Proposed changes in taxation of employee stock option plans
If you intend to provide employees with a benefit in form of an employee option or a share in a business corporation (most often by transferring shares as part of employee stock option plans), you will be interested in the currently discussed government bill amending certain laws in connection with the development of the financial market and the promotion of old-age security. The amendment should come into effect on 1 January 2024.
The amending proposal submitted in the second reading in the chamber of deputies regulates the taxation of employee stock option plans in the Income Tax Act. It will apply to the acquisition of options and shares in a business corporation that is the employee's employer, as well as the acquisition of options/shares in a business corporation from this employer’s parent company, subsidiary, or a corporation related to the employer through capital.
The amendment explicitly defines the point in time when this non-monetary benefit is to be taxed on the part of the employee. The taxable moment, absent in existing legislation, has been completely redefined for most situations. Possible taxable moments are:
- the employee ceases to perform dependent activity with the employer
- the employee or employer ceases to be a Czech tax resident
- transfer of shares or options
- exercise of an option
- expiration of 10 years from the date a share in a business corporation or an option was acquired.
- Transferable or non-transferable options
The proposed wording of the amendment does not specify whether it applies to freely transferable or non-transferable options. According to the Supreme Administrative Court’s established case law, the allocation of a non-transferable option does not currently establish a taxable moment on the part of the employee. According to the unofficial statement of the Ministry of Finance, the proposed regulation is aimed mainly at the taxation of transferable options and not non-transferable ones. However, time will tell whether this interpretation will actually be applied, mainly considering that this conclusion is not clearly evident from the proposed wording of the law. When calculating taxable income, it should now be possible to consider any impairment of shares or options that may occur over time.
Obligations of employees and employers
Employees will be obliged to inform their employer about the transfer of shares or options by the end of the calendar month in which the transfer took place. However, this is the only notification obligation that the amendment introduces for employees. How an employer will determine other facts relevant to taxation on the part of the employee (such as a change in tax residency) therefore remains a great unknown. Since the determination of an employee's tax residency is time-consuming and the necessary facts can be determined with certainty only after the end of the relevant taxable period (and the other state may have a different taxable period from the Czech Republic), it can be expected that the employer will often be in default with the relevant tax and insurance payments and will thus be subject to possible sanctions.
If shares or options are acquired from another company in the group that is not considered a taxpayer and the related expenses are not borne by the employer, the employee will be obliged to report this income in their tax return for the taxable period in which one of the taxable moments occurs.
We will continue to monitor the draft amendment and keep you informed of further developments.