Making Employee Share Plans More Attractive in Europe

Employee share plans align employees’ interests with those of shareholders and foster a culture of ownership. However, across Europe, the uptake and effectiveness of such plans lag behind those in regions like the United States, largely due to legislative and regulatory barriers.

Jurisdictional differences present a significant challenge to equity plan administrators and creators, in many cases leading to certain jurisdictions being excluded from the talent strategy as a whole or limiting participation of employees in jurisdictions outside of the HQ.

This blog discusses possible legislative updates that could help unlock the full potential of equity incentives in Europe.

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Harmonization of Tax Treatment Across Member States

The Challenge

Taxation of employee equity is fragmented across Europe, with each country applying different rules regarding both the timing and rates of tax on equity awards. In many countries, employees face immediate tax liabilities upon vesting or exercise, often before they have an opportunity to sell shares and access cash to pay the tax bill. 

Conversely, in some jurisdictions, taxation is delayed but applied to the full value at the point of exercise, frequently at the highest marginal tax rates. 

Both approaches can result in a disproportionately high tax burden, making equity compensation unattractive and financially risky for employees. 

Example

France

• Current Approach: In France, employee stock options and free shares are subject to social security contributions and income tax. Taxation typically occurs at the point of vesting (for free shares) or exercise (for options), regardless of whether the employee has sold the shares and realized cash. The rates can be high, especially for higher earners, and social charges apply in addition to income tax.
• Impact: Employees may face significant tax bills before they have liquidity, making equity compensation less attractive and riskier, particularly in startups where share liquidity is uncertain.

Germany

• Current Approach: In Germany, the taxation of employee equity is triggered at the time of exercise for stock options or at vesting for certain other equity instruments. The entire benefit is taxed as employment income at the employee's marginal tax rate, which can be quite high. There are limited deferral options, and capital gains treatment is generally not available at this stage. In addition, earnings from employee participation programs can be impacted by social security charges and impact eligibility for state benefits (for example parental benefits). 
• Impact: Like France, employees may owe taxes before they have the ability to sell their shares, creating a cash flow problem and reducing the attractiveness of equity-based compensation.

These examples highlight the lack of harmonization across member states and the need for EU-wide guidelines that would defer taxation until shares are sold, as well as potentially introduce preferential tax treatment for employee equity in startups and scale-ups.

Recommended Update

• EU-wide Guidelines: The European Union should pursue harmonized guidelines for the taxation of employee equity, encouraging deferral of tax until shares are sold and cash is realized.
• Preferential Tax Treatment: Lower tax rates or exemptions for qualifying employee share plans, especially in startups and scale-ups, would make such plans more competitive with cash compensation from larger companies.

Simplification of Regulatory and Reporting Requirements

The Challenge

Complex administrative and reporting obligations discourage many companies, especially Small and Medium-sized Enterprises and startups, from offering employee share plans. 

For businesses operating across borders, the challenge is even greater: they must comply with the securities, tax, and labor laws of every country where they employ staff and offer equity as part of compensation. This complexity is amplified for companies with a highly mobile workforce, as ensuring compliance with multiple jurisdictions creates significant operational burdens. 

These hurdles not only increase costs and legal risks but also reduce the overall effectiveness and attractiveness of equity compensation.

Example

Italy

• Current Approach: In Italy, companies offering employee equity navigate a maze of local securities regulations, tax reporting, and labor law disclosures. Each equity grant to employees requires detailed documentation and filings with both tax authorities and labor agencies. For foreign companies, the process is even more complex, as Italian rules often require local translations, legal opinions, and sometimes even prior approval from regulatory bodies.
• Impact: These administrative barriers are particularly burdensome for startups and Small and Medium-sized Enterprises, which often lack the resources to manage such complexity. As a result, many avoid offering equity plans to Italian employees, or limit participation to senior staff only.

Spain

• Current Approach: Spain also imposes strict reporting and disclosure requirements on companies granting equity to employees. Every grant must be reported to tax authorities, and there are specific rules regarding the registration of foreign equity plans, data protection, and securities law compliance. For companies with employees in multiple countries, these requirements must be managed alongside those of each additional jurisdiction.
• Impact: The need to comply with layered national requirements increases legal costs and operational risk, discouraging smaller companies from offering equity broadly. Employees who move between countries face additional hurdles, as share plans may not be easily portable or recognized across borders.

Recommended Update

• Streamlined Reporting: Introduce simplified and standardized reporting requirements for employee share plans at the EU level, reducing administrative burdens, particularly for smaller companies.
• Cross-Border Portability: Develop mechanisms that allow share plans to be easily portable for employees moving between EU countries, enabling seamless participation without triggering additional compliance issues.
• EU-wide Passporting: Implement an EU-wide “passport” for approved employee share plans, allowing companies to offer the same plan across member states with minimal additional bureaucracy.

