In today’s tight labour market, it is very important for companies not only to attract talent, but also to retain it. Talent retention can be achieved in several ways. One common method is to offer employee participation to top talent and key employees, for instance through shares, certificates, options, or other forms of long-term incentives. In this blog, share certificates are discussed.
How can you easily set this up as an employer? And which form of employee participation best suits your company?
What does depositary receipts for shares mean?
Depositary receipts for shares are issued when a company transfers shares to a third party, often ‘Stichting Administratiekantoor’ (STAK). The STAK is then a shareholder, with all the rights that go with it, such as voting rights, profit rights (dividends), and the right to organise shareholders’ meetings. However, the STAK always acts in the interests of the depositary receipt holders.
The main difference between issuing shares and granting depositary receipts to staff is that when shares are issued, control shifts (partly) to the employees/shareholders. With certification, this is not the case.
Advantages and disadvantages
The advantages of shareholding include:
- Strengthened commitment to the company;
- Retention of say and control;
- Tax favourable treatment for the employee (taxed in Box 3 for < 5% participation and in Box 2 for ≥ 5%);
- No direct impact on company liquidity;
- Simple implementation (apart from notarial deeds and possible certification of shares).
Some disadvantages are:
- Transfer and certification of shares;
- Change in control upon implementation;
- Alignment with tax authorities to avoid Box 1 wages and value-depressing factors;
- Financing of share purchase price (employee loan);
- Valuation issues;
- Possible break-up of fiscal unity in case of excessive interest for employees.
How does certifying shares work?
Agreements between the STAK and depositary receipt holders are laid down in general administration conditions and individual participation agreements.
Conditions of administration
The administration conditions are general and regulate, among other things, the keeping of a register of depositary receipt holders, the transferability of depositary receipts (often only with the consent of the STAK Board) and the distribution of dividends. They may also include arrangements for issuing new shares to the STAK.
Participation agreement and valuation
The participation agreement contains specific agreements per depositary receipt holder, such as the number of depositary receipts, the lock-up, the price, and payment terms (e.g. in instalments or via a loan from the employer). The leaver arrangement is also important: on termination of employment, the employee may be obliged to offer his certificates to a certain party, with the offer price often depending on the reason for leaving.
Valuation can be done in various ways. For example, by net past profits or by discounting future cash flows (CDF method). The valuation can be agreed with the tax authorities in advance and included in the participation agreement to avoid discussion afterwards.
Tax considerations
In addition to legal considerations, there are tax concerns because benefits from depositary receipts can be taxed as wages. The value of the depositary receipts determines the taxable amount, and wage tax may be deducted from the salary or offset.
Rights and obligations of depositary receipt holders
The terms of administration and participation agreement specify the rights and duties of depositary receipt holders. It is wise to consult the articles of association of the STAK and the company, for example to see how governance structures and meeting rights are regulated.
Conclusion
Employee participation with depositary receipts can be a good solution to allow employees to participate without losing control of the company. For both employers and employees, it is important to properly set out the conditions and tax implications and seek legal and tax advice to avoid later problems. Are you considering employee participation with certificates? If so, contact our advisers.
