Taxation of employee stock option plans again and differently

The major change is the introduction of an entirely new system for taxing income from the exercise of qualified employee options granted by a qualified employer to a qualified employee.

 

According to the amendment, income from the exercise of qualified employee options generated by a qualified employee should not be taxed as income from employment (dependent activity) but should be treated as other income under the Income Tax Act. This means that this income will not be subject to social security and health insurance contributions. The amendment thus aims to support small innovative companies and start-ups.

 

Income from the exercise of a qualified option should be determined as the difference between the market value of the acquired share or the financial settlement of the option at the time of exercise on the one hand, and the higher of the market price of the share at the time of granting the option or the agreed option price on the other hand.

 

In the case of the acquisition of a share in a corporation, the income will be subject to personal income tax in the taxable period in which the share is sold; no later, however, than in the taxable period in which the 15 years from the exercise of the option expire.

 

Since only the difference between the market price of the share at the time of exercising the option (or at the date of its financial settlement) and the market price of the share at the time of granting the option (or the agreed option price, if higher) will be taxable as other income, any positive difference between the total income generated and the income taxable as other income will continue to be taxable as income from employment (dependent activity) and thus subject to insurance contributions on the part of both the employee and the employer.

 

A qualified employee option is understood to be a written, gratuitous, non-transferable commitment to acquire a share in a corporation made by a qualified employer to a qualified employee. The employer must report this commitment to the tax administrator. The employee may acquire the share under such a commitment at the earliest after three years from the date it was made, unless specified changes in the employer's or controlling entity's share capital occur earlier or unless the employer or the controlling entity enters the public stock market. At the same time, the employer must disclose to the employee the market price of the share in the corporation at the time of granting the option and at the time of exercising it.

 

The amendment also states that a qualified option may be settled not only by exercising it to acquire a share in a corporation as such but also by obtaining a financial settlement.

 

A qualified employee is deemed to be an employee who meets all conditions set out below:

 

A qualified employer is defined by their annual turnover (not exceeding CZK 2.5 billion) and total assets (not exceeding CZK 2 billion). The same values apply to corporate groups and consolidated financial statements. Neither the employer nor any other member of the corporate group may belong to a defined group of entities such as banks, insurance companies, or audit firms.

 

Some minor changes to the current legislation include a change in the moment of taxation where an employer has notified the tax administrator that the taxation of income from stock and option plans will be postponed to a future date: the moment when an employee or employer ceases to be a Czech tax resident is to be omitted from the list of possible taxable moments due to the difficulty of tracking this fact. It is also proposed that the maximum period after which income is to be taxed be extended to 15 years from the date of acquisition of the share in a corporation or the option.