Among the many ways to retain talent in start-ups, phantom shares are a very attractive option for both the company and the employee. This type of share grants employees economic rights that are equivalent to a stake in the company's share capital, i.e. the right to receive payment based on simulated shares in the company.
Phantom shares are intended as an incentive for employees or the company's management team. The term phantom refers to the fact that they are theoretical or fictitious shares, but take into account the division of the share capital. In short, it is a consideration for their commitments to remain in the company.
What are the advantages of phantom shares?
Phantom shares are particularly interesting for start-ups that do not plan to grow in the coming years and do not have many resources. The main advantage of phantom shares is that they do not make the beneficiary a shareholder, but they do give him or her economic rights and, therefore, these shares are not regulated as capital gains. So, in short, they serve as a loyalty instrument, without transferring the political rights of the shareholders.
How are phantom shares taxed?
They are taxed at the moment they are granted, as they are only expectations of collection. When the beneficiary receives the payment, it must be taxed as employment income for Personal Income Tax (IRPF), while the company must make the corresponding withholdings from the employee's salary.
The employee must declare the delivery of the shares as employment income in their personal income tax, valuing the actual price of these securities as salary income.
How are profits calculated?
The value of the phantom shares usually corresponds to the current value of the company's shares and is agreed at the time of calculation. At the end of the term for which they are granted (exercise date), the new share price is recalculated and the person holding the share receives the difference between the final price and the initial price.
It is therefore fairly straightforward to calculate this gain when the method of valuing the phantom share is to make it equivalent to the real share, but this does not mean that other systems cannot be agreed. In fact, the freedom in determining the phantom share configuration is such that associated concepts are frequently encountered.