The last few years, Employee Stock Option Plans, i.e. ESOPs, has been a more and more common way of rewarding employees. This is especially the case with new emerging tech companies, that often is low on cash, but has a good prognosis in terms of the forecasted stock price evaluation, and is in need of offering incentive for key employees.
Consequently, ESOPs offer great advantages both for the employer and the employee. However, ESOPs can cause tax trouble, both for the employer and the employee, as different jurisdictions taxes plans differently.
When are employee stock options taxed in Sweden?
An important question, for every employee that is part of an ESOP, is when employee actually will be liable to tax on its options. Is it at vesting, i.e. when the employee earns the right to the options, or is it at the grant, i.e. when the employee receives the options? Or is it perhaps at exercise, when the employee uses the right to buy the underlying security?
Well – it depends. According to Swedish tax law, an option can be classified in two ways – which determines the point of taxation. Either an option is classified as a 'security', or an 'employment option'.
If the option is classified as a security, the employee will be liable to Swedish Income Tax (wage tax) at grant, based on the option’s market price.
Contrary, if the option is classified as a ‘employment option’, the employee will instead be taxed with Swedish Wage Tax at exercise, or if the option is sold, based on the option’s market price at that occasion.
Naturally, this can lead to an increased tax burden for the employee (and the employer - by reason of social security fees). Therefore, it is usually more beneficial if an ESOP is classified in Sweden as a security, due to the fact that any value increase subsequent to the grant, is taxed with Swedish capital tax, that is substantially lower than Swedish Wage Tax.
A complex legal assessment must be done of each ESOP, in relation to the Swedish Supreme Administrative Court’s case law. The assessment requires a tax lawyer to examine the agreements governing the ESOP, in relation to principles established in Swedish case law.
How high is the tax on employee stock options in Sweden?
If options from an ESOP is classified under Swedish tax law, as a security, the employee will be taxed with Swedish Wage Tax (30 – 55 %) at grant. Any later increase in value will be taxed with Swedish Capital Tax (30 % or 25 %).
If options from a ESOP is classified as an employment option, the employee will be taxed with Swedish Wage Tax (30 – 55 %) at exercise or sell.
How do I declare employee stock options in my Swedish Tax Return?
In order to declare ESOPs correctly, one has to be aware of whether the options are seen as a security or an employee option. Also, one has to be aware of the option’s market price at certain occasions, but this information is generally available from the company that administer the ESOP.
Should a person living in Sweden fail to correctly declare his/her employee stock options in the tax return, there is a risk of hefty tax penalties. Therefore, you want to make sure that you know how your employee stock options should be classified in Sweden.
International tax aspects of employee stock options in Sweden
a problem that is quite usual among expats living in Sweden, is how to declare stock options that were granted and vested prior to relocating to Sweden, but sold after becoming tax resident in Sweden. According to a verdict from the Swedish Supreme Administrative Court, it is in some cases possible to exempt options from tax, if they were earned prior to the owner becoming tax resident in Sweden.
Another way of avoiding Swedish Tax on ESOPs, is to claim the application of a tax treaty, that in some cases can prevent Sweden from taxing option. Tax treaties are also used to mitigate double taxation of employee stock options, i.e. when Sweden and another state wants to tax the same options.
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