Legislative proposal for tax incentives for startups

To qualify for this regulation, the company must meet various conditions. One of these is having an RVO Ruling, confirming that the company qualifies as a 'startup' or 'scale-up'. It is therefore advisable to assess at an early stage whether your company qualifies for such a ruling. In addition, it is prudent to review whether the current or intended employee stock option plan meets the conditions and what the regulation concretely means for the remuneration policy.

According to the explanatory notes to this legislative proposal, a significant part of the future economic growth of the Netherlands depends on the success of startups and scale-ups and the innovation that these companies bring. With this legislative proposal, the government aims to give these companies better opportunities to grow successfully in the Netherlands, among other things by facilitating access to early-stage financing and by encouraging the attraction and retention of (international) talent.

In addition, startups and scale-ups often lack the financial means to offer employees competitive compensation packages. Stock options can partially bridge this gap. Although employee participation takes various forms, the legislative proposal exclusively provides for a favourable tax treatment of employee stock option schemes at startups and scale-ups that meet the requirements.

According to the explanatory notes to the legislative proposal, the current tax treatment of stock options in the Netherlands appears unfavourable compared to other (European) startup countries such as the United Kingdom, France and Sweden. The benefit from stock options is currently taxed in box 1 at progressive rates, where financing the tax charge may lead to problems, whereas other countries often tax such benefits at a lower rate or treat them as capital gains.

A startup or scale-up is, according to the legislative proposal, an enterprise focused on rapid growth through a scalable and repeatable business model that originates in innovation. The shares may not be traded on a regulated market and may not be held, directly or indirectly, for more than 25 percent by a listed entity.

A scalable and repeatable business model means the ability of an enterprise to rapidly grow its revenue without at least a proportional increase in headcount, resources or costs, by leveraging technology that results in lower marginal costs and economies of scale. Innovation is understood to mean the development or improvement of products, services, processes or technologies, involving technical novelty or substantial functional improvement compared to the relevant sector.

The Netherlands Enterprise Agency (RVO) assesses whether an enterprise qualifies as a startup or scale-up and issues a ruling to that effect. This ruling is valid for eight years and can be renewed a maximum of three times for five years each.

If the validity period of the ruling issued by the RVO expires, the enterprise no longer qualifies as a startup or scale-up within the meaning of the legislative proposal. The regulation then no longer applies and the options, or the shares acquired upon exercise that have not yet been subject to tax at that point, fall back under the general tax treatment for employee stock options. However, the employee retains the tax benefit (taxable base reduction) for the period during which the company qualified as a startup or scale-up, and this benefit is determined on a pro rata temporis basis at the taxable moment.

To qualify for the regulation, the employee stock option right must meet the following exhaustive conditions:

• The option rights must relate to shares in the capital of the withholding agent itself or of a parent company that directly or indirectly owns more than half of the startup or scale-up, provided both entities hold a ruling from the RVO designating them as a startup or scale-up.
• At the time of the grant of the option right, the company must qualify as a startup or scale-up, for which an RVO Ruling has been issued. This ruling may be issued with retroactive effect.
• It must be agreed in writing that the options and the shares acquired upon exercise may not be disposed of until 2 years after the grant, unless there is an earlier sale or IPO of the company.
• In the event of an intended sale of shares acquired upon exercise of the option right by the employee, a mandatory written approval procedure applies.
• The employer must maintain an adequate administration of, among other things, the share ownership, the granted option rights and the transactions.
• In principle, the regulation is limited to withholding agents that fall within the EU definition of 'small, medium-sized and micro-enterprises' (SME). In broad terms, withholding agents fall within this framework if the enterprise to which the withholding agent belongs has fewer than 250 employees and a turnover not exceeding 50 million euro or an annual balance sheet total not exceeding 43 million euro. However, withholding agents that do not fall within the SME definition may also make use of the proposed regulation, provided the de minimis aid ceiling of 300,000 euro per three years is not exceeded.

Options relating to shares in a startup or scale-up that qualify as a lucrative interest within the meaning of Section 3.92b of the Income Tax Act 2001 are excluded from the proposed regulation. The proposed regulation is also not applicable to an employee who, before or after the grant of the option rights, holds a substantial interest as defined in Section 4.3 of the Income Tax Act 2001.

Both limitations may have an unintended effect on the scope of the regulation. After all, startups and scale-ups that have no connection with private equity - but whose shares do fall within the scope of the lucrative interest provisions due to their financing structures - cannot make use of the regulation. In addition, emigration of the employee may lead to specific tax complications, including a potential international mismatch in the timing of taxation (and thus a risk of double taxation), which may lead to problems in financing the tax charge.

The legislative proposal amends the tax treatment of employee stock options that meet the exhaustive conditions in two ways. On the one hand, the taxable base is reduced: only 65 percent of the taxable benefit from employee stock options is considered as employment income, resulting in an effective tax rate of approximately 32 percent. In addition, the taxable moment is shifted to the moment at which the shares acquired through the exercise of the employee stock options are actually sold. This also applies if the employee leaves employment in the interim. Under the current rules, taxation occurs at the moment the shares become freely tradable, which can lead to liquidity problems because the employee may not be able to sell the shares at that point. Under the new regulation, an employee may choose - before the options are exercised - to have the taxable moment occur at the moment of exercise, or if the shares are not yet freely tradable, at the moment they become tradable, and must notify the employer of this choice in writing. The taxable base reduction remains applicable when an earlier taxable moment is chosen by the employee. If an employee sells the option right to a third party before exercise, the full benefit is taxed at that moment. The taxable base reduction to 65 percent does not apply in that case.

The aim is for the employee stock option regulation to enter into force on 1 January 2027, provided the Senate and the House of Representatives approve the legislative proposal.

The legislative proposal provides for transitional provisions: the regulation can also be applied to employee stock options granted on or after 17 April 2025, provided that these have not yet been subject to employment tax as of 31 December 2026 and meet all of the exhaustively stipulated conditions. The RVO Ruling must then have been applied for by 31 December 2027 at the latest.