In a transaction, it is a possibility that the management and/or employees also invest as part of the company’s acquisition. This is management participation. This is done primarily to motivate the manager or employee to optimise the performance of the business. Management participation plans can have major consequences in terms of taxation. In order to avoid unforeseen expenses, you are well advised to call on the specialists of Meijburg & Co.
Management participation plan
Management participation plans are available in many forms. Aside from equity interests, option interests and other rights are also possible. In all cases, it is important to align the plan’s structure to the specific requirements of issuing entity.
If a management participation plan is not well structured, this has significant consequences. Not only for the acquired company , but also for the acquiring company and the manager or employees themselves. It is therefore important to structure the plan correctly in terms of tax and legal aspects. We can assist in these matters.
Potential risks for the business or shareholders
If you are considering a management participation, then we would like to share some thoughts with you on the consequences for the business. If your plan is not well structured, these consequences can be far-reaching. Here are some questions you can answer to prevent this:
- How much can the employees finance themselves?
- What should the financing be like for the entire structure?
- Should the employer burden be corporate tax deductible?
Possible consequences for the manager or employee
Are you taking part in management participation as a manager or an employee? Then you may experience taxation while being unaware of it. The most important consequences are those for personal income tax. Personal income tax consists of three boxes. We explain below what each box could mean for you.
Box 1
Income from employment, such as a normal bonus, falls under box 1. Certain plans belong to box 1 as well. These are plans in which you can acquire an interest at a relatively low price. The potential yield could be large, or special rights could be issued. In such cases, there may be a lucrative interest. This means that a tax rate of a maximum of 51.75% applies to the lucrative interest. The exact percentage depends on the total taxable income of the manager or employee. However, the law states that it is also possible to tax a lucrative interest in box 2. In that case, the rate is 25% (in 2019). This requires a certain amount of structuring.
Box 2
Does the share interest represent 5% or more of the nominal share capital, or is there a special class of shares? Then the interest falls under box 2. This means that on disposal of the interest, dividends and realised profits fall under the 25% tax rate.
Box 3
Is the share interest less than 5% and does it not qualify as wages? In that case, the value of the shares on 1 January of the year in question is typically taken as the tax base for box 3. The effective tax burden in box 3 depends on all advantages from savings and investments. The rate for 2019 is between 0.58% and 1.68%.
Differences in taxation
Under which box and tax rate you fall depends entirely on how the management participation has been designed. As a result, taxation can vary considerably for the manager or employee. Moreover, the optimal tax structure may vary significantly for different plans. We will gladly advise you on which structure would be most advantageous for your situation.
Need help with management participation?
Is your company being taken over and are you participating in the transaction as a manager or an employee? Do you require tax advice on a management participation plan? Or do you want to know more about the legal possibilities to implement your participation plan? Meijburg & Co’s professionals are here to help you. We can optimise your plan’s structure in tax and legal terms, so that you will not be confronted with unnecessarily high costs. We can also offer assistance with all other aspects of management participation. We are looking forward to getting to know you.
