Income from stock option plans: discrepancy between time of taxation and time of premium payment
The act amending certain laws in connection with the development of the financial market and the promotion of old-age security entered into effect on 1 January 2024. One of the amended laws was the Income Tax Act, which now regulates the taxable moment for income from employee share and option plans. Unfortunately, the laws governing social security and health insurance premiums have not been adapted accordingly.
The amendment to the Income Tax Act explicitly defines the point of time when this non-financial income is to be taxed on the employee’s part. (We informed you about the changes in the November issue of Tax and Legal Update). While the taxable moment has mostly been shifted to the future (postponed), the change has not been reflected in Czech insurance laws, and the payments of social security and health insurance premium remain regulated in the old way (i.e., e.g., when shares are allocated to an employee). The point of time of taxation thus differs from the point of time of premium payment.
The new rules apply to income flowing to employees from the acquisition of an interest/share or a transferable option in a business corporation that is their employer or its parent, subsidiary or affiliated corporation. Starting from 1 January 2024, such income will be taxed at the time when:
- the employee ceases to carry out employment for the employer, its parent, subsidiary or capital-related person or its legal successor
- the employer enters into liquidation
- the employee or employer ceases to be a Czech tax resident
- the share or option is transferred
- the option is exercised
- a share exchange occurs in which the total nominal value of the employee’s shares changes; no later than 10 years after the acquisition of the share or option.
According to information from the Ministry of Finance, the term ‘employer’ includes not only legal but also beneficial employers within the meaning of the Income Tax Act. Thus, for foreign employees posted to work in the Czech Republic for a Czech beneficial employer, the point of time of taxation of income from employee stock/option plans may occur, e.g., upon the termination of their posting.
Unfortunately, the legal regulation postponing the point of time of taxation of income from employee share and option plans has not been analogously reflected in laws governing the payments of social security and health insurance premium in the Czech Republic. Thus, if social security and health insurance premiums on income
from stock/option plans are to be paid to the Czech Republic, the different definition in the insurance laws and in the Income Tax Act results in a discrepancy between the time of taxation and the time when the duty to pay the premiums arises.
As from a legal point of view, a benefit is provided when the interest/share is transferred to the employee or when a non-transferable option is exercised, the condition under the insurance laws of the taxable income from employment being ‘accounted for’ to the employee is fulfilled at that time, and the social security and health insurance premiums due in the Czech Republic should be paid that month. No account is taken of the fact that under the amendment to the Income Tax Act the point of time of taxation of the income from employment may not have yet occurred (and will only occur sometime in the future).
The Ministry of Finance confirmed this conclusion on its website. At the same time, they informed that the changes to postpone the payment of insurance premiums until the taxable moment have already been initiated by the Ministry of Labour and Social Affairs together with the Ministry of Health. They should thus be adopted within the next amendment to the insurance laws.