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A and their spouse B divorce in and A transfers 1, stock options to B as an adjusting payment. B exercises the stock options received in the distribution of matrimonial assets and subscribes for 1, X Plc shares in Under section 85 of the Marriage Act, matrimonial assets can be distributed immediately after the divorce process has started at the District Court. The matrimonial assets may thus be distributed before the divorce is final. The application for divorce may also be dropped after the matrimonial assets have already been distributed section 25 and 26 of the Marriage Act.

Before the divorce is final, the spouses are considered to be within the same sphere of interest. Options received based on an employment contract cease to be regarded as employee stock options when the employee passes away. On account of this, when the estate is distributed and the estate gives the stock options to the surviving spouse as an adjusting payment, it is not regarded as exercise of employee stock options referred to in section 66, subsection 3 of the Income Tax Act. Employee stock options are an asset that may be pledged.

As a rule, such a transfer is regarded as exercise of stock options. An exception to the above main rule is a situation where the employee transferring employee stock options receives, as consideration, options of the receiving company or the company that acquires the underlying shares.

The principles of the ruling can also be applied to stock options received in a demerger and governed by similar terms and conditions, because a demerger — just like a merger — is a general succession to which the principle of continuity is applied. If the terms and conditions of the stock option scheme are amended before the period for exercising the options begins, the value of the benefit regarded as wages will be determined in accordance with the amended terms.

Gross Compensation

Amendment of the terms and conditions of the ESO scheme is not regarded as exercise of stock options, and it has no tax consequences to the employee. As a rule, share-based compensation plans implemented as a holding company scheme are governed by provisions on the taxation of employee stock options if the plan allows the employee to receive or buy shares below the market price.

If a benefit under the scheme is not granted as shares, it is regarded as taxable earned income under section 61, subsection 2 of the Income Tax Act. A benefit derived from a holding company scheme is thus mainly taxable earned income, in whatever form the benefit is granted. However, if the scheme does not allow shares to be bought below the market price, the capital gain on shares bought at the fair market price is capital income. Cash dividends and other payments made to the employee on the basis of such a holding company scheme become taxable earned income as they are paid.

Valuation of benefit arising from employee stock options is prescribed in section 66, subsection 3 of the Income Tax Act. If the employee exercises the stock options by purchasing the underlying shares or stakes, the value of the benefit is considered to be the market price of the shares or stakes minus the price the employee has paid for the shares or stakes and the employee stock options in total.

The benefit is valuated at the price on the date of exercise. The average rate on the date of subscription can be used as the fair market value of a share quoted on the stock exchange or on some other regulated market publicly quoted shares. The fair market value of a share quoted on a non-regulated market other than publicly quoted shares is determined in accordance with the Tax Administration guidance Valuation of assets in inheritance and gift taxation if no other clarification is available.

As a rule, the taxpayer must therefore always provide the Tax Administration with a clarification of the fair market value of the shares they have received based on an ESO scheme and of how the value has been calculated. Employee stock options may be exercised at a time when trading on the marketplace is interrupted. This may be the case, for example, if shares are subscribed for during the weekend or in the evening after the stock exchange has closed. In these cases, the market price of the share is determined based on the average rate on the date of subscription. If the share has not been traded at all during the date of subscription, the market price of the share is determined based on the average rate on the day when the share was traded last.

Employee stock options are wages paid by the employer. The beneficiary may attempt to hedge against changes in share or option value by means of derivative contracts. Other kinds of derivative contracts are also not considered in the valuation of the benefit. Sometimes several days may pass between the subscription and receipt of shares.

Even when the share value drops considerably during this period, the taxable income is calculated based on the fair market value on the date of subscription. Depending on the terms and conditions of ESO scheme, the employee may be entitled to sell their options.

Taxation of employee stock options -

In this case, the option rights may be registered for public trading. They may also be sold outside public trading. Under section 66, subsection 3 of the Income Tax Act, the value of the benefit arising from the sale is the sale price minus the price paid by the seller. An assignment to sell stock options registered for public trading may be given at a time when trading in the marketplace is interrupted.

Benefits of Non-Qualified Stock Options

This may be the case, for example, if the assignment is given during the weekend or in the evening after the stock exchange has closed. In these cases, the fair market price of the share is determined based on the average rate on the day when the assignment to sell is carried out. The rules on capital gain are not applied to the exercise of employee stock options. When the value of a benefit arising from employee stock options is calculated, it is therefore not possible to deduct the acquisition cost assumption, for example. The rules on capital gain are applied when the employee sells the shares they have acquired in exchange for their employee stock option see section 3.

