(Para-) fiscal advantages for employee stock options and EU state aid law

On 5 July 2017, the European Commission (EC) has published an interesting decision (C(2017) 4237 final) with respect to a beneficial Swedish (para-) fiscal regime regarding employee share options for certain small and medium-sized companies (SA.47144).

– (Para-) fiscal advantage for employee stock options can constitute (in-) direct economic advantage for employer
– Measures that (indirectly) benefit only small and medium-sized enterprises can be considered as prima facie selective
– ‘Operating aid’ in casu declared to be compatible with internal market further to Art. 107(3)(c) TFEU, outside the scope of EC soft law

Contemplated measure

At the end of 2016, the European Commission (EC) was notified by Sweden of a new (para-) fiscal regime for employee share options (the ‘Employee Share Tax Regime’ or ESTR).


Without going into the details, suffice it to say that the ESTR brings about (para-) fiscal benefits for both the employee as well as the employer concerned (see below):

  • For the employee, the ESTR (compared to the ordinary treatment) results in a reduction of the personal income tax payable. In fact, the benefit in kind resulting from the share options received would de facto become taxable at lower rates (of capital income) instead of the higher rates applicable to employment income.
  • For the employer, the ESTR (compared to the ordinary treatment) results in an exemption of the duty to pay social security contributions related to the benefit in kind resulting from the share options granted (although the related expenses no longer qualify for corporate tax deductibility).


The ESTR only applies, however, where certain conditions are met with respect to the employer, the employee and the share options.

Firstly, the employer/company must be a Swedish limited liability company (or a Swedish PE of a comparable foreign company) that has certain characteristics, which include:

  • Being ‘small’ (with reference to FTEs and accounting figures) and ‘young’ (not in operation for more than 10 years)
  • Not being dependent on public bodies, not being listed on a regulated market, being active within certain industries or being in (financial) difficulties.

Secondly, the employee must be employed with such a company during the vesting period (at least 30h per week) and may not control (together with relatives) more than 5% of the voting rights or shares of the company. The employee must hold the option for more than 3 years, and must exercise the option within 10 years, from the time of grant.

Thirdly, with respect to the share options, the ESTR can only apply where, at the time of entering into the option agreement, (i) the total value of outstanding options does not exceed SEK 75m and (ii) the total value of options held by each employee does not exceed SEK 3m. The total value is considered to correspond to the FMV of the underlying shares.

EC decision

State aid …

The EC finds that the contemplated ESTR falls within the scope of Article 107(1) TFEU, and therefore prima facie constitutes forbidden State aid:

  • Firstly, the EC holds that the ESTR gives rise to an economic advantage as it relieves the companies/employers of charges that are normally included in their budgets, since (i) no social security contributions have to be paid on the relevant BIKs and (ii) they can grant additional remuneration to their employees (§25).
  • Secondly, the EC argues that the ESTR is selective, as it “benefits only small companies” (§26).
  • Thirdly, the EC argues that the ESTR is imputable to the Swedish State (as it is based on a legislative act) and is financed through Swedish State resources (as the Swedish State forgoes social security revenues) (§27).
  • Finally, the EC decides that, as the measure strengthens the position of an undertaking compared with that of its competitors, and given that some of the beneficiaries are active on markets that are open for competition and trade, the ESTR is liable to distort (or threaten to distort) competition and trade between Member States (§28).

Consequently, the ESTR constitutes State aid.

… Compatible with internal market

Nonetheless, the EC subsequently decides that the aid is compatible with the internal market under Article 107(3)(c) TFEU, as it “facilitate[s] the development of certain economic activities or of certain economic areas [and] does not adversely affect trading conditions to an extent contrary to the common interest“. To assess the compatibility of the aid, the EC assesses whether the usual ‘common principles’ are observed:

  • The contribution to a well-defined objective of common interest;
  • The need for state intervention;
  • The appropriateness of the aid measure;
  • The incentive effect (i.e. the measure results in a behavioural change so that the beneficiary companies take on additional activities that would not be carried out (to the same extent) absent the aid measure);
  • The proportionality (sensu stricto) of the aid (i.e. no less distortive measure is available);
  • The avoidance of undue negative effects on competition and trade between
    Member States; and
  • Transparency of aid (i.e. all relevant acts and other relevant information about the aid must be easily accessible to all stakeholders).

