Expert Group opinion on moment of receipt when gross salary is exchanged for virtual shares or a bonus

In the case presented to the Expert Group, employees can exchange salary for participation in a virtual share plan through an employer’s scheme. The decision to take part in the share plan can only be taken once a year at the start of January. At that moment the salary has not yet been received. The virtual shares give entitlement to a payment after three years, provided that the employee is still employed there. The amount of the payment will depend on the value of the virtual shares when the blocking period ends. The employee receives the payment from the employer as a lump sum at that time. 

According to the Expert Group virtual shares appear to be most similar to phantom shares. The notional payment date is the date on which the salary is exchanged for virtual shares. The amount of the salary is the amount that the employee waives in exchange for participation in the virtual share plan. According to the Expert Group, a later time would constitute an unconventional moment of payment. The lump sum which the employee receives after the blocking period ends also constitutes salary at that moment. In this case, the previous amount deemed to be salary can be deducted from the payable payroll tax, but not beyond zero. 

A similar opinion has been published on a bonus plan which comes to the same conclusion. That bonus plan provided for remuneration which depends on the monthly salary, the bonus opportunity and the extent to which collective and individual targets were met in a calendar year, expressed as a bonus percentage. The bonus is calculated at the end of the calendar year by multiplying the salary by the bonus opportunity and the result of the bonus percentage. The bonus is paid in April of the year following the calendar year in which the targets were met. The minimum contribution (the portion of salary waived) is 5%. If the employee leaves the organisation during the calendar year, the gross salary waived in order to take part in the bonus plan will still be paid out as a lump sum (subject to payroll tax). In the Expert Group’s opinion this type of  bonus plan can be compared with a conditional right to a management bonus. Here too, the Expert Group takes the view that the employee receives the salary at the moment when it is exchanged for participation in the bonus plan. 

Based on these Expert Group opinions, does this not appear to undermine all exchange options (cafeteria schemes) that are used in practice? Don’t they all result in an unconventional moment of payment? We believe that it is not the intention of the Tax and Customs Administration to suggest this and that these Expert Group opinions refer specifically to these situations of exchange for virtual shares (comparable to a conditional right to phantom shares) and participation in the bonus plan (comparable to a conditional right to a management bonus). Particularly the fact that regular salary is exchanged for uncertain wage claims and the much later moment of receipt, seem to have been decisive for the tax authorities. In practice this will only apply in exceptional situations and does not apply to an Individual Selection Budget (IKB), for example, where everything normally takes place within the limits of the year and the consideration for the exchange is also uncertain. 

In our view it is open to question whether this Expert Group opinion is entirely correct. Do you have virtual share plans or similar schemes in which gross salary is exchanged for participation in the plan? If so, do discuss this with your EY advisor.