Startup Employee Stock Options – Country Comparison

Employee Stock Options (ESOs) are a vital tool for startups to attract and retain top talent, offering a piece of the potential upside in exchange for commitment and contribution, especially when cash flow is limited. However, navigating the world of ESOs can feel like traversing a complex maze, with varying regulations, tax implications, and legal considerations across different jurisdictions. This guide provides a detailed exploration of ESO schemes in key startup hubs to offer a practical roadmap for founders, HR professionals, and employees alike.

Understanding Employee Stock Options

At its core, an ESO is a contract granting an employee the right, but not the obligation, to buy a specific number of company shares at a pre-determined price (the strike price) within a defined period. Essentially, it’s a coupon allowing you to purchase shares at a discount, with the hope of profiting if the company’s value grows.

Key Stages and Taxable Moments

ESOs typically involve several key stages, each with potential tax implications:

  1. Grant: The company offers ESOs to the employee, outlining terms like vesting schedule, strike price, and exercise window. In most jurisdictions, the grant itself isn’t a taxable event.
  2. Vesting: This is a gradual process where employees earn the right to exercise their options over time, usually tied to continued employment or performance milestones. Vesting schedules incentivize employees to stay with the company. Some countries (like the US) may trigger tax liabilities at vesting for certain types of options.
  3. Exercise: This is when the employee chooses to purchase shares at the strike price. The difference between the strike price and the fair market value at exercise (the spread) is often considered taxable income in many jurisdictions.
  4. Sale: The employee sells their shares, potentially realizing a profit. This usually triggers capital gains tax, with rates varying significantly by country.

Understanding taxation of share options

Share price Time STRIKE PRICE DISCOUNT Strike price Last round valuation Grant Date TAX ON EXERCISE Strike price Valuation on exercise Exercise Date TAX ON SALE Strike price Sale price Sale Date TAX ON EXERCISE & SALE Strike price Exercise & Sale price Exercise & Sale Date Simultaneous

Factors Influencing Tax Treatment

The tax implications of ESOs can be influenced by:

  • Option Type: Some countries, like the US, have different tax treatments for Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs).
  • Holding Period: Tax rates on share sale profits may be impacted by how long the employee holds the shares after exercising their options.
  • Country-Specific Regulations: Each jurisdiction has its own unique tax code, exemptions, and reporting requirements related to ESOs.

Global Employee Stock Options Analysis – 2024 Update

Below is a country-analysis made primarily by Index Ventures.

Latvia

Latvia provides a very favorable stock option environment for startups with a straightforward implementation process, capital gains tax treatment at sale, and no employer taxes.

Current Framework:

  • Tax only due when shares are sold (12-month minimum holding period)
  • 20% capital gains tax on difference between sale price and market value at exercise
  • No limitations on company size or option amounts
  • Earlier exercise triggers employment income taxation

Recent Updates:

  • Reformed Personal Income Tax Law (December 2020)
  • Reduced holding period from 36 to 12 months

Key Strengths:

  • Simple implementation process
  • No formal valuation requirements
  • Non-voting shares permitted
  • Perfect scores across all criteria

Estonia

Estonia stands out with its exceptionally flexible stock option regime, offering favorable tax treatment at the point of sale and no employer taxes, making it ideal for startups.

  • Preferred Scheme: Stock options for all private companies.
  • Taxation: Income tax (flat 20%) on the spread at the point of sale. No employer taxes after three years of exercise.
  • Notable Features: Highly flexible, even heavily discounted strike prices are accepted.

Current Framework:

  • No taxation until sale if held for three years
  • 20% personal income tax on gains at sale
  • No caps on issuance or company size
  • Flexible implementation options

Recent Updates:

  • July 2020 amendments for more flexibility in three-year holding period
  • Favorable treatment possible even if holding period not met under certain conditions

Key Strengths:

  • Highly flexible system
  • Accepts discounted strike prices
  • No employer taxes after three years
  • Perfect evaluation scores

Lithuania

Lithuania stands out with its simple and favorable stock option scheme, applying capital gains tax rates at sale and offering no employer taxes, making it a strong choice for startups.

  • Preferred Scheme: Stock options for all private and public limited companies.
  • Taxation: Capital gains tax (15% or 20% depending on bandings) upon share sale (after 3 years holding).
  • Notable Features: Straightforward setup, no formal valuation required, non-voting preferred shares possible.

