INTERNATIONAL TAX PLAZA - Position paper of a knowledge group of the Dutch tax authorities on the treatment for Dutch corporate income tax purposes of certain Phantom Stocks

In this article we discuss position paper KG:011:2022:4 of October 10, 2022. In this position paper the Knowledge Group special profit provisions for Dutch corporate income tax purposes of the Dutch tax authorities answers the question whether the costs incurred in relation to the granting and the increase in value of certain Phantom Stock(s) granted under an Employee Phantom Stock Plan fall(s) within the scope of Article 10, Paragraph 1 under j of the Dutch Corporate Income Tax (DCIT) Act.

Phantom stock

Phantom stock is a contractual agreement between a company and the recipients of phantom stock that bestow upon the grantee the right to a cash payment at a designated time or in association with a designated event in the future, which payment is to be in an amount tied to the fair market value of an equivalent number of shares of the company’s shares.

Article 10, Paragraph 1 under j of the DCIT Act

Article 10, Paragraph 1 under j of the DCIT Act arranges that in the case a company of which the capital is wholly or partly divided into shares:

issues or grants shares in that capital or in that of an affiliated company,
issues or grants profit-sharing certificates in the company or an affiliated company,
issues or grants rights to acquire shares in that capital or profit-sharing certificates in the company or an affiliated company; or
issues or grants similar rights, including rights granted to employees whose annual salary exceeds EUR 636,000 (ITP: 2023 number), the value of which is mainly directly or indirectly determined by the change in value of those shares or profit-sharing depositary receipts

the costs incurred in relation therewith are not deductible for DCIT purposes.

The underlying case

In the context of Article 10, Paragraph 1 under j of the DCIT Act the question has arisen whether costs incurred in relation to the granting and the change in value of certain Phantom Stocks fall within the scope of this provision. The facts of the case are as follows:

Certain employees of a taxpayer and its subsidiaries can opt to participate in the taxpayer's Employee Phantom Stock Plan;
In all aspects the Phantom Stocks imitate the characteristic of the taxpayer's depositary receipts;
If the employees participate in the scheme, they will be awarded conditional Phantom Stocks to which certain performance requirements apply;
If after a certain number of years after the conditional Phantom Stocks were granted the performance requirements are met, the conditional Phantom Stocks become unconditional;
An unconditional Phantom Stock is understood to mean a right to an amount in cash;
The cash amount to which an unconditional Phantom Stock entitles is equal to the value of a depositary receipt in thetaxpayer;
The exchange of unconditional Phantom Stocks for cash can only take place by selling the Phantom Stocks to the taxpayer during a certain period of the year;
The owners of the (un)conditional Phantom Stocks are entitled to a so-called 'dividend equivalent'. This means that the moment a dividend is paid to the owners of depositary receipts, the Phantom Stock owners will receive an (un)conditional right to an amount equal to the dividend paid on the depositary receipts;
The owners of conditional Phantom Stocks will receive a conditional right to the dividend equivalent. The right will become unconditional at the moment the conditional Phantom Stocks become unconditional.

Questions

Does Article 10, Paragraph 1 under j of the DCIT Act apply to the granting of the Phantom Stocks and the increasse in value thereof?
Does it make a difference for the answer to question 1 that the Phantom Stocks granted are conditional Phantom Stocks?
Is the wage limit of Article 10, Paragraph 1 under j of the DCIT Act to be tested annually?

Answers

Question 1

Yes. Article 10, Paragraph 1 under j of the DCIT Act applies to the granting and the increase in value of the Phantom Stocks insofar as they are granted to employees whose annual wage exceeds EUR 598,000 (2022 number) (EUR 636,000 for 2023).

Question 2

No. Article 10, Paragraph 1 under j of the DCIT Act also applies to the granting of a conditional right. The moment on which a right is granted is the moment at which it is assessed whether Article 10, Paragraph 1 under j of the DCIT Act applies. In this case, the moment on which the relevant employee signs the Phantom Stock scheme is the moment on which the (conditional) right is granted. There is no later moment of granting.

Question 3

No. The applicability of Article 10, Paragraph 1 under j of the DCIT Act is tested in its entirety and only once and that is at the time of the granting or issuance of shares or profit-sharing depositary receipts, rights to acquire shares or profit-sharing depositary receipts or rights equivalent thereto. The same applies to the wage limit of Article 10, Paragraph 1 under j of the DCIT Act.

Remarks ITP

This position paper of the Dutch tax authorities regards a specific sort of Phantom Stocks. Namely Phantom stocks that meet both of the following 2 criterions:

The Phantom Stocks are granted under an Employee Phantom Stock Plan; and
The Phantom Stocks are granted to an employee whose annual wage exceeds the limit as laid down in Article 10, Paragraph 1 under j of the DCIT Act (EUR 636,000 for 2023)

The full Dutch text of the position paper, including very extensive considerations can be found here.

Other position papers of the Knowledge Group special profit provisions for Dutch corporate income tax purposes of which we already made an English summary can be found here.

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