Taxation Timing of Transferable Stock Options

Facts of the Case

The appellant was involved in the restructuring of Y-AG. Owing to his specific expertise, he was granted an option that was not made available to third parties. However, the option could be sold to third parties at any time and was therefore freely transferable and fully marketable. Ultimately, the appellant acquired the option at an arm’s length price. Instead of receiving the shares, he received a cash settlement. The tax authorities treated this payment as employment income subject to payroll tax.

Decision of the Austrian Administrative Supreme Court (VwGH)

With regard to the timing of taxation, the VwGH followed its established case law and held that the granting of a stock option merely provides an employee with a tax-irrelevant opportunity. The measurable economic benefit does not arise until the option is exercised. The decisive factor is whether the option would have been granted to an unrelated third party in the same form; the fact that the option is transferable to third parties is irrelevant.

Regarding the existence of an employment-related benefit, the Court stated that, since the granting of the option merely creates a tax-irrelevant opportunity, the benefit from the employment relationship does not arise at the time the option is granted. Instead, it arises when the employee acquires the shares at a discounted price through the exercise of the option. If the option is structured in a way that would not have been offered to a third party, the terms and conditions under which the option was originally acquired are of no further relevance.

Conclusion

The VwGH’s decision is noteworthy for two reasons.

First, the Court relies on earlier decisions concerning non-transferable stock options and extends that case law to transferable options without providing a detailed justification. Although Austrian tax law does not contain an explicit statutory distinction, several legal sources suggest that transferable and non-transferable options should be treated differently.

Second, the Court held that even the acquisition of an option at an arm’s length price merely grants the employee a tax-irrelevant opportunity. From a systematic perspective, this approach appears questionable, as the purchase of the option at market value already constitutes an acquisition transaction. No economic benefit arises at that stage; any subsequent appreciation in value would generally be attributable to the employee’s private investment assets.

If the Court’s reasoning is followed, the gain generated upon the sale of the shares or equity interests may still be treated as an employment-related benefit and, consequently, be subject to payroll tax, despite the fact that the option was acquired at arm’s length terms. By contrast, an option that is offered to third parties on the same arm’s length basis would generally be subject only to capital gains taxation at a rate of 27.5%.

This differing treatment does not appear to be entirely consistent from a systematic tax perspective. It remains to be seen whether the VwGH will continue to follow this line of reasoning in future cases or whether it will engage more thoroughly with the doctrinal criticisms that have been raised against it.