Although a discussion of the assessment of these ‘common principles’ greatly exceeds the scope of this blog post, suffice it to say that the EC weighs the positive effects of the aid (in terms of a contribution to a ‘common (EU) interest’, in casu the need to match labour resources to the economic needs of high-growth (Swedish) SMEs in order to increase their productivity and growth) against the negative effects thereof (in terms of the impact on competition and intra-EU trade) (cfr. §32). This ‘balancing test’ ultimately boils down to an elaborate assessment of whether the measure complies with the principle of proportionality.

In the end, the EC decided not to raise objections and allowed Sweden to implement the ESTR (note that Sweden had already enacted the ESTR, albeit subject to approval by the EC).


Indirect advantage

Although the EC’s analysis remains somewhat vague in this respect, the ESTR case could be considered as so-called ‘indirect advantage’ case.

As is well-known, Art. 107(1) TFEU applies to economic advantages that are granted to “undertakings” (i.e. entities engaged in offering goods or services on a market). In this respect, it should be noted that employees in principle do not constitute undertakings, contrary to their employers. Economic advantages may be granted to the employer (and therefore fall within the scope of Art. 107(1) TFEU) in two ways:

  • The employer (undertaking) may directly receive an economic advantage, such as a (para-) fiscal benefit. In that scenario, the application of Art. 107(1) TFEU is fairly straightforward. Except where the benefits are passed on to others, the employer – being the direct recipient – is also the real beneficiary of the economic advantage. Where all other conditions of Art. 107(1) TFEU are met, such economic advantage constitutes State aid. In the case at hand, employers are the direct recipients of an economic advantage, as the ESTR exempts them from the duty to pay social security contributions on the amount of the BIK related to the employee share options.
  • Even where the employer is not the direct recipient of the economic advantage, he may still receive an economic advantage indirectly. Indeed, it is settled case-law that State aid may be involved where the direct recipient of aid is not an undertaking but the real beneficiary does qualify as an undertaking (e.g. Case T-93/02 Confédération nationale du Crédit mutuel, para. 95 and Case T-177/07 Mediaset, para. 75). The CJEU has in this respect confirmed that a benefit granted by the State to employees which (indirectly) relieves the employer of employment costs may qualify as aid (see e.g. Case 30/59 Steenkolenmijnen v High Authority, p. 29; Case C-5/01 Belgium v Commission, para. 36-42 and Case T-565/08, Corsica Ferries, para. 137). With respect to the ESTR, the EC aligns itself to this line of cases (see §25).

The above does not mean that all government interventions (e.g. tax advantages) that benefit employees confer (indirect) aid upon their employers. As acknowledged by the EC, all government interventions may have beneficial “secondary economic effects” for undertakings other than the direct recipient of the advantage (Notion of Aid Notice, §116). Such secondary effects only entail an indirect advantage where, “from an ex ante point of view […, ] the measure is designed in such a way as to channel its secondary effects towards identifiable undertakings or groups of undertakings” (id.). In the case at hand, one can hardly deny that the ESTR benefits, from an ex ante perspective, identifiable undertakings (i.e. SMEs).

State resources and indirect advantage

In relation to the latter, it is somewhat regrettable that the EC’s analysis with respect to the other conditions of Art. 107(1) TFEU, in particular the condition that the aid be financed by State resources, remains very succinct:

  • With respect to a direct granting of an economic advantage to an undertaking, the State resources foregone will normally mirror the economic advantage enjoyed by the undertaking (see V. Verouden & P. Werner (eds.), EU State Aid Control: Law and Economics, Alphen aan den Rijn, Kluwer Law International, 2016, 67). With respect to the ESTR case, this is evidenced by the exemption from the duty to pay social security contributions: the economic advantage (the social security contributions saving) is exactly matched by the State resources foregone (the shortfall of social security revenues) (§27).
  • However, where an economic advantage is granted to undertakings indirectly, the amount of State resources foregone and the economic advantage do not necessarily correspond (see V. Verouden & P. Werner (eds.), o.c., 67). This is also clear in the ESTR case: the amount of tax saving in the hands of the employees does necessarily mirror the wage cost saving of their employer. In the decision, the EC seems to avoid this query by limiting its analysis to the direct advantage conferred by the ESTR (see supra), i.e. the decision does not specify how the indirect advantage (i.e. the reduction of the employer’s wage costs) is financed by State resources.

