Taxation of stock options for employees in Chile

Startups usually offer stock options as part of their employees' compensation packages. This makes for a win-win situation — when you own a piece of the business, it motivates you to help it do well. And sometimes, your options can be worth more than your salary. Especially if you join a company early and then it takes off, so you can sell your purchased shares for a higher value than what you paid for it.

Stock options aren't really stock — they're the opportunity to exercise (buy) a certain amount of company stock at an agreed-upon price, called the strike price. That said, you're under no obligation to exercise them — that's why they're called options.

How stock options work: grants and vesting

Option grants are contracts used by companies to offer you the opportunity to buy shares. That contract will establish all of the details of your offering, including:

• The type of shares you'll get
• How many shares you can buy
• Your exercise price (the cost of buying the shares, usually based on the Fair Market Value of the shares at the time they are granted)
• Your vesting schedule (when you'll be allowed to start purchasing shares)

The process of earning the right to buy shares is time-conditioned, and it is called vesting. Usually, you have to pass what's called a “vesting cliff” or suspension period — when companies make sure you stay for a certain period of time before you can exercise any options. The most commonly seen cliff period is 1 year.

You can usually only exercise your vested options — If you leave the company, the options you haven't vested yet will return to the company's employee equity pool, to be re-granted to future employees.

Where do these stock options come from?

The Employee Stock Ownership Plan (ESOP) sets aside a number of common shares held by a company and reserved for option grants. The shares of the ESOP are distributed among the employees who are offered options.

How long does vesting take?

Vesting is the period of time or milestone that must be met before you can exercise your options.

An option grant's schedule is typically comprised of the following stages:

1. Grant: The date when the company made you the offer to buy shares as an employee.

2. Cliff: The gap between when an option grant is first issued and when you can start exercising it. The typical cliff is 1 year.

3. Fully vested: When all shares have been "unlocked" and are available for purchase.

4. Exercise: When you purchase some or all of the shares in your option grant. 

5. Sale: When you sell some or all of your shares in the company.

What's my exercise price?

Each stock option has an exercise price or strike price, which is the price per share you'll be paying when making a purchase. The exercise price should at least match the Fair Market Value (FMV) of the company's shares at the time the options are granted. Strike prices for early hires are generally quite low.

How are stock options taxed in Chile?

Unlike the United States, in Chile, there aren't different types of stock options, but there are differences in the tax obligations you may be subject to depending on how your options were granted, how much they are worth, and when they are exercised and sold.

Since Ley 21,210 modified the tax treatment of option plans, taxation essentially depends on whether or not your option grant is mentioned in your individual or collective employment contract. In other words, your work contract must mention, at the very least, that stock options are offered as part of your compensation package, regardless of whether there is a separate contract dictating its terms.

A. When stock options are mentioned in individual or collective employment contracts:

In this case, you will be taxed when you sell your shares, that is, taxation is deferred until after the exercise of the option.

This way, the granting of options itself is not taxed, and the taxable event would only be configured for the sale of the shares that were acquired by exercising the option. That's nothing more than a capital gain on the exercise value of the option (how much your shares sold for – how much you paid for them).

The applicable tax on your profits is the Complementary Global Tax or Additional Tax depending on where in Chile you live, and it must be declared and paid through Form 22 of the Servicio de Impuestos Internos (SII), in April of the following tax year.

B. Option grants not mentioned in individual or collective employment contracts:

On the other hand, if your stock option is not agreed upon in your work contract, the exercise of the option itself is a taxable event. For this reason, the difference between the market value of the shares at the time of exercise and the exercise price is considered remuneration.

Similar to the previous case, one applicable tax is the Complementary Global Tax or Additional Tax. In addition, you have the Second Category Single Tax. Both of them must be withheld, declared, and paid by the employer or company as appropriate.