In 2018, Sweden introduced a beneficial tax treatment of stock options to employees of small and newly started companies, the so-called qualified employee stock options (QESO). In short, the rules allow options to vest and exercise into shares without triggering taxable salary income and without a social security impact on the company. Instead, the full increase in the value is taxed as capital income at a future disposal of the shares. These rules have been updated as of 1 January 2022 and there are three adjustments made that should be highlighted, these are: i) larger companies are now in scope; ii) QESO may be provided through issuing of a warrant immediately converted to a share at exercise; and iii) board members are now in scope. The latter being the most exciting change and the main subject of this article.
The adjusted rules are applicable to companies with less than 150 employees and with a net turnover or a balance sheet total not exceeding SEK 280 million. As before, the business may not have been conducted for more than 10 years and must not be listed on a regulated market within or outside of the European Economic Area (EEA), which still limits the applicability. It is important to note in this context that the rules do not apply to each separate company but to a group. The increased thresholds may, however, mean that the rules may apply largely to companies listed on a market place that does not qualify as a regulated market.
Provision through warrants
The rules have proven to be rarely applicable and uncertainties with respect to the legal commitment by the employer have caused companies to deliver the QESOs through issuing of warrants in accordance with a ruling by the Supreme Administrative Court, which, as of 1 January 2022, has been implemented into local law.
Applicable also to board members
As from 1 January 2022, Sweden has not only increased the thresholds for the rules on QESO to apply and facilitated the delivery of the same, but also allowed the issue of QESO to board members. This is a welcome and valuable change, as Sweden needs to attract and retain competent boards. This is essential to all companies but not least to the smaller and newly started companies covered by the rules. Considering the huge delta between the tax on salary income and capital income in Sweden, we have seen difficulties over the years attracting competent boards as investments made are first and foremost allocated to the building of the business rather than the salaries and board fees. Consequently, board members of Swedish startups have had to accept compensation in the form of future and potential income from securities.
However, to qualify for QESO, a board member has to earn a minimum compensation, a minimum board fee from the company, during the vesting period, i.e., in the period between the provision of the QESO and the date when the QESO is exercised into a share. The minimum fee is 1.5 income base amounts, which is approximately SEK 100,000. This is in line with the requirement for an employee even if the minimum compensation for an employee is 13 income base amounts, i.e., approximately SEK 920,000. A holder of QESO who has taken on positions as both board member and employee, is considered as an employee in this regard. The difficulties start when the company has successfully recruited a board member who it, during the vesting period, decides to employ. It is not clear from the rules whether it is allowed to apply the higher minimum level to the portion of the vesting period when the individual is actually employed. It is clear that if an individual has dual functions, the minimum level for an employee is applicable but applying the higher minimum level of an employee to an individual who shifts a position as a board member into employment during the vesting period would require substantial salary payments to cover for a lower compensation as a board member. In our view, this lack of clarity could be discriminatory and not in the best interest of a growing company, the target of the rules, which opts to employ a former board member who has already been granted QESO.
Even though the changes implemented as of 1 January 2022 are beneficial and increased the applicability of the rules in a positive way, the rules are still complex and each separate issue should be carefully assessed.