Huygens Quantitative Tax Consulting

Dutch Tax Administration published internal memo on recognition of taxable wage upon granting shares under an incentive plan

8 August 2023 - The Dutch Tax Administration published an internal memo which provides interesting insights for the management and employees of a private equity portfolio company seeking certainty in advance about their participation in an incentive plan.


On 2 August 2023, the Dutch Tax Administration (‘DTA’) published an internal memo pursuant to the Dutch Public Access to Government Information Act (Wet open overheid), which provides interesting insights for the management and employees of a private equity portfolio company seeking certainty in advance about their participation in a management/employee incentive plan.

In principle, the value of the financial instruments granted to the portfolio company’s employees as part of the incentive plan must be compared to the price paid for these instruments, to assess whether the incentive plan contains a remuneration component that constitutes taxable wage. To avoid time-consuming procedures involving scarce valuation specialists within the DTA, the memo provides for a “efficiency margin” (doelmatigheidsmarge).

This efficiency margin entails that tax inspectors are allowed to give a portfolio company’s employees upfront certainty about the absence of taxable employment income, based on a simplified approach and without consulting an internal valuation expert. The efficiency margin only applies to instruments that constitute a so-called ‘lucrative interest’ (lucratief belang), and it can only be applied if the incentive plan was set up in connection with the acquisition of the target company by the private equity firm from an unrelated seller.

Simplified approach: exit envy

Based on the efficiency margin, the DTA can confirm in a tax ruling that the incentive plan does not contain a taxable wage component, if the “exit envy” is less than 2. The exit envy is defined as the projected money multiple (‘MM’) of the employees at exit divided by the sponsor’s projected MM at exit. The DTA acknowledges that this definition is not market practice.

Although the memo also mentions that the exit envy could be based on the internal rate of return (‘IRR’), the MM-based exit envy is considered the key metric. An IRR-based envy ratio may be used as a sanity check if there is uncertainty about the MM-based envy ratio.

Cash flow forecast: investment case

The memo prescribes that by default, the tax inspector should base its assessment on the cash flow forecast of the investment case, as contained in the private equity investment proposal. However, the tax inspector is encouraged to consider multiple scenarios, for example by also taking the bank case or management case into account, and, if appropriate, adjust the investment case-based result accordingly. If a taxpayer wishes an evaluation based solely on a scenario other than the investment case, it must provide a justification for the use of that scenario.

Key take-aways

  • The memo confirms that a valuation analysis must normally be prepared to analyse the difference between the price paid and the value received by the company’s employees. Taxpayers should therefore avail of a valuation analysis to support their position in their income tax return if they have not obtained a tax ruling confirming their position.
  • In case of an incentive plan (i) that constitutes a lucrative interest, (ii) that was granted in connection with a third-party acquisition, and (iii) for which an investment case is available that confirms an exit envy that does not exceed 2, it may be interesting to obtain a ruling from the DTA to avoid discussions on taxable wages. However, if a ruling is obtained and the incentive plan turns out to be loss-making, the taxpayer will no longer be able to claim that he received “negative wages” when the incentive plan was granted.
  • This internal memo gives an interesting insight into the DTA’s thinking and approach, but it is unlikely that taxpayers can rely on the efficiency margin, without obtaining a ruling. The memo was prepared for internal discussion purposes only and states that the application of the efficiency margin is not mandatory; the competent inspector has the discretion and responsibility as to whether he will provide certainty in advance on the absence of taxable employment income, and whether to involve a DTA valuation specialist.
  • If a taxpayer wants certainty in advance, but the exit envy exceeds 2, it is likely efficient to submit the ruling request along with a valuation prepared by a valuation specialist, as this may help to avoid discussions on the value of the incentive plan. The same applies for situations where the shares granted to the managers do not constitute a lucrative interest (e.g., shares that constitute an investment in “box 3”).

If you would like to know more about this memo or the valuation of shares under a management/employee incentive plan, please reach out to Quirijn Knab or Stephan Kraan.


Photo Quirijn Knab

Quirijn Knab

+31 20 247 03 03
+31 6 10 89 76 10

Photo Stephan Kraan

Stephan Kraan

+31 20 247 03 01
+31 6 82 32 67 91