Stock option plans: an alternative form of remuneration worth considering for SME directors

Increasing what actually ends up in the director’s pocket, without simply increasing the company’s payroll cost, is one of the main challenges when structuring remuneration in an SME.

For many years, the main trade-off was between salary, dividends, benefits in kind, individual pension commitments and certain specific tax optimisation schemes. However, the tax environment has changed. The scope of the copyright regime has been significantly restricted, the taxation of investment income is evolving, and directors are increasingly looking for solutions that are both efficient and properly documented and defensible.

Against this background, Catalyst now regularly considers stock option plans as part of its director remuneration reviews.

The aim is not to systematically replace salary or dividends, but rather to assess whether this mechanism can be a relevant additional component of an overall remuneration strategy.

The background

Stock option plans are based on a well-established legal framework: the Belgian Act of 26 March 1999.

The principle is relatively straightforward. The company grants stock options to its director free of charge. The director accepts the offer within the statutory period. A benefit in kind is then declared and taxed on a lump-sum basis. Following a lock-up period, the options may be exercised, transferred or sold in accordance with the terms of the plan.

As part of our advisory services, Catalyst works, among others, with the Call+ solution, which allows this type of plan to be structured based on a methodology covered by an advance tax ruling issued by the Belgian Ruling Commission.

It is important to stress that a ruling is not a blank cheque and never removes the need for an individual assessment. It does, however, provide a significantly more secure tax and methodological framework than a structure implemented without prior validation.

What does this mean in practice for the director?

Under a traditional remuneration structure, an increase in salary generally results in a significant tax and social security burden.

A stock option plan works differently. The taxable benefit is determined on a lump-sum basis at the time the options are granted. For options with a ten-year term, the taxable benefit is generally set at 23% of the value of the underlying shares, in accordance with the mechanism provided for by law.

This benefit is then subject to professional withholding tax and the applicable social security contributions.

At the end of the lock-up period, the director may sell the options in accordance with the terms of the plan. Value can therefore be transferred from the company to the director’s private assets within a specific tax framework that is often more efficient than traditional remuneration, provided that all applicable conditions are met.

The relevance of the mechanism therefore needs to be assessed at several levels:

• The overall cost for the company
• The lump-sum taxation of the benefit
• The actual net income received by the director
• Its consistency with the existing remuneration package
• The company’s ability to finance the repurchase of the options
• The robustness of the tax documentation

A stock option plan should therefore not be viewed as a standalone product. It must form part of an overall remuneration strategy.

Why can it be attractive?

The main advantage of a stock option plan lies in the way the benefit is taxed.

Unlike salary, which is subject to a high tax and social security burden, or dividends, which remain subject to withholding tax on movable income, a stock option plan is based on lump-sum taxation of the benefit.

For the same budget borne by the company, the director may therefore, in certain circumstances, receive a higher net amount.

The mechanism may also provide an indirect benefit for the company. The benefit in kind arising from the plan may contribute towards reaching the EUR 50,000 remuneration threshold required to benefit from the reduced corporate income tax rate of 20% on the first bracket of taxable profit.

For an SME whose director’s remuneration is just below this threshold, this aspect can be decisive when assessing whether the plan is appropriate.

When can a stock option plan make a difference?

At Catalyst, we believe that stock option plans should in particular be considered in the following situations:

• The director wishes to increase their net remuneration without excessively increasing the cost for the company
• The company has sufficient liquidity to finance the mechanism
• The director already receives a significant reference gross remuneration
• The company wishes to complement an existing remuneration policy
• Previous optimisation schemes, such as copyright remuneration, are no longer appropriate
• The director has a significant credit balance on their current account and wishes to consider alternative solutions
• The company wishes to reach or maintain the remuneration threshold required for the reduced corporate income tax rate
• The director wishes to structure their remuneration within a more thoroughly documented and defensible framework

In these situations, a stock option plan can become a genuine component of the director’s remuneration strategy.

Points to consider

A stock option plan should never be implemented automatically.

Before considering such a mechanism, the following points should in particular be reviewed:

• The amount of the director’s reference gross remuneration
• The applicable limit on the benefit that may be granted
• The company’s liquidity position at the end of the lock-up period
• The actual services performed by the director for the company
• The documentation supporting the tax deductibility of the cost for the company
• The impact of the stock option plan on the overall balance between salary, dividends and other benefits
• The director’s personal financial and asset position
• Any potential timeline for the sale of the company
• The consequences of the capital gains tax
• The consistency of the arrangement with other benefits already granted

The most sensitive issue remains the tax deductibility of the cost of the plan for the company.

This deductibility is based on Article 49 of the Belgian Income Tax Code 1992. The company must be able to demonstrate that the expense relates to genuine and properly substantiated services performed with a view to acquiring or preserving taxable income.

A stock option plan without a solid file documenting the underlying services is a vulnerable stock option plan.

The impact of the capital gains tax

The new 10% tax on certain capital gains on financial assets must also be taken into account in the analysis.

Stock options granted under a Call+ plan may fall within the scope of this new taxation. The impact should nevertheless remain limited where the plan is properly structured and the options are sold as soon as the lock-up period expires.

In such a case, the acquisition value to be taken into account should, in principle, correspond to the market value at the time the options become exercisable. If the options are sold at that point, no taxable capital gain should in principle arise.

If the sale is postponed, however, only the increase in value occurring after that date could be taken into account, subject to the applicable annual exemption.

For plans that had not been settled by 31 December 2025, a reference value must be determined in order to establish the starting basis for calculating any subsequent capital gain. This step is essential in order to avoid future discussions regarding the amount of the taxable gain.

In practice, this does not undermine the attractiveness of the mechanism, but it does confirm the importance of annual monitoring and properly planning the settlement of the options.

When is a stock option plan not the right solution?

A stock option plan is not suitable for every situation.

First of all, the company must have sufficient liquidity to repurchase the options at the end of the lock-up period. Otherwise, the mechanism may lose part of its attractiveness or create liquidity pressure for the company.

Secondly, the director must actually perform genuine and documented services for the company. Alternative remuneration cannot be disconnected from the economic reality of the activity.

Finally, a stock option plan is a complementary tool. It does not replace an appropriate core remuneration package. For very small businesses, start-ups or directors without a significant remuneration history, other solutions may sometimes be more appropriate.

Our advice

A stock option plan is not a miracle tax solution. It is a remuneration instrument that can be highly attractive when properly structured, documented and incorporated into an overall remuneration strategy.

At Catalyst, we have chosen to include stock option plans in our director remuneration analyses because they address a genuine question: how can a director’s net income be optimised while maintaining a tax position that is properly documented and defensible?

But the real question is not simply whether the mechanism is advantageous.

The real question is whether it is appropriate for your specific situation.

Has your director remuneration not been reviewed recently? Would you like to compare salary, dividends and a stock option plan in concrete terms?

Contact your Catalyst account manager to carry out a personalised simulation and determine whether a stock option plan could usefully form part of your remuneration strategy.

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