In relation to the latter, one could object on the basis of the case-law of the CJEU that, for the purposes of determining whether an aid exists, one should establish “a sufficiently direct link between, on the one hand, the advantage given to the beneficiary and, on the other, a reduction of the State budget” (e.g. Case C-518/13 Eventech, para. 34). In the case of an indirect advantage, such link is more precarious, as the economic benefit (e.g. a tax advantage such as in casu) needs to be ‘passed on’ by the direct recipient to the true and ultimate beneficiary undertaking. That being said, this link should only be sufficiently direct, i.e. it is deemed to be present whenever there is an identifiable causal relation between the spending of State resources and the advantage being granted. This means that “sufficiently direct links” can also be established in indirect advantage cases.

This is confirmed in an (indirect advantage) case where tax concessions were given to investors (non-undertakings) for investing in companies established in certain German Länder (undertakings), which resulted in a greater demand for shares of the latter companies). In that respect, the CJEU held that “the origin of the advantage indirectly conferred on the undertakings […] is the renunciation by the Member State of tax revenue which it would normally have received, inasmuch as it is this renunciation which has enabled investors to take up holdings in those undertakings on conditions which are in tax terms more advantageous. The fact that investors then take independent decisions does not mean that the connection between the tax concession and the advantage given to the undertakings in question has been eliminated since, in economic terms, the alteration of the market conditions which gives rise to the advantage is the consequence of the public authorities’ loss of tax revenue” (Case C-156/98 Germany v Commission, para. 26-27).

SME aid can be selective

In recent years, EU State aid law has mainly come to the fore as a weapon against Member States offering tax benefits to large multinational enterprises, cf. the EC’s investigations into tax rulings and other tax regimes de facto beneficial to larger enterprises (e.g. the Spanish goodwill depreciation regime).

As evidenced in the ESTR case, one cannot forget, however, that benefits granted to small and medium-sized enterprises (SMEs) can qualify as State aid as well. Indeed, SMEs may very well constitute “certain undertakings or the production of certain goods” in the sense of Art. 107(1) TFEU. Limiting the beneficial treatment of (para-) fiscal measures to SMEs may therefore be (prima facie) selective, a conclusion which has been confirmed in the case-law of the CJEU (e.g. Case T-55/99 CETM, para. 47-48; Joined Cases T-92/00 and T-103/00 Territorio Histórico de Álava a.o., para. 40; Case C-351/98 Spain v Commission, para. 40 and Case C-409/00 Spain v Commission, para. 49).

Fiscal aid can be compatible outside the scope of EC soft law

Finally, the ESTR case is noteworthy as it is a case where a (para-) fiscal advantage has been declared to be compatible with the internal market further to Art. 107(3)(c) TFEU.

This could be seen as peculiar, since (i) (para-) fiscal advantages are a form of ‘operating aid’ (i.e. aid which is intended to release an undertaking from normal, day-to-day charges and is not linked to specific investments) and (ii) it is settled case-law that “operating aid […] does not in principle fall within the scope of Article [107(3) TFEU, as the] […] effect of such aid is in principle to distort competition in the sectors in which it is granted, whilst nevertheless being incapable, by its very nature, of achieving any of the objectives of [common interest]” (see e.g. Case T-459/93 Siemens v Commission, para. 48 and Case T-348/04 SIDE, para. 99).

Although operating aid (incl. (para-) fiscal advantages) may at times still be declared to be compatible with the internal market, this usually occurs where such aid falls within the scope of EC soft law (e.g. frameworks, guidelines, etc.) spelling out the conditions on the basis of which aid may be regarded as proportionally aiming to attain an objective of common interest. The current EC’s compatibility decision, however, does not arise within the context of such EC soft law. One could wonder whether this opens the ‘door of compatibility’ for future (para-) fiscal cases falling outside the scope of EC soft law.

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