Employee stock option plans to revert to old rules of taxation of income from dependent activity
After almost a year of uncertainty over the taxation of income from employee stock option plans, a proposal to amend the Income Tax Act was submitted by deputies during the discussion of an amendment to the Act of Child Care Services in Children’s Groups (Print No. 716) to allow employers to revert to how they taxed this type of income before the end of 2023.
Since January 2024, the administration of employee stock option plans has become significantly more complicated for employers due to a change in the point of time of the taxation of income from dependent activity arising from the acquisition of a share or an option in an employer, their parent company or subsidiary, or an entity related to the employer through capital. In most cases, the point of time when this income is taxed has been shifted to the future. Insurance premiums only began to reflect this from 1 July 2024, since the original draft amendment failed to take into account the shift in the point of time of taxation.
Changes in the point of time of taxation have caused problems with the tracking of the actual taxable moment of such income (i.e. when to tax the income within payroll processing or in which year to include it in the tax return) and have also raised the issue of avoiding double taxation of income abroad, among others.
If the amending proposal is adopted, employers will be able to choose whether to apply postponed taxation.
According to the proposal, the procedure for postponing taxation would only apply if the employer notified the tax administrator by the 20th day of the month following the month in which the employee acquired the share or option that they wished to postpone the point of time of taxation.
Otherwise, the employee's income would be taxed in the same way as it was until the end of 2023: i.e., in the month the share or transferable option is acquired or the non-transferable option exercised if the income is required to be taxed within the monthly payroll. However, if the employee only taxes this income as part of their income tax return, then the obligation would apply to the taxable period in which the acquisition or exercise of the shares or options in question occurred.
The payment of relevant insurance premiums, if any, should be made at the same moment as taxation.
The draft amendment not only seeks to correct the taxation procedure for the future but also to regulate that of 2024, via transitional provisions. For this year, the procedure of postponing the point of time of taxation would apply only if the employer notifies the tax administrator of such intention within two months from the amendment's effective date.
If the employer does not notify the tax authorities of their intention to postpone, the employer will be required to additionally pay income tax prepayments and insurance premiums for the individual months of 2024 when the employee generated income from dependent activity arising from the acquisition of shares under the employee stock option plan if the taxation is to be done in payroll in accordance with the law.
The transitional provisions also provide that the late payment of income tax prepayments and any insurance premiums for individual months of 2024 will not be penalised.