Two of the most common mechanisms used by companies to retain and reward their managers and employees are phantom shares and stock options.
Phantom shares
• The company grants a phantom share, the right to receive compensation if the company’s value has increased compared to the grant date. This compensation is collected when a liquidity event occurs, as agreed, and based on the increase in the share’s value. It applies to the phantom shares granted.
• No actual shares are granted. Beneficiaries do not become shareholders of the company.
Stock options
• The company grants stock options. These shares become the property of the beneficiary when they exercise the option. From that point on, the beneficiary may sell them freely.
• The exercise price is usually below market value, which generates compensation in kind when the option is exercised.
• The beneficiary becomes a shareholder once the option is exercised.
I summarize the taxation of each case in the table below:
| Tax accrual | PIT (IRPF) | CIT (IS) | |
|---|---|---|---|
| Phantom shares | Liquidity event (usually the sale of the company) |
Monetary work performance (difference between market value on the day of the liquidity event and the value granted at award) |
Deductible expense (when the liquidity event occurs) |
| Stock options | Exercise of the option | Work performance in kind (difference between market value on the exercise date and market value on grant) (possible exemption for the first €12,000 or €50,000 in start-ups) |
Deductible expense (when the option is exercised) |
| Sale of the share | Capital gain or loss (difference between sale price and market price on the exercise date) |
In both cases:
• Companies usually set a period of 3 to 4 years between grant and vesting to retain the manager or employee.
• If the income generation period exceeds 2 years, a 30 percent PIT reduction may apply for irregular income if requirements are met.
• Company results are tied to employee remuneration, creating an incentive because effort and talent relate directly to compensation.
These tools can be useful for both talent acquisition and tax planning. If you want to assess whether they fit your case, you can contact GM Tax Consultancy whenever you need.