Stock options in Chile: when they are taxed and what executives should review

Stock options are incentives through which an employer grants an employee the right to purchase company shares in the future at a specific price. Usually, that price may be lower than the market value if the share price increases during the vesting period.

In simple terms, the employee does not immediately receive a share. What the employee receives is the right to buy the share under certain conditions.

For that reason, understanding the tax treatment requires distinguishing the different stages of the benefit.

The first stage is the grant, which is the moment when the option is granted. In other words, the employee receives the right to participate in the plan.

Then comes the vesting period. During this stage, the employee must meet certain conditions to consolidate the right. Usually, this means remaining with the company for a defined period, although performance conditions or other requirements may also apply.

Vesting occurs when those conditions are met. From that moment, the employee may become entitled to exercise the option, depending on the terms of the plan.

Finally, exercise is the moment when the employee decides to exercise the option and purchase the shares at the price defined in the plan.

In Chile, the tax treatment of stock options has changed over time. Since January 1, 2017, amendments entered into force that affected how these benefits are analyzed. Later, Law No. 21,210 on Tax Modernization introduced additional changes in this area.

One of the most important points is that the grant of the option does not, by itself, trigger taxation for the employee. The analysis focuses mainly on the exercise of the option, the sale of the option, or the subsequent sale of the shares.

The key difference is whether the benefit is included in individual employment contracts or collective labor instruments.

When stock options are included in individual employment contracts or collective labor instruments, both the grant and the exercise of the option may be treated as non-taxable income. In that case, taxation is generally triggered upon the sale of the option or the sale of the shares.

By contrast, when the benefit is not included in those employment instruments, the exercise of the option may be treated as employment compensation. This means that the economic benefit associated with the exercise may be subject to employment income taxation, in addition to any effects that may arise from a later sale.

For executives and professionals with international mobility, this analysis can become even more relevant. If a person received options while working in one country, vested during an international period, and later exercises or sells while in Chile, it may be necessary to review the portion of the benefit attributable to services performed in each country.

Tax treaties, tax equalization policies, payroll obligations, annual reporting and coordination with the employer may also become relevant.

For that reason, stock options should not be reviewed only when the shares are sold. Ideally, they should be analyzed from grant, during vesting and before exercise, especially when international mobility is involved.

The conclusion is simple: in stock options, the tax timing matters, but so does the document supporting the benefit and the country where the services were performed during the vesting period.