Standardized stock option plan does not guarantee entitlement to cost
deduction
A company offers the manager a stock option plan. It calls on a specialized
institution that offers standard solutions for stock options. However, that is
no guarantee for the deductibility of the costs.
Facts
A company with only one employee, namely the manager, decides to offer that
manager a stock option plan. This can be advantageously arranged for tax
purposes in implementation of the law of 26 March 1999: under this system, the
beneficiary is taxed on a flat-rate benefit in kind, based on the value of the
options at the time they are granted. With a bit of luck, the enjoyer will be
able to sell the options with a capital gain over time. The capital gain is then
tax-free.
This is how it happened: the company hires an institution (hereinafter referred
to as P NV), which arranges all this. P NV has already set up similar
constructions in the past, which were also covered by a ruling. In this case, no
ruling is requested, but the situation is largely the same as the previous
situations for which P NV did receive a ruling. This is done: the manager is
taxed in the year in which the options are granted to him, in accordance with
the special regime of the 1999 law.
Subsequently, the company also wants to deduct the costs associated with the
stock option plan. But then the tax authorities get in the way: in order to be
tax deductible, the expenses must comply with Article 49 of the WIB 1992. And
one of those conditions is that the expenses must have been incurred with a view
to acquiring or retaining income. A condition on which much ink has already been
spilled.
Vision of the tax authorities
The tax authorities believe that the stock option plan was not concluded with a
view to earning or retaining income. A stock option plan is concluded in order
to grant a benefit in kind. A benefit in kind is a form of wages and wages are
deductible business expenses. But even then: wage costs are also subject to the
condition that they must be linked to actual performance (so that the employer
can generate income). In this case, the tax authorities established that the
expenses were not paid to the employee, but to P NV. In addition, the employer
does not demonstrate that there was actual performance against the benefit or
remuneration.
View of the taxpayer
The taxpayer puts forward 2 counterarguments to this. According to him, the fact
that the expenses were paid to P NV is irrelevant. This is an expense that was
intended to provide an advantage to the manager, and it is therefore clear that
it is a method of remuneration. The court also fully agrees: this argument is
rejected.
The second argument is an attempt to establish that the granting of stock
options is of a professional nature. But instead of demonstrating what services
were provided, the taxpayer relies on the earlier rulings obtained by P NV,
which referred to the same situation. And that's where it goes wrong.
Judge's view
At first instance, the rule (and this actually also applies to case law) is that
prior decisions have no precedent value. A ruling only binds the tax authorities
in a concrete case, with concrete data. The Preliminary Decisions Service
sometimes publishes a general position (e.g. on costs specific to the employer
with regard to the home office), but otherwise you cannot rely on a ruling that
was concluded between other parties. Even though the rulings cited were exactly
2 rulings obtained by P NV in the same circumstances.
The court therefore does not follow the taxpayer's last argument. The court
rules as follows:
The fact that the benefit in kind was taxed as wages is entirely justified, but
according to the court it is separate from the deductibility of the costs of the
option plan.
The fact that a ruling has been concluded for the same 'product' of P NV is
irrelevant and does not guarantee the deductibility of the costs.
The taxpayer must in any case demonstrate what services are provided against the
salary.
Subsequently, the court concludes that the taxpayer does not succeed in that
last proof. Not even knowing that the manager is the only person in the company
who delivers.
Professional expenses?
The information in the judgment is insufficient to establish why the court
considers that a benefit in kind granted to the only person working in a company
should not be regarded as remuneration for performance.
This may have to do with the fact that neither the position nor the salary of
the manager changed, and there are also no elements that indicate that the
manager has done anything extra that would justify the granting of a stock
option plan. In such circumstances, the granting of the options is actually a
liberality, which is not matched by performance.
It remains of course special that on the one hand the tax authorities tax the
manager on a benefit in kind, because it concerns wages, and at the same time he
does not allow the company to deduct because it does not concern wages. But the
main lesson here is that rulings cannot be used as a precedent.