Share-Based Incentive Schemes: Arrangements, Tax Rules, and Pitfalls

A common scheme is that employees are offered the opportunity to purchase shares in their employer’s company, often at a discounted price. The company benefits from improved liquidity as it does not have to make a direct payment. If the shares are offered at market price, neither employer’s National Insurance contributions nor tax are triggered at the time of purchase or subscription. Employees may be offered  existing shares or to subscribe for new shares in the company. The shares may be transferred from other shareholders or from the company’s own shareholding. With such a scheme, the employee becomes a genuine owner in the company.

The scheme can be tax-advantageous for employees. When buying at market price, they may benefit from the company’s value increase without income tax at the time of purchase. Gains on subsequent sale are taxed as capital income (37.84% in 2025), and the company avoids employer’s National Insurance contributions. This is favorable compared to bonus and option schemes, where both employer’s contributions and individual income tax apply. If shares are offered below market price, the benefit is considered taxable income, and both income tax and employer’s contributions are triggered upon purchase or subscription.

The scheme is easy to administer, but employees must have capital to buy shares and may need to use their own funds or take out loans. If the employer offers loans or credit, this is tax-free if provided at market interest rates. When buying at market price, the employee risks a fall in share value and financial loss.

It is possible and lawful to agree that the company or other shareholders may buy back shares if the employee leaves. The buy-back price often depends on whether the employee is a “good leaver” or “bad leaver”. “Good leavers” usually receive market price, while “bad leavers” receive the lower of market price and cost price. Restrictions on transfer may also be agreed for a period, and the company or shareholders may have the right, but not the obligation, to buy the shares upon departure. Such rules are often appropriate, as the purpose of the share scheme may be undermined if shares can be freely sold shortly after acquisition or upon departure.

Summary:

• The employee receives shares in the company in exchange for payment.
• Employees obtain direct ownership and the opportunity for dividends and value appreciation.
• The scheme often requires the employee to invest their own funds and bear the risk of a fall in share price.

An option scheme gives employees the right, but not the obligation, to purchase shares in the company at a later date, usually at a fixed price (the “strike price”). Employees can thus participate in future value increases without committing to purchase or providing equity at the time of grant. There is no purchase obligation or financial risk before the option is exercised, unless an option premium has been paid.

The employee may benefit from all value increases from the time of grant, or from value increases above a certain level, depending on the strike price set relative to market value. An option scheme can therefore motivate employees to increase the company’s value over time.

Upon exercise of the option, the employee pays the agreed purchase or subscription price and acquires the right to the shares. After exercise, the option lapses, and the employee becomes an ordinary shareholder.

To offer options to employees, the company must ensure that shares can be delivered upon exercise. This can be achieved through pre-agreed terms for new share issues, a sufficient holding of own shares, or by other shareholders, often principal shareholders, transferring shares to employees by agreement.

Option agreements can be entered into directly between shareholders and employees, without the company issuing the options. In such cases, the shareholders undertake to sell shares on agreed terms if the option is exercised.

Granting options in an employment relationship does not trigger tax liability for the employee. Tax arises only upon exercise, if the shares are purchased below market value. The benefit is then taxed as salary, and the employer must pay employer’s National Insurance contributions. Thus, no tax is triggered at the time of grant, unlike in many other countries. In Norway, the time of exercise determines taxation. Value increases from exercise to sale are taxed as capital income.

Summary:

• Employees receive the right (but not the obligation) to purchase shares at a pre-agreed price at a later date.
• The scheme provides the opportunity for gain if the share price rises, without the need to invest immediately.
• The schemes can be complex for tax purposes and involve risk if the share price does not develop as expected.

From 1 January 2018, special rules were introduced for small start-up and growth companies. The purpose is to address liquidity challenges that arise when employees must pay tax on a benefit without having realized a cash gain.

Under the scheme,  no tax or employer’s National Insurance contributions are triggered upon exercise, even if the option is exercised at a discount. Tax on the difference between the strike price and market value is deferred until the shares are sold. Gains above the strike price are further taxed as capital income, not salary. The tax rate upon sale is 37.84% in 2025. No employer’s contributions are payable on the option gain.

There is no limit to the size of the gain upon exercise of the option. Losses are deductible,   and the majority  of  start-up companies do not succeed. The scheme requires that several conditions for the company, the employee, and the option are met. Upon introduction, the rules were criticized for being too restrictive, and the scheme has since been expanded. For options granted after 1 January 2022 and from 13 March 2025, the following main conditions apply:

Conditions Related to the Company:

• The company cannot not be older than 10 years at the time of grant.
• The company must on average have 50 or fewer full-time positions (total of full-time, part-time, and temporary employees). For grants from 13 March 2025, this is increased to 150 full-time equivalents.
• The company’s operating income or balance sheet total must not exceed MNOK 80 in the year before the option is granted. For grants from 13 March 2025, the limit is MNOK 200.
• The company must, as a general rule, be a non-listed Norwegian limited company (aksjeselskap).

Some companies are excluded from the scheme, including those where public bodies directly or indirectly control at least 25% of the shares, or the company operates in the coal or steel industry.

Conditions Related to the Employee:

• Annual working hours must on average be at least 25 hours per week from grant to exercise.
• The employee may not have a direct or indirect ownership interest or voting rights exceeding 5% in the year of grant or in the two preceding years.

To receive options, the employee must be employed by the company at the time of grant. It is therefore, as a general rule, not possible to grant options simultaneously with an offer of employment.

Conditions Related to the Option:

• The scheme applies only to call options, not put options.
• The exercise price may not be lower than the fair market value of the shares at the time of grant.
• The total value of options granted to a single employee during the employment relationship may not exceed MNOK 3 of the underlying share value.
• The total underlying value of options granted in the company may not exceed MNOK 60 at the time of grant.
• The options must be held for at least 3 years and a maximum of 10 years at exercise (vesting period).

Under synthetic share and option schemes, the employee receives a future cash payment linked to the value development of a specified number of shares, as  though they held actual ownership. The employee receives the same economic gain as with actual ownership, but without legal rights or obligations. For existing shareholders, a key advantage is that their ownership remains undiluted.

Synthetic options do not follow the ordinary tax rules for options in employment. Payments are taxed as salary, and the employer must pay employer’s National Insurance contributions. This applies if the employee has not paid a contribution or made an investment to obtain the synthetic right.

The Norwegian Tax Directorate has, in binding advance rulings (BFU), stated that synthetic shares owned through the employee’s holding company may be covered by the exemption participation method. Furthermore, it has been stated that gains or losses on personally owned synthetic shares are, as a general rule, taxed at the ordinary capital income rate of 22%. However, it is important to note that the Tax Directorate in a later BFU stated that gains on synthetic options should be taxed as employment income, with employer’s contributions, if there is a close connection to the employment relationship. In the relevant case, emphasis was placed on the fact that the scheme was only offered to employees, and that the company had a buy-back right upon departure.

A key factor is whether the employee has made a genuine capital investment on market terms with risk of loss. The investment can then be compared to a normal capital investment in terms of risk and conditions for capital taxation. Syntheticoptions as incentive may therefore be  less favourable for tax purposes than ordinary options, as it can result in stricter taxation.

Summary:

• Under synthetic schemes, employees are entitled to a cash payment corresponding to the value increase of a certain number of shares, but without owning the shares directly.
•  No personal  investment is required, and it is easier for the company to manage. Holding ownership though a personal holding company may offer additional advantages..
• The employee does not acquire ownership or voting rights, and the scheme’s may be less motivating for some individuals. Additionally, it may be less tax efficient compared to alternative arrangements.