Tax structuring of a CEO equity incentive

Issue

Our client had to recruit and motivate a new CEO while the company equity was “underwater” as a result of the financial and economic crisis. 

This CEO was carrying out his duties through his management company. 

PwC was requested to design a tax-effective reward scheme.

Approach

PwC carried out a modelling exercise by which various equity incentive arrangements were assessed in order to minimize the taxation for both the Company and the CEO.

Compliance with the Belgian corporate law has to be ensured: the incentive cannot be granted directly to the CEO.

Recommendation

PwC’s modelling revealed that stock options should be granted by the Company to the management company of the CEO.  Subsequently the management company should grant these stock options to the CEO.

Results

The option grant to the management company followed by the option grant to the CEO was tax neutral for the management company.

The taxable benefit recognized in the hands of the CEO as a result of the option grant was fairly low given the fact that the share price was close to nil.

The exit proceeds that the CEO could obtain upon the exercise of his options and the sale of the shares are expected to be tax free.