Managing Employee Stock Options in Chile

Although they have existed for decades, employee stock options are a new concept for many Chilean companies, startups, and employees. The tide is changing though. There is increasingly more interest from foreign and local companies who want to provide their Chilean employees with stock options. 

There is no doubt that providing employee stock options are a good tool to attract and retain talent. It also aligns the employees with the long-term goals of the company. 

Companies looking to provide this benefit need to first understand the tax consequences that such options will have on both the company and individual employees. Fortunately, the Chilean Tax Office is aware of this trend and has made some changes in 2021 to clarify taxation.   

What is a Stock Option?

Stock Options, as the word implies, are options that companies give to employees to buy some of their shares at a discount, as long as certain conditions are met. The benefit of buying the shares through an employee stock option is that the price to be paid per share is set, something that is defined in the work contract. So if the company is doing well and the employee meets the conditions, the person can buy the shares at a discounted rate. 

Previous Treatment of Stock Option in Chile

Before the 2017 tax reform, stock options were not regulated in the legal tax system and the Chilean tax office was responsible for setting how they would be taxed. 

Originally, it was established (Ord. N°3307, of August 8, 2001). that the highest value obtained when selling the share would be taxed. If the acquisition had been made with contributions from the employer, it would be considered as higher remuneration for the worker which would be subject to tax depending on the personal taxation rate of the specific employee in question. 

New Treatment of Stock Options

The current regime distinguishes between compensation plans established in the employment contracts and those that are not in the employment contracts. The difference between the two options will affect when the tax is applied to the employee. 

From a company’s standpoint, there is no difference since both options allow for the company that is providing the stock option to deduct the difference between the disposal value and the value paid when the option was delivered as an expense.  

Labor compensation programs agreed in individual labor contracts or in collective labor contracts/agreements.

• Granting of the option by the company to its workers does not constitute income and therefore is not affected by taxes. 
• If the worker decides to purchase the options, it is also not considered income at this time and is not affected by taxation until they are sold.  
• The greater value obtained in the sale of the option by the worker will be taxed in accordance with Article 17.8(a)(iv) of the Income Tax Law. For these purposes, “greater value” is considered to be the difference generated between the sale price of the option and the value paid by the worker when the option is granted, if any. (this is the capital gains) 

Compensation plans not agreed upon in individual or collective work contracts.

• The granting of the share does not constitute income so there is no taxation at this point, but the exercise of the option would be considered income. 
• It would be taxed at the personal taxation rate of the employee (second category tax) at this point. 
• The main difference with options granted under an employment contract is that they are taxed when the employee exercises the option even though they have not sold them and received the profit. 

Conclusion

Our recommendation is that the incentive offered to the worker should be agreed upon in the labor contract to achieve more beneficial taxation for the employee.  The result is the employee will pay taxes on the capital gains (the difference in price between what the option costs and the price they sell). This will be declared the year that they sell the stock and not when they exercise the option. There is no lower tax rate for capital gains in Chile, so it is treated as income and taxed at the personal tax rate that they fall into.  

Companies should be aware of the following to ensure their employee stock options are successful – 

• Companies should ensure that the stock option is agreed upon in a work contract or an annex to the original employment agreement. It should clearly outline the requirements to qualify, the option price, and anything else relevant to the matter. 
• Companies should ensure that employees understand the tax obligations of the stock option. Since these types of benefits are quite new in Chile, many employees will not understand how taxation works. 
• Foreign companies providing stock options from a country outside Chile should also provide resources to the employees so that they understand what they need to do from a taxation perspective where the stock is being bought and sold. 

Ax Legal is an advisory firm that works with foreign companies in Latin America. Our legal and commercial advisors team has a distinguished track record of helping foreign technology and services companies grow and operate in Latin America. Over the years, we have worked with starts up, mid-size businesses, and publicly listed companies. The one common factor that connects our clients is that they are leaders in their field, providing innovative technologies and services to the industrial sectors.

To better understand how we can support you in the Region, please contact Cody Mcfarlane at cmm@ax.legal