialised institution to offer standard stock options solutions. Yet this does not guarantee the deductibility of the costs.

Facts

A company with only one member of staff, namely the manager, decides to offer that manager a stock option plan. This can be fiscally favourable in implementation of the law of 26 March 1999: the recipient is taxed on a lump-sum benefit in kind, based on the value of the options at the time they were granted. With some luck, over time, the recipient can sell the options with a capital gain. That capital gain is then tax-free.

And so it happened: the company engaged an institution (hereinafter "P NV") to take care of all this. P NV has set up similar constructions in the past, which were also covered by a ruling. In our case, no ruling is requested, but the situation is very similar to previous situations for which P NV did obtain a ruling. One is executed and the company director is taxed in the year the options were granted to him, according to the special regime of the 1999 Act.

Next, the company wants to deduct the costs associated with the stock option plan. But then the tax authorities get in the way: to be tax deductible, the expenses must comply with Article 49 of the Income Tax Code 1992. And one of those conditions is that the expenditure must have been incurred with a view to acquiring or maintaining professional income, a condition on which much ink has already flowed.

Views of the tax authorities

The tax authorities believe that the stock option plan was not entered into for the purpose of acquiring or retaining income. A stock option plan is entered into to obtain a benefit in kind. A benefit in kind is a form of wages and wages are deductible professional expenses. But then again, wage expenses are also subject to the condition that they must be linked to actual performance (so that the employer can earn income). In this case, the tax authorities establish that the expenses were not paid to the employee, but to P NV. And additionally, the employer does not show that there was actual performance against the benefit or remuneration.

Taxpayer’s view

The taxpayer puts forward 2 arguments against this. That the expenditure was paid to P NV is irrelevant, according to him. This is an expense that was intended to provide a benefit to the business manager and so it is established that it is a form of remuneration. The court also fully agrees: this argument is rejected.

The second argument is an attempt to have it established that the grant of the stock options was of an occupational nature. But instead of demonstrating what services were provided, the taxpayer relies on the older rulings that P NV had obtained, which talked about the same situation. And that is where it goes wrong.

Judge’s view

First, the rule (and this actually applies to case law) is that prior rulings have no precedential value. A ruling only binds the tax authorities in a concrete case, with concrete data. The Advance Ruling Service sometimes publishes a general position (e.g. on costs proper to the employer regarding the home office), but otherwise you cannot rely on a ruling concluded between other parties. Even though the rulings cited were exactly 2 rulings that P NV had obtained in the same circumstances. 

Therefore, the court does not follow the taxpayer as regards its last argument. The court ruled as follows:

• That the benefit in kind was taxed as salary is perfectly correct, but is, according to the court, separate from the deductibility of the costs of the option plan.

• The fact that a ruling was entered into for the same 'product' of P NV is irrelevant and does not guarantee the deductibility of the costs.

• In any case, the taxpayer has to prove the services against the salary.

The court then concludes that the taxpayer does not succeed in the latter proof. Even though the manager is the only person in the company who provides services.

Professional fees?

The details in the judgment are insufficient to establish why the court considers that a benefit of any kind granted to the sole person working in a company should nevertheless not be considered pay for performance.

Possibly this has to do with the fact that neither the position nor the manager's salary changed, nor are there any elements indicating that the manager did anything extra that would justify the grant of a stock option plan. In such circumstances, the grant of the options is actually a liberality, with no performance in return.

Of course, it remains peculiar that the tax authorities, on the one hand, tax the company manager on a benefit in kind because it is salary, and at the same time, they do not allow the company a deduction because it would not be salary. But the main lesson here is that rulings cannot be used as precedents.

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