S-WoPEc
 
Scandinavian Working Papers in Economics
HomeAboutSeriesSubject/JEL codesAdvanced Search
Research Institute of Industrial Economics (IFN) Working Paper Series

No 1104:
Stock Option Taxation and Venture Capital Activity: A Cross-Country Comparison

Magnus Henrekson () and Tino Sanandaji ()

Abstract: The VC sector is interesting both in its own right and as a proxy for entrepreneurial finance in a broader sense. We highlight the tax treatment of stock options as an important factor for variations in the size of the VC sector. VC often relies on complex mechanisms and option-based contracts to mitigate incentive problems. Granting stock options to founders and key employees also allows credit-constrained start-ups to attract and retain top talent. This type of compensation cannot be unambiguously classified as either capital or labor income. Some tax systems treat stock options in VC-funded firms as employee compensation, which is subject to payroll taxes with high progressive rates, whereas others treat them as capital gains with low flat tax rates. The effective rate depends on tax practices and is not readily indicated by statutory taxes. The tax consultancy firm PwC calculated the effective tax rate for a standardized entrepreneurial case in 22 countries, which is supplemented with our own calculations for 16 additional countries. In this sample of 38 countries, we find a negative cross-country relationship between the effective tax rate on employee stock options and the rate of VC activity. This negative effect is stronger for countries with high R&D investments and weaker in countries with low R&D spending.

Keywords: Business taxation; Corporate governance; Entrepreneurship; Innovation; Institutions; Tax policy; Venture capital; (follow links to similar papers)

JEL-Codes: H25; H30; K34; L26; (follow links to similar papers)

30 pages, January 11, 2016, Revised November 9, 2017

Before downloading any of the electronic versions below you should read our statement on copyright.
Download GhostScript for viewing Postscript files and the Acrobat Reader for viewing and printing pdf files.

Full text versions of the paper:

Wp1104.pdf    PDF-file
Download Statistics
This paper is forthcoming as:
Henrekson, Magnus and Tino Sanandaji, 'Stock Option Taxation and Venture Capital Activity: A Cross-Country Comparison', Venture Capital.



Questions (including download problems) about the papers in this series should be directed to Elisabeth Gustafsson ()
Report other problems with accessing this service to Sune Karlsson () or Helena Lundin ().

Programing by
Design by Joachim Ekebom

Handle: RePEc:hhs:iuiwop:1104 This page was generated on 2017-11-09 15:43:47