The benefit arising from employee stock options is taxable earned income in full. Shares acquired based on employee stock options may have transfer restrictions that prohibit the employee from transferring the shares during the restriction period following the subscription. Despite potential transfer restrictions, the value of the benefit arising from the employee stock option is determined based on the time when the taxpayer receives or buys the shares.

Taxation of employee stock options

Before the above ruling, the value of the benefit arising from employee stock options could, under highly exceptional circumstances, be valuated at the value of the day when the transfer restrictions terminated the Supreme Administrative Court ruling KHO In the case in question, the employees could on 14th February subscribe for shares that according to the terms and conditions of a bond with warrants had a transfer restriction terminating on 15th December The Supreme Administrative Court held that under those circumstances, the fair market value of the benefit arising from the employee stock option was the quoted price of the share at the time the transfer restriction terminated.

The terms and conditions of a share-based compensation plan may include a suspensive condition, according to which the employer defers the transfer of the shares based on the scheme to the employee until after the vesting period mandatory deferred compensation plan. Before entering a compensation plan, the employee may also have the right to request that the employer should defer the share transfer until after the vesting period voluntary deferred compensation plan.

In a share-based compensation plan with a suspensive condition, the employee does not immediately gain the ownership of the shares they earn. They are therefore not entitled to dividends and cannot exercise other share-based rights, either. Depending on the terms and conditions of the plan, the employee may lose their right to shares if their employment relationship to the employer who granted the benefit terminates before the shares are transferred to them.

A share-based compensation plan with a suspensive condition is an ESO scheme under section 66, subsection 3 of the Income Tax Act if after the period specified in the terms and conditions of the plan the employee is entitled to a number of shares determined based on the grounds specified in the terms. If the employee has met the requirements set for the award but has not gained ownership of the shares, no tax will be imposed on the benefit arising from the employee stock option until after the employee receives the shares. If the employee meets the requirements specified in the terms and conditions of the plan, they are entitled to receive 1, shares of X Plc free of charge.

The employee meets the requirements during , but the shares are not transferred to A until 4 January The plan gives A a benefit taxable as employee stock options, and its value is the fair market value of the shares that A receives on 4 January The terms and conditions of a share-based compensation plan may include a resolutory condition, according to which the employee may, under certain conditions, lose the shares that were transferred to them on the basis of the compensation plan.

The effect that such a resolutory condition has on tax assessment depends on the conditions on which the employee may lose the shares transferred to them. A resolutory condition may concern only termination of employment. In such a compensation plan, shares are not transferred to the employee until after the employee has met the qualifying requirements set in the terms and conditions of the plan. The terms and conditions of the compensation plan state, however, that the employee will lose the shares they have qualified for if the employment relationship between the employee and the employer who awarded the shares is terminated before the date mentioned in the terms.

A corresponding resolutory condition may also be included in a compensation plan implemented in the form of a stock option. Such a compensation plan with a resolutory condition is regarded as an ESO scheme under section 66, subsection 3 of the Income Tax Act if the share transfer is preceded by a vesting period enabling the employee to benefit from an increase in share value.

In such a plan, employee stock options are exercised when the shares are transferred to the employee. The value of the benefit is determined at that time, and subsequent changes in share value are not taken into account see section 3. The year is the tax year during which the employee received or bought the shares. Based on the scheme, A gained ownership of 1, shares of X Plc in The terms and conditions of the share award scheme state that A will lose the shares if their employment relationship to the X group terminates before the end of The shares cannot be transferred before that time.

In other respects, A has full ownership of the shares. In the income taxation of , the shares received by A were regarded as employee stock options referred to in section 66, subsection 3 of the Income Tax Act and taxed accordingly. A resigns from X Plc in and transfers to rival company Y Plc and therefore has to return the shares they have received earlier.

If the employee is not required to return the cash payment, the tax assessment will not be adjusted in that respect. If the employee has received dividend on the shares, they may have to pay back the dividend as well. In that case, the tax assessment of those tax years when dividend was taxed also has to be adjusted.

A resolutory condition can be formulated such that shares may be transferred to the employee with a restricted right of ownership even before the employee has actually qualified for the shares. A qualifying requirement may be, for example, a certain increase in share price or achievement of performance targets. In such a case, the employee is not regarded to have received the shares until after the requirements for the final qualification have been met.

The time is the time when the stock options are exercised under section 66, subsection 3 of the Income Tax Act. The terms and conditions of the plan state that B is not entitled to transfer the shares in question.