Current Framework:

  • No taxes until sale (three-year holding requirement)
  • Flat rate taxation upon sale
  • No restrictions on issuance or company size
  • Comprehensive coverage for different company types

Recent Updates:

  • Rules stabilized since 2020
  • Maintained consistent policy framework

Key Strengths:

  • Straightforward setup process
  • No formal valuation needed
  • Non-voting preferred shares allowed
  • Perfect scores across criteria

Israel

Current Framework:

  • 25% capital gains tax at sale for trust schemes
  • Two-year holding period from grant
  • No employer taxes
  • Sub-10% shareholding requirement

Key Strengths:

  • Accepts 409A valuations
  • Strong trust structure benefits
  • Clear regulatory guidelines
  • Effective for both startups and established companies

Canada

Canada’s tax regime for stock options is generally favorable, especially for QSBCs, with a significant tax-free portion on gains for qualified options. However, reasonable notice requirements for termination can impact unvested options.

  • Preferred Scheme: Stock options for Qualified Small Business Corporations (QSBCs).
  • Taxation: Income tax (50% of marginal rate) at the point of sale. Tax calculated at exercise but payable upon sale. First C$850k tax-free if the sale is more than 2 years after exercise.
  • Notable Features: 409A compliant valuations often accepted, non-voting common shares common, potential for foreign tax credit issues.

Current Framework:

  • 50% of marginal rate at sale
  • Tax calculated at exercise, paid at sale
  • C$850k tax-free for 2+ year holdings
  • QSBC-specific benefits

Key Strengths:

  • Accepts 409A valuations
  • Non-voting shares common
  • Substantial tax-free allowance
  • Foreign tax credit provisions

United Kingdom

Current Framework:
Multiple schemes available:

  • Company Share Option Plan (CSOP):
  • Up to £60,000 per employee
  • No income tax/NI on difference between strike price and market value
  • Capital gains tax only due upon sale
  • Share Incentive Plan (SIP):
  • Up to £3,600 of free shares annually
  • Tax-free if held for 5 years
  • Capital gains tax may apply at sale
  • Save As You Earn (SAYE):
  • Up to £500 monthly savings
  • Tax-free interest/bonuses
  • No income tax/NI on price difference
  • Enterprise Management Incentive (EMI):
  • Up to £250,000 over 3 years
  • For companies <250 employees and <£30M assets
  • Possible 10% tax rate under Business Asset Disposal Relief

Recent Updates:

  • April 2023: CSOP limit increased from £30,000 to £60,000
  • Enhanced flexibility across schemes

Key Strengths:

  • Multiple flexible schemes
  • Significant tax advantages
  • Clear regulatory framework
  • Strong startup support

Portugal

Current Framework:

  • Two-year holding period for tax deferral
  • 14% effective tax rate (50% of 28% flat rate)
  • For startups and SMEs (<250 employees, €50M turnover)
  • Early exercise triggers employment income taxation

Recent Updates:

  • 2023: Introduced 50% tax rule
  • New startup/scale-up definitions
  • Enhanced tax benefits

Key Strengths:

  • Competitive tax rates
  • Clear startup focus
  • Modernized framework
  • Recent positive reforms

France

France offers a tax-advantaged BSPCE scheme for startups, deferring taxation to the point of sale and applying special reduced rates. However, the scheme has eligibility restrictions based on company age and structure.

Current Framework:

  • BSPCE scheme for companies <15 years old
  • Tax-free at grant and exercise
  • Three-year holding period requirement
  • Flat rate taxation after holding period

Recent Updates:

  • 2023 Finance Act amendments
  • Extended to international employees
  • Enhanced subsidiary coverage

Key Strengths:

  • Strong startup focus
  • Clear tax benefits
  • International flexibility
  • Consistent high ranking

USA

Current Framework:

  • Multiple scheme options (ISOs/NSOs)
  • Potential long-term capital gains benefits
  • Complex but flexible framework
  • Varied tax treatment options

Key Strengths:

  • Established regulatory framework
  • 409A valuation standard
  • Multiple scheme options
  • Strong market acceptance

Germany

Current Framework:

  • Tax deferral until sale for qualifying companies
  • Applies to companies <1,000 employees
  • €86M turnover or €100M balance sheet limit
  • One-year holding period requirement

