Employee Options VS. RSUs for Greek Tax Residents - A Practical Guide
A recent tax update brought about much anticipated changes in the taxation of employee options and RSUs. The Greek Tech Finance Network hosted Elina Filippou and Irene Tsiosta from Zepos & Yannopoulos, who took a deep dive into this tax update and the use of employee options and RSUs in general. In this blogpost, you will find a summary of the tax framework currently in place, a comparison between the two ways to give out equity, and our view on options vs. RSUs, along with the slides and the video from the presentation.
What is an option and what is an RSU? Why do we use both and which one should Greek startups use?
Employee stock options and restricted stock units (RSUs) are both types of equity compensation often granted by startups to their employees and executives. Rather than granting shares of stock directly, the company gives out options or RSUs instead, which are vested over a given time period to ensure that the stock is ultimately granted only if the employee sticks with the company for, say, 3-5 years. Neither form has voting rights until transformed into stock.
Options come in the form of regular call options that give the employee the right to buy the company's stock at a specified price. The benefits of a stock option are only realized if a company's stock price rises above the exercise price.
Similarly, upon vesting, RSU holders receive the stock which is assigned a fair market value. RSUs have no tangible value until vesting is complete.
What was the status prior to the announcement?
Prior to this announcement, there was guidance solely for the tax treatment of stock options, while there was no reference in the law regarding the tax treatment of RSUs. As a result, a strict interpretation of the tax system would suggest that one would have to declare both as part of the salary and thus be taxed up to 44% according to current standards.
What has changed with this announcement?
This announcement by IAPR clarifies that any revenue from employee options or RSUs should be treated as capital gain, which is currently taxed at a 15% rate (or 5% for early-stage startups).
How does an option work & how is it taxed?
Grant date: The option is granted to the employee with an exercise price close to zero and a vesting schedule attached to it.
👉 Note that some sort of vesting schedule (with a 2-year minimum) is also a prerequisite for the preferential tax treatment.
Exercise date: The date when the employee makes use of the options, purchasing stock at the exercise (instead of the market) price. Note the employee has to pay the exercise price (albeit small) to purchase the stock.
A taxable benefit is generated as the difference between the exercise price and the book value of the stock at the time. This amount is taxed as a capital gain at 15% (or
Sale date: For startups, this date usually coincides with the exercise date. The employee sells his/her stock for a price that is higher than the exercise price that he/she purchased the stock for.
The employee is then taxed with capital gains tax of 15% (or 5% for startups). Note that if this happens earlier than 2 years from the grant date, say in the case of accelerated vesting, the tax charged is still the income tax of 44%. In case the sale price is higher than the book value of the stock at the exercise date, the difference is subject to 15% capital gains tax.
Where is this applicable?
This is applicable for Greek tax residents and for options issued by foreign-affiliated and domestic entities alike and exercised after January 1st, 2020. For Greek entities, it applies to S.A. (A.E.), but not to IKE.
What is considered a startup (that enjoys the 5% taxation)?
A startup is defined based on: net turnover < €8.000.000, net asset value < €4.000.000 and up to 50 employees (irrespective of Elevate Greece registration).
How does an RSU work and how is it taxed?
Grant date: RSUs are offered to the employee with a vesting schedule attached, similar to employee stock options.
👉 There is no taxable event at this point. Note that no min period applies here.
Transfer date: The date when vesting is completed, and the RSU comes into the hands of the employee.
A taxable benefit is generated based on the book value of the stock at the time. This amount is taxed as capital gain at 15%.
Sale date: For startups, this date usually coincides with the transfer date. The employee can proceed to sell his/her RSU stock as any other stockholder.
👉 The employee would pay 15% tax on any capital gains. In case the sale price is higher than the book value of the stock at the transfer date, 15% capital gains are due on the sale price.
Where is this applicable?
This is applicable for Greek tax residents and for RSUs issued by foreign and domestic entities alike and exercised after January 1st, 2020.
What should be declared by the company and employee?
The employer should provide a certificate to the employee at the end of the year when the option has been exercised / the RSU has been transferred upon vesting indicating the taxable benefit generated.
In addition, the employer should include the taxable benefit in the relevant withholding tax declaration (Βεβαίωση Αποδοχών) filed on a monthly basis (solely for reporting purposes since no withholding tax applies).
The employee should also report the taxable benefit in their annual tax filings (from the year when the benefit is generated) for information purposes up and then, upon sale of the stock, for the assessment of the corresponding tax.
Lacking more specific guidance by EFKA, in terms of social security contributions, both RSUs and options are treated similarly to benefits in kind. In other words, as is and strictly speaking, social security contributions are owed in both cases. This is another point that we would love to see clarified in the near future, explicitly lifting the obligation to pay social security contributions on RSUs and employee stock options alike.
Which option is best, options or RSUs?
In both cases of options and RSUs, the principle remains the same: to give out a sort of equity compensation with the aim of sharing risk & reward with your employees. Still, there are some differences in the way that the two forms of equity function, as well as the way they are treated by the Greek authorities.
For example, one obvious point pro-options to consider would be the potential to receive the benefit of a mere 5% tax for startups. On the other hand, in the case of options, the employee is required to pay the exercise price (albeit small) prior to receiving any proceeds, while there is also a strict 2-year minimum holding period which is in conflict with the principle of accelerated vesting. RSUs are also simpler from the company’s point of view, since employees are not treated as stockholders which results in a simpler cap table. All in all, it is always a per case choice and up to the founder to choose, but we would lean towards RSUs, as the simplest option that removes complexity rather than optimizing for tax.
In any case, this tax update is a positive development providing much needed guidance that concerns a growing population of startups and employees in Greece. We stand by anticipating similar developments on the social contributions front (and perhaps this could serve as an opportunity to also clarify the benefits-in-kind contributions).