Increased Flexibility for Plan Design

The Challenge

Rigid rules around plan design, such as minimum holding periods, restrictions on plan types, or requirements for local trustee arrangements, limit the ability of companies to tailor share plans to their needs and workforce demographics.

Example

United Kingdom

• Current Approach: The UK offers several approved share plan types (such as EMI, CSOP, and SIP), but each comes with strict rules regarding eligibility, minimum holding periods, and limits on the value of awards. For example, EMI options are only available to smaller companies and have stringent requirements with respect to employee working hours and company activities. Additionally, many plans require shares to be held in trust for a minimum period to achieve tax advantages.
• Impact: While the UK is more advanced than many countries, the rigidity of approved plans can limit the following:
• Customization: Companies that want to offer more flexible or innovative equity arrangements often face higher taxes or lose tax-advantaged status, making it harder to align incentives with business needs.
• Participation: Startups move fast, and so do their fundraising/valuation. Often, employees join between valuations, or at a point in time when the company is still eligible for the tax-advantaged plan, but the paperwork is produced after a round of financing/event that leads to a loss of eligibility. In the race to close the fundraise, startups often don’t have the bandwidth to also issue documents, receive a valuation, etc. This results in employees receiving non-tax advantaged equity, even though they joined while the company was still eligible.

Netherlands

• Current Approach: In the Netherlands, there are limited approved share plan types, and the law often requires complex local arrangements, such as the use of a Dutch foundation to hold shares on behalf of employees. These structures can be costly and administratively burdensome, especially for startups and international companies. The lack of explicit recognition for digital or tokenized equity further restricts innovation in plan design and administration.
• Impact: This rigidity makes it challenging for companies to offer equity in a way that is both attractive to employees and aligned with modern business practices, such as remote work, digital assets, or cross-border teams.

Recommended Update

• Flexible Frameworks: 
• Legislation should allow for a broader range of plan types and vesting schedules, enabling companies to design equity incentives that fit their business models and talent strategies.
• Legislation should allow companies to apply reasonable timelines retrospectively, focusing on when actual events occurred rather than when bureaucratic processes were completed. This approach would enable companies to present accurate facts in hindsight and allow employees to participate in relevant plans, even if legal deadlines have expired by the time proper documentation is submitted.
• Recognition of Digital Securities: Update legal frameworks to explicitly allow for digital or tokenized equity, making it easier for companies to manage plans and for employees to track and transfer their holdings.

Enhanced Employee Protection and Education

The Challenge

Employees often lack clear information and understanding about the value and risks associated with equity incentives. In some countries, consumer protection laws even restrict companies from fully explaining the benefits and mechanics of these plans. Unlike other forms of compensation, employees have limited access to affordable, independent advice, particularly on legal and tax matters. Obtaining such guidance is often complex and costly, which adds to the confusion and mystique surrounding employee equity. As a result, companies face significant challenges in driving genuine engagement and retention through share plans.

Example

Austria

• Current Approach: In Austria, employee share plans are subject to limited mandatory disclosure requirements. Companies are not required to provide standardized or detailed information about the risks, tax treatment, or mechanics of equity awards. Consumer protection laws can sometimes restrict how much a company can explain about the potential benefits or risks, especially for unlisted shares or complex plan structures.
• Impact: Employees often receive only basic information and may not fully understand the implications of accepting equity. Access to independent advice is rarely facilitated by employers, and employees must navigate complex legal and tax matters on their own, often incurring significant personal expense.

Portugal

• Current Approach: In Portugal, there is little structured support for employee education regarding equity compensation. Companies are not obliged to offer financial education or detailed, standardized disclosures about share plans. Independent legal and tax advice is available but typically expensive and not widely promoted or subsidized by employers.
• Impact: Employees may be unaware of key risks, such as tax liabilities, vesting conditions, or leaver terms, leading to misunderstandings and sometimes financial hardship. This lack of transparency and support undermines engagement and can make share plans less effective as retention or motivation tools.

Recommended Update

• Standardized Disclosures: Require clear, standardized, and accessible information for employees about the risks, tax implications, and equity terms and conditions.
• Support for Financial Education: Encourage or require employers to provide financial education and resources, helping employees make informed decisions about their equity compensation.
• Facilitate Access to Advice: Promote frameworks that make independent legal and tax advice more accessible and affordable for employees participating in share plans.

Conclusion

Modernizing European legislation to make employee share plans more attractive is essential for fostering innovation, entrepreneurship, and competitiveness. By implementing the above, Europe can close the gap with other global markets and open a path to becoming a leader in empowering its workforce to share in the success of the companies they help build.