Recent Updates:

  • Future Financing Act (2024)
  • Major reform of taxation timing
  • Significant improvement in ranking

Key Strengths:

  • Dramatic policy improvement
  • Clear qualifying criteria
  • Competitive framework
  • Strong recent reforms

Greece

Current Framework:

  • Two-year holding period (three for startups)
  • 15% capital gains tax (5% for startups)
  • 0.5% ownership cap at grant
  • Employment income taxation for early exercise

Recent Updates:

  • 2020 legislation refinements
  • Enhanced startup benefits
  • Clearer eligibility criteria

Poland

Current Framework:

  • Two-year holding period for tax benefits
  • Flat rate capital gains at sale
  • Limited to qualifying companies
  • 5% shareholding cap

Recent Updates:

  • 2022 rule updates
  • Enhanced clarity on implementation

Key Strengths:

  • Clear taxation framework
  • Strong startup support
  • Potential for improvement

Austria

Current Framework:

  • Available to companies <10 years old
  • <€40M turnover and 100 employees
  • Tax postponed to sale
  • Mixed taxation rate system

Recent Updates:

  • Start-up Promotion Act (2024)
  • Enhanced tax deferral options
  • Improved ranking position

Italy

Current Framework:

  • Benefits for Innovative Startups/SMEs
  • Tax exemption at exercise
  • Flat rate tax at sale
  • Progressive taxation for non-qualifying companies

Recent Updates:

  • 2020/2021 procedural simplifications
  • Enhanced clarity on tax treatment

Ireland

Ireland’s KEEP scheme for startups offers tax deferral to the point of sale and capital gains tax treatment. However, it has limited eligibility criteria based on company size, industry, and employee ownership.

Current Framework:

  • KEEP scheme for qualifying companies
  • One-year holding requirement
  • €100k annual/€300k total limits
  • Deferred taxation until sale

Status:

  • Limited progress
  • Extension through 2025
  • Room for improvement

Czech Republic

Current Framework:

  • New tax deferral system (2024)
  • Applies to all company sizes
  • Ten-year maximum deferral
  • Retroactive application

Recent Updates:

  • January 2024 reforms
  • Significant improvement in approach
  • More changes expected

Sweden

Current Framework:

  • <150 employees requirement
  • Three-year holding period
  • SEK 3M per employee cap
  • Single vesting date requirement

Recent Updates:

  • 2022 scheme expansion
  • Increased company size limits
  • Higher value thresholds

Australia

Australia has put tax-favorable schemes in place, but their complexity requires expert assistance to navigate. Startups may face challenges granting options to numerous employees due to prospectus requirements.

  • Preferred Scheme: Stock Options with tax benefits for qualifying companies.
  • Taxation: Gains taxed at 23.5% (discounted from 47%) upon sale. 5% employer tax on spread if wage bill exceeds A$0.5m.
  • Notable Features: Complex eligibility criteria, assured valuations with possible discounts, prospectus often required for larger offerings.

Current Framework:

  • Tax-favorable schemes available
  • Complex implementation requirements
  • Prospectus requirements for larger offerings
  • Various qualifying criteria

Spain

Current Framework:

  • €50,000 annual tax-free limit
  • Three-year holding requirement
  • “Emerging Companies” focus
  • Ten-year maximum deferral

Recent Updates:

  • 2023 Startup Law
  • Increased tax-exempt limit
  • Enhanced deferral options

Denmark

Denmark primarily uses warrants for employee incentives, taxing them at both exercise and sale. A tax-advantaged treatment for stock options exists but is limited to companies with a single class of shares, making it unsuitable for most VC-backed startups.

  • Preferred Scheme: Warrants are commonly used due to a lack of favorable stock option schemes for VC-backed companies.
  • Taxation: Taxed as income at exercise (8-56%) and as capital gains at sale (up to 42%).
  • Notable Features: Limited tax-advantaged treatment for single-share-class companies, warrants require valuation at grant.

Current Framework:

  • 20% annual salary value limit
  • Three-year holding period
  • Single vesting date requirement
  • Flat capital gains rate

Recent Updates:

  • Increased option value limit
  • More selective offering allowed
  • Limited flexibility improvements

Netherlands

The Netherlands has made efforts to improve its stock option environment, but high income tax at exercise and limited tax-free benefits make it less attractive than other leading startup hubs.

