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  3. US Stock Options Are Far More Favourable To Issuing Companies Than Elsewhere

US Stock Options Are Far More Favourable To Issuing Companies Than Elsewhere

Mike Godfrey,, New York

22 November 2000

In an article published last week in David Hardesty of Markle Stuckey Hardesty & Bott comments on the US tax treatment of stock options granted to employees and service providers.

Such options are either qualified or non-qualified, with qualified options (which have to be out of the money when granted, and are subject to some other conditions) being taxed more favourably for the recipient than are non-qualified options. The gain realised on exercise of most qualified options is subject only to long-term capital gains tax as long as the stock is held for at least a year after exercise.

A gain realised on non-qualified options however is treated as compensation and is subject to income tax on exercise.

Importantly, for the issuing company, gains realised on exercise are deductible as compensation, whether the options were qualified or non-qualified. There is no profit and loss account consequence for the issuing company of the exercise of stock options, and this accounts for the fact that many high-tech (and other) companies which have made extensive use of stock options for their staff report substantial earnings while yet paying no taxes. (See the full article by Professor Hardesty at

The situation in most other countries is far less liberal for companies issuing stock options, partly explaining the more innovative behaviour of US companies, which can reward their employees with tax-free gains and their stock-holders with dividends which are effectively paid by the tax-man.

In the UK, for example, companies receive no tax deduction on the exercise of options they have granted. On the contrary, they have to account for 'National Insurance' (a kind of payroll tax) on the posibly very inflated value of the options that were exercised, although recent changes have allowed transfer of this obligation to the employee concerned.

So, in the US stock options allow companies to save cash and pay less tax, while in the UK they oblige companies or their employees to pay extra tax and don't provide any incentive to investors.


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