Employee Shares and Options in Taxes and Insurance Premiums from 1 January 2024
Along with the consolidation package, a minor amendment to the Income Tax Act came into effect on 1 January 2024 that somewhat goes against the grain by introducing yet another exception, namely the deferral of the time of taxation of income under employee stock ownership plans (ESOP) and employee stock purchase plans (ESPP). However, the consolidation package did not regulate these schemes in the area of social security and health insurance.
These employee option schemes aim to motivate key employees to contribute to the company’s success by allowing them to buy, for example, shares in their company, the foreign parent company, or another group company at a preferential price. This benefit has been used mainly by large multinational companies, but it has recently become popular with start-ups, which promise their employees the opportunity to significantly participate in the future growth and increasing value of the company.
However, any large expansion of these schemes has been hindered in the Czech Republic until now by legislation, under which no exceptions were set out and non-monetary income, which arises when an employee acquires a share at a preferential price, was immediately taxed. In the case of options, taxation did not take place until the option was exercised, but in terms of value and motivation, the taxation essentially also took place at the outset.
Act No. 462/2023 Sb. can be thus considered a breakthrough as it introduced the deferral of taxation to statutory moments, such as the moment of share transfer, the moment of share or option exchange, the moment of entering into liquidation, change of residence, or the expiry of 10 years from the share or option acquisition date or the moment of exercising the option.
The last moment (exercise of the option) does not seem to have changed according to the statutory text, however, there have been whispers that the Act refers to options as transferable options and not non-transferable options and option rights, which employers in our country usually provide. Therefore, if we disregard the fact that the legislator’s intention is not expressed precisely in the Act, the taxation of most employee options will actually be deferred because the decisive moment will be the acquisition of the share or option, which is deferred up to a maximum of 10 years from the share acquisition date.
The definition of the taxable income amount remains the same, i.e. it is the difference between the market (normal) price at the time of acquisition of the share and/or (according to the Ministry of Finance) transferable option and the price at which the employee actually acquired the share and/or option. As the market price at the acquisition date and not at the time of taxation is used for the comparison, the market price may decrease in the interim from the time of acquisition to the time of taxation (e.g. the time of sale by the employee). In the event of a decrease in the share price, the non-monetary income to be taxed will be reduced by the difference in market prices plus any profit shares, settlement shares, returned share premiums, bonuses and similar benefits received by the employee in the meantime. In the event of an increase in the share price, the non-monetary income calculated from the original market price of the share at the time of its acquisition will be taxed, i.e. as it was until 31 December 2023 (only the moment of taxation will be deferred).
Unfortunately, no regulations governing social security and health insurance were linked to the amendment upon its adoption. However, this is about to be rectified because, in connection with the changes to agreements to complete a job to be effective from 1 July 2024, amendments to laws governing social security and public health insurance contributions are currently being discussed, in which the moments of taxation are also deferred for premiums in relation to income tax. However, insurance laws do not include provisions that are present in the Income Tax Act in the the event of a decrease in market prices from the time of acquisition to the time of taxation. Therefore, in the event of a decrease in the value of the shares, the tax base will differ from the assessment base for insurance contributions. According to the explanatory memorandum, such a decrease is not taken into account because “it is not income accounted for by the employer in the new amount”.
Other imperfections of this regulation include the absence of more detailed transitional provisions, i.e. it is not clear, for example, if the deferral of taxation will apply only to shares and options acquired after 1 January 2024.
Please note that this amendment does not change the principle where an employee is generally taxed twice on employee shares – first as employment income when acquiring the shares (for free or at a lower price) and then again as “other income” when selling the shares, unless it is tax-exempt income (sale after three years from the acquisition of the shares and/or five years in the case of an ownership interest).
In conclusion, we would like to note that although the change is outright positive, there will probably be other adjustments to extend reliefs if they can be pushed through in the form proposed, for example, by start-ups.
If you have an option scheme in place or are about to implement one, please do not hesitate to contact us.
