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Spanish tax law provides a significant obstacle to the implementation of Employee Share Participation Schemes (ESPSs), in that the transfer of shares to employees at no cost or at below-market prices is subject to taxation. Perhaps for this reason, such schemes have not become well developed in Spain.

The importance of the ESPS is recognized in both the PEPPER Report and in Council Recommendation 92/433/EEC, Concerning the Promotion of Participation by Employed Persons in Profits and Enterprise Results (Including Equity Participation), and will be of special significance in the Spanish government's ambitious privatization programme scheduled for 1997.

The proposed Supplementary Act to Spain's 1997 National Budget does provide more favourable tax treatment for such schemes, thus to a certain extent enabling their development. As from 1997, the transfer of shares to company employees will not be considered taxable income, whether the said transfers are free of charge or below market prices, so long as this benefit does not exceed certain annual limits. In some cases, this new treatment will even be extended to share transfers made to employees within the same group of companies. As a result of these provisions, the tax effect will be deferred until the employee sells the shares.

In contrast, there have been no improvements proposed to the tax treatment of assisted financing, though this activity is allowed by Spanish commercial law, nor the treatment of the granting of stock options free of charge to employees in the context of an ESOP. Neither are tax improvements planned for other types of ESPS, although the Supplementary Act may be amended before its eventual enactment.

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