In Spain, an increasing number of companies are turning to incentive plans to attract and retain talent, align the interests of key employees with those of the company, and enhance worker performance by providing tax-efficient compensation.
Each incentive plan offers its advantages and disadvantages, as well as specific tax treatments for both the company and the employee. Therefore, when selecting the plan that best suits the company’s needs, it is essential to understand the applicable taxation for each party.
In this article, we outline the taxation of the most common incentive plans in Spain.
Taxation of Stock Options
Implementing a Stock Options incentive plan involves granting options that give the employee the right to acquire a specific number of shares at a predetermined price, typically lower than the market value. This right is activated under two conditions:
- The achievement of certain key performance indicators established by the company.
- The employee’s continued employment with the company.
Taxation for the Employee
The employee will not bear an initial tax burden when the stock option is granted, provided that the option is non-transferable, except in the case of death. However, the difference between the acquisition price of the option and the market value of the share at the time of acquisition will be considered a labour income, taxed under the general taxable base of personal income tax (IRPF).
When the incentive plan is implemented for all employees of the company or specific groups or subgroups, this labour income will be exempt up to €12,000 per year, provided that the ownership over the shares is maintained for three years and that the employee’s participation in the company, individually or with their spouse and relatives up to the second degree, does not exceed 5%.
Additionally, if the incentive plan targets employees of a startup as defined by Law 28/2022, the exempt amount will be €50,000 per year. In this case, meeting the previously stated conditions will not be necessary; it will suffice for the plan to be part of the company’s overall compensation policy and to promote employee participation in the startup.
Moreover, if there is a vesting period of more than two years between the grant and the exercise of the option, a 30% reduction on the income to be allocated may apply, with a maximum amount of up to €300,000 per year.
Finally, if the share appreciates after being acquired by the employee and he decides to sell it, the income will be considered as a capital gain that will be subject to taxation at a tax rate ranging from 19% to 28%.
Taxation for the Company
Once the stock option is exercised, the expense equivalent to the benefit in kind will be deductible by the company for corporate income tax purposes.
Taxation of the Free Allocation of Shares
Adopting this plan involves granting the employee the right to receive a specific number of shares free of charge.
The shares may be allocated periodically throughout the plan (for example, annually over several years) or at the end of the plan, potentially including intermediate partial allocations.
In this case, the taxation is similar to that established for Stock Options, with the difference being that the shares acquired for free will be considered as labour income based on their total market value at the time of allocation. The tax liability will arise at that moment.
The same tax benefits applicable to Stock Options may be applied, provided the established requirements are met.
Taxation of Phantom Shares
Implementing a Phantom Shares plan involves granting employees economic rights equivalent to a specific number of fictional shares in the company’s capital, without them becoming shareholders. If the following conditions are met:
- The key performance indicators established by the company, and
- The employee’s continued employment,
the company will liquidate these phantom shares and pay the employee an amount in cash equivalent to their value, as if they were actual company shares.
Taxation for the Employee
The amount received when liquidating of the Phantom Shares will be fully integrated as labour income, taxed under the general taxable base of personal income tax (IRPF). Although the exemptions applicable to Stock Options and the free allocation of shares do not apply, there is the possibility of a 30% reduction for irregular income, provided that the aforementioned requirements are met.
Taxation for the Company
The company can deduct the corresponding amount for Corporate Income Tax purposes at the time of payment rather than when granting the phantom shares.
These are just a few examples of the most commonly used incentive plans in Spain. Still, there are additional options, such as financed stock purchases with or without an envy ratio, granting multi-year bonuses in kind or cash, or participation in capital gains.
The specific tax treatment of these incentive plans, particularly regarding the potential application of tax benefits, will largely depend on the conditions established within each plan. Therefore, we recommend adequately planning these compensations and reviewing their tax implications before implementation to make them more secure and attractive for employees.
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