  • Preferred Scheme: Stock options using the standard tax framework.
  • Taxation: Progressive income tax (up to 49.5%) at exercise for tradeable shares. 25% tax-free benefit up to €50,000.
  • Notable Features: No tax on sale for shareholders with <5% interest, but an annual deemed return tax may apply.

Current Framework:

  • Optional tax deferral system
  • Five-year maximum deferral
  • Progressive income tax rates
  • State approval requirement

Recent Updates:

  • 2023 taxation deferral option
  • Limited improvement impact
  • Need for further reform

Belgium

Belgium’s system makes stock options extremely difficult to use for startups, leading to the use of warrants which are taxed at grant, making them significantly less attractive.

  • Preferred Scheme: Warrants are commonly used due to the challenging implementation of stock options.
  • Taxation: 18% of share value taxed at grant. Reduced rates (9% or 18%) apply at sale depending on holding period.
  • Notable Features: Taxation at grant discourages stock option use. Warrant schemes are complex and necessitate independent valuation.

Current Framework:

  • 18% tax at grant (60-day acceptance)
  • No additional tax at exercise/sale
  • Two-year holding requirement
  • Higher rates for late acceptance

Recent Updates:

  • 2023 reform attempts stalled
  • Limited progress due to political challenges

Finland

Current Framework:

  • Exercise point taxation
  • Limited tax benefits
  • Complex implementation
  • No recent improvements

Norway

Current Framework:

  • Limited startup scheme
  • Ten-year company age limit
  • NOK 3M benefit cap
  • Fair market value requirement

Recent Updates:

  • 2023 startup scheme introduction
  • Very limited scope
  • Minimal ranking impact

Switzerland

Switzerland lacks a tax-favored scheme for stock options, making them less attractive compared to other startup hubs. While capital gains are tax-free for Swiss residents, income tax at exercise can be high.

Current Framework:

  • Exercise point taxation
  • Limited tax benefits
  • Complex regulations
  • No recent improvements

Status:

  • No significant reforms
  • Maintained previous approach
  • Need for comprehensive update

Other countries

Singapore

Singapore’s tax treatment of stock options is generally favorable, with taxation at exercise and capital gains on share sales generally not taxed. However, the administrative process for reporting and withholding can be complex.

  • Preferred Scheme: Stock options, generally exempt from securities registration requirements.
  • Taxation: Spread taxed upon exercise, capital gain on sale generally not taxed.
  • Notable Features: No foreign exchange restrictions, but complex reporting and withholding requirements for employers.

UAE

The UAE’s regulatory landscape for ESOs is evolving. Taxation typically occurs at exercise, and foreign exchange regulations vary depending on the specific free zone.

  • Preferred Scheme: Stock options, subject to Securities and Commodities Authority (SCA) regulations.
  • Taxation: Spread typically taxed at exercise as employment income. No capital gains tax.
  • Notable Features: Limited foreign exchange restrictions depending on the free zone.

Taiwan

Taiwan offers a straightforward tax system for stock options, with taxation upon exercise and capital gains on share sales not taxed directly but considered for alternative minimum tax (AMT) calculations.

  • Preferred Scheme: Stock options, with no specific securities restrictions.
  • Taxation: Spread taxed upon exercise. Capital gains on share sale considered for AMT.
  • Notable Features: Reporting required for currency transactions exceeding certain thresholds.

South Korea

South Korea offers a generally favorable environment for stock options, with taxation at exercise as salary income and capital gains upon share sale (with exemptions for small gains). However, navigating foreign exchange regulations can be complex.

  • Preferred Scheme: Stock options, with no specific restrictions for offerings to employees for welfare purposes.
  • Taxation: Spread taxed at exercise as salary income. Capital gains taxed upon share sale (with exemptions for small gains).
  • Notable Features: Reporting required for currency transfers exceeding certain thresholds, social insurance contributions apply.

New Zealand

New Zealand’s lack of a general capital gains tax is attractive, but the benefit from stock options is taxed as income at the taxing date (when the employee holds shares like any other shareholder), which can be a drawback.

