When the company is listed, market value is a data point: the share price on the day. When it is not listed, market value is a matter of evidence, and evidence gets argued over. That is why the critical point in almost every file on equity pay from unlisted companies is not how the income is characterised but how much the share was worth on the day of exercise or delivery. Every euro of difference in that figure is a euro added to the general tax base, the part of Spanish income tax charged at progressive rates, at your marginal rate.
This guide deals only with that: which documents count, in what order, how much force the 409A report has in Spain, and how far an illiquidity discount can be sustained.
Three different valuations for the same share
Before arguing about evidence it helps to separate three questions, because the law gives a different rule for each, and mixing them up is a common mistake.
| What for | Which rule applies |
|---|---|
| Valuing the income in kind on exercise or delivery | Normal market value, article 43.1 of the Spanish Income Tax Act, with no fixed formula except for start-ups under letter g) |
| Working out the gain when you sell the shares | Article 37.1.b) of the Spanish Income Tax Act: transfer value, with a floor if market value is not proved |
| Declaring them in the Wealth Tax at 31 December | Article 16 of Act 19/1991: book value per share from the last approved balance sheet, subject to conditions |
These are three figures that may not match, and not matching is not inconsistency: the law simply requires different things. What is a problem is declaring one value for Wealth Tax and defending a very different one in an income tax review without being able to explain the gap.
The 409A report: what it is, and what it is not, here
A 409A is a valuation that the US company commissions from a third party to set the exercise price of its options in line with US rules. It is usually updated every twelve months or when something significant happens, and it has one feature worth understanding: it is built to justify an exercise price, not to estimate what an investor would pay. That is why the 409A value of the common share usually sits below the price of the last preferred round.
In Spain no rule gives it the force of an official valuation. It is one more piece of evidence, weighed freely. Our position is that, when it is contemporaneous with the milestone, has been prepared by an independent third party and explains its methodology, it is the best evidence available of the value of the common share. And we also say the opposite: it does not bind the tax authorities, and there have been reviews in which the price of a funding round close in time was used instead of the 409A. That risk is real, and it has to be flagged before the decision is taken, not afterwards.
The ranking of evidence
From most to least persuasive, the way we use it when preparing a file:
- A real transaction in the same share class, close to the date. A sale between independent parties, or a liquidity offer open to employees (a tender offer), is the hardest thing to rebut.
- A funding round closed with an independent investor. It sets the price of the preferred class, not the common one, but it is a powerful anchor and the tax authorities use it.
- A contemporaneous 409A report, with its methodology set out, signed by a third party and dated before the milestone.
- An internal valuation or a cap table with the company's own calculation. It serves as support, not as the main evidence.
- Nominal value or exercise price. This is not a valuation: it is a term of the contract.
Excellent evidence that is six months late loses almost everything against modest evidence that is contemporaneous. If you are going to exercise, ask for the current 409A before you exercise and keep the email it was sent with. Reconstructing it two years later, when the information request arrives, is far more expensive and a good deal less convincing.
From preferred to common
This is the step that causes the most argument. The round sets a price per preferred share, carrying a liquidation preference, anti-dilution protection and sometimes a preferred dividend. The share the employee receives is common and has none of that. Claiming they are worth the same is economically false, but a discount has to be supported with a method, not an impression: which economic rights separate one class from the other, how the price is shared out in a sale scenario, and how much weight each scenario carries. A report that explains that allocation can be defended. A round percentage with no explanation cannot.
The discount for illiquidity and restrictions
A share that cannot be sold is worth less than an identical one that can. In Spain the argument rests on the very concept of normal market value: if there is no market for that security, the value has to reflect that fact. What has to be documented is the specific restriction, not a general sense of illiquidity.
| Restriction | Where it is evidenced |
|---|---|
| Ban on transfer without consent | Articles of association and shareholders' agreement |
| Pre-emption right of the company or of the shareholders | Articles of association |
| Lock-up after a possible stock market listing | Plan and subscription agreement |
| Right to buy back at an agreed price if the employee leaves | Award Agreement |
A necessary warning: the illiquidity discount is disputed ground. No rule recognises it with a set percentage, and whether it is accepted depends on the quality of the report and on the approach of the body carrying out the review. It is raised, it is documented, and you accept that it may not succeed. Anyone promising you a safe percentage is selling you something that does not exist.
When the tax authorities put forward a different figure
If a review argues for a market value higher than the one declared, the effect is immediate: more employment income in the general base, with late-payment interest and, depending on the case, a proposed penalty. The defence consists of showing that the declared figure was the normal market value on that date, and for that three things have to be in order: the contemporaneous evidence, the explanation of why that evidence was chosen and not another, and consistency with what was declared in the other taxes for the same year.
The third point is the one that complicates the most files. Declaring a low book value for Wealth Tax and defending a high market value for income tax, or the other way round, forces you to explain the difference. There is an explanation (they are different legal rules, as the table at the start shows), but it has to be given, and it is given better if it was thought through in advance. How to answer a proposal of this kind is covered in answering Hacienda, the Spanish tax authority.
The fixed rule for start-ups
There is one written exception. Article 43.1.1.º g) of the Spanish Income Tax Act, introduced by Act 28/2022 on start-ups (empresas emergentes), says that when shares or participations are delivered to employees of a start-up, the value is that of the shares subscribed by an independent third party in the last capital increase carried out in the year before the year of delivery and, if there was no such increase, the market value at the time of delivery.
It is a convenient rule, because it replaces the argument with a data point. But it only applies if the company qualifies as a start-up under the terms of that Act, which in practice leaves out most of the US parent companies that reach this firm. Checking that status before invoking the rule is part of the job.
The article 37.1.b) floor when you sell
When you later sell unlisted shares, the law sets a floor on the transfer value unless you prove that the amount received is what independent parties would have agreed. That floor is the higher of two figures: the net equity attributable to the shares according to the balance sheet of the last financial year closed before the sale, and the figure obtained by capitalising at 20 % the average profit of the three financial years closed before the sale.
It has a counter-intuitive effect worth anticipating. In a company with accumulated losses and low net equity, the floor is low and gets in nobody's way. In a profitable company that pays no dividends, capitalising profits at 20 % can produce a high figure and turn a sale at an agreed price into a larger gain than expected. That is why a sale of unlisted shares is prepared before signing, not after.
How a valuation is argued in a report
This anonymised sample shows how the value of an unlisted share is supported in writing: which evidence is used, why the rest is set aside, and with what reservations the conclusion is delivered. Twelve pages from a real case handled by this firm, written in Spanish.
What to keep, starting today
The folder we ask for in these cases, which serves both for income tax and for the Modelo 720 and Wealth Tax, is short: the plan and the grant agreement; every 409A you have been given, with its date; the announcement of each funding round; the cap table or a certificate of your holding at 31 December of each year; the confirmation of each exercise or delivery with its exchange rate; and any liquidity offer that has been passed on to you. Whatever is not in that folder simply does not exist when a review comes.
If your case is at this point, tell us about it through the form for this service and we will tell you which evidence you are missing before the milestone happens.