This content is from: Local Insights


The new tax treatment of stock options and long-term incentives in Spain - to be in force from January 1 2003 - represents a commitment to better tax treatment and to a broader spread of benefits. The latest amendments to the Project Law are a partial modification of the Spanish Personal Income Tax (PIT) Law approved by the Spanish Lower House last October 3. They show the Spanish government's commitment to going beyond the situation created during the late 1990s which led to public questions about the practices of some managers of large Spanish companies. And the proposed reforms set out to provide a more reasonable, if still improvable, tax treatment for employees' stock purchase and stock option schemes.

With regard to stock options, the projected law provides an increase in the current reduction percentage (from 30% to 40%) to be applied on the income (usually, the difference between the exercise price of the option and the market value of the stock on exercise date) obtained by employees on exercise of stock options which were exercisable only two years after their grant. The above, together with the fact that, with the proposed amendments, the maximum amount which can benefit from such reduction could double, and taking into account the general three-point reduction of the marginal PIT rates (with a new maximum marginal rate of 45%), there will be a substantial improvement in the tax treatment of incentive schemes from January 1 2003. Obviously, due to the partial maintenance of the aforementioned limitation on the maximum amount to benefit from the reduction (meaning, under the projected wording, a maximum of €36,000 ($35,000) free of taxation), the improvement will not be very attractive for executives with considerable shareholdings. It must be noted, in addition, that the above-mentioned increase in the maximum amount that can benefit from the reduction will be conditional on the grant of the options in the same conditions to all employees of the company, group or sub-group of companies, as well as to a three-year maintenance by the employee of the stock acquired on exercise of the options.

Regarding stock purchase schemes, the projected amendments also tend to encourage the establishment of global schemes, by substantially increasing the annual tax-free limit from €3,005 to €12,000, and also eliminating the present five-year limit.

The reform, although still requiring further clarifications from the Spanish tax authorities as regards certain specific issues, must be considered in general as a positive step in the process of promoting their consideration by employers and advisers when designing new remuneration schemes in Spain, especially taking into account the current situation of the capital markets and a foreseeable upward trend of stock exchanges in the mid to long term.

Arturo Reina and Juan Sosa

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