  • Preferred Scheme: Stock options with tax benefits based on employment income rules.
  • Taxation: Benefit taxed as income at the taxing date. Capital gains tax doesn’t apply but specific rules for holding and selling stock can impact outcomes.
  • Notable Features: No foreign exchange restrictions, employer typically receives a tax deduction.

Japan

Japan offers a tax deferral option for “Tax-Qualified Stock Options” with specific requirements for exercise period and costs. Otherwise, the spread is taxed at exercise. Capital gains apply on share sale.

  • Preferred Scheme: Stock options with potential tax deferral for “Tax-Qualified” options.
  • Taxation: Spread taxed upon exercise, unless specific “Tax-Qualified” conditions are met for deferral. Capital gains taxed upon share sale.
  • Notable Features: Complex regulations and reporting requirements, tax deferral option encourages long-term commitment.

Index Ventures’ Country Ranking

The table below summarizes Index Ventures’ ranking of 22 countries based on their overall “friendliness” to employee stock options:

CountryTotal ScoreStrike PriceMinority S’holders & BureaucracyEmployee Tax (Timing)Employee Tax (Rate)Employer TaxationRanking
Latvia3055555Winner
Estonia3055555Winner
Lithuania3055555Winner
Israel2855454Winner
Canada2855454Winner
UK2743555Winner
Portugal2645454High Ranking
France2655453High Ranking
USA2545443High Ranking
Germany2553554High Ranking
Greece2443355High Ranking
Poland2443355High Ranking
Austria2132553Runner Up
Italy2033344Runner Up
Ireland1823332Runner Up
Czech Republic1711554Runner Up
Sweden1723223Runner Up
Australia1731433Runner Up
Spain1611553Ripe for Change
Denmark1513232Ripe for Change
Netherlands1412333Ripe for Change
Belgium1411413Ripe for Change
Finland1313232Ripe for Change
Norway1322232Ripe for Change
Switzerland1212231Ripe for Change

Note: Scores are based on Index Ventures’ evaluation criteria (5 = Most favorable, 1 = Least favorable)

Categories:

  • Winners: 27-30 points
  • High Ranking: 24-26 points
  • Runners Up: 17-23 points
  • Ripe for Change: <17 points

Index Ventures’ Scoring Methodology:

Index Ventures assigned scores (1-5, with 5 being the most positive) to each country based on six key factors:

  1. Plan Scope: Accessibility and breadth of the scheme.
  2. Strike Price: Ability to offer discounted strike prices without adverse tax treatment.
  3. Minority Shareholders & Bureaucracy: Administrative burden and impact of minority shareholder rights.
  4. Employee Tax (Timing): Whether taxation is deferred to the point of sale.
  5. Employee Tax (Rate): Favorability of tax rates applied to employee benefits.
  6. Employer Taxation: Financial impact on companies using stock options.

Key Trends in 2024

  1. Taxation Timing Shift: More countries are moving towards deferring taxation until the point of sale, following the successful Baltic model.
  2. Startup-Focused Reforms: Several countries have introduced specific provisions for startups and SMEs, recognizing their unique needs and challenges.
  3. Scheme Expansion: Countries like Sweden have expanded their schemes to cover more companies by increasing employee and revenue thresholds.
  4. Regional Competition: European countries are increasingly competing to offer attractive stock option schemes to retain talent and attract startups.

Further reading:

Index Ventures / Not Optional Ranking

Rewarding talent guide

Connect with our network and find out which country is best for you

The big takeaway from this global ESO exploration is clear: there’s no single “best” country for every startup. The ideal location hinges on your company’s situation, goals, and long-term vision. Countries like the UK, with its attractive EMI scheme, and the Baltic States, known for their straightforward and tax-friendly ESO systems, demonstrate a commitment to attracting top startup talent. Others, like Spain and Portugal, rely on virtual stock option schemes that offer some benefits but lack the allure of true ownership. Ultimately, designing the best ESO setup requires understanding the intricate interplay of tax laws, labor regulations, and even cultural nuances in each country. That’s where expert advice comes in. Connect with our network of experienced lawyers, tax advisors, and other ESO professionals who can guide you through the complexities and help you craft a winning strategy.

Reach out via the contact form below, and let’s unlock the power of ESOs to fuel your company’s global growth. To learn more about specific country ecosystems and their unique approaches to supporting startups, explore NordicHQ’s Business Attraction Index Series.

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