article / 02 Feb 2022
Option programs for employees in Sweden
Under Swedish tax rules, option programs directed to employees are mainly classified as securities or employee stock options. Gains realized on securities are generally taxed as capital gains, although exemptions can apply for companies with a limited number of shareholders, and the exercise of an option classified as a security does not trigger tax consequences. However, granting or transferring a security to an employee at a price below fair market value will constitute a taxable benefit taxed as salary income. Employee stock options, on the other hand, are not taxed upon grant or allotment. Instead, exercise of an employee stock option triggers a taxable benefit for the employee valued at the difference between the strike price paid and the fair market value of the acquired share.
Securities, for Swedish income tax purposes, are characterized mainly by the ability of the holder to transfer the security to another person. Certain securities, such as shares and warrants issued pursuant to Swedish company law, have an inherent transferability for the holder which generally prevails over restrictions imposed through agreements between the employee and the employer. Employee stock options, on the other hand, are characterized by a strong connection to continued employment and non-transferability.
Foreign stock options issued to employees tend to qualify as salary taxed employee stock options for Swedish income tax purposes due to the commonly restrictive terms. However, due to the progressive taxes on salary income in Sweden, it is often desirable to strive for incentive programs based on options to be classified as securities, requiring fewer restrictions than foreign employers may otherwise be accustomed to.
However, since 2018, a new tax regime has been imposed allowing for the allotment of so called qualified employee stock options (Sw. kvalificerade personaloptioner, sometimes referred to as “QESOs” or “KPOs”), which are exempted from salary taxation under Swedish tax legislation both at the time of grant and the time of exercise. The employer will also be exempted from social security contributions on the options.
The qualified employee stock option regime is mainly inspired by the enterprise management incentive (EMI) regime in the United Kingdom and are required to fulfil certain conditions to qualify for tax relief.
To qualify as qualified employee stock options, neither the company group nor the business operated by the group (if, for example, the business has been acquired from another entity) can be older than 10 years. Further, company group must be of limited size in regard to its number of employees, net turnover and balance sheet total during the financial year prior to the year during which options are allotted.
As from 1 January 2022, the limits are as follows:
- -less than 150 employees and working shareholders, and
- a net turnover or annual balance sheet total of at most MSEK 280.
Companies with certain businesses (including inter alia banking or financing, coal or steel production, provision of legal and accounting services etc.) cannot offer qualified employee stock options.
Furthermore, the total value of new and outstanding employee stock options may not exceed MSEK 3 in relation to individual employees and MSEK 75 in relation to the company when the employee stock option is granted. There is a mandatory minimum vesting time of three years, and the option cannot be exercised less than three years or more than ten years from the grant.
The employee must work on average at least 30 hours per week during the vesting period and receive a certain minimum salary, and cannot be a significant shareholder in the company prior to the grant of the option. As from 1 January 2022, qualified employee options are also available to board members serving in the company with a low required remuneration.
Please note that further conditions apply apart from what has been mentioned above, and due to the tax consequences for both the employer and the employees of non-compliance with the regulations, it is important to analyze any implementation of qualified employee options thoroughly.