Employee Share Plans Taxation – Optional Tax Regime on the Horizon

This year has brought significant changes in the taxation of employee share and option plans (hereinafter "ESOP"). The new rules effective from January 2024 (more in our article HERE) have caused numerous complications in practice. However, better times are ahead - on 24 October 2024, a parliamentary amendment was introduced as part of the amendment to the Act on the Provision of Childcare Services in Children's Groups, which aims to significantly simplify the situation.

Current situation and its challenges

The amendment effective from January 1, 2024, introduced mandatory deferral of ESOP income taxation until the first of several legally defined moments. In practice, this unified approach has proven not optimal for all employers. Companies are struggling with the demanding monitoring of various decisive moments for taxation, and especially international companies face difficulties in managing their global programs. The situation was further complicated by the initial mismatch between the moment of taxation and social security and health insurance contributions payment, which was not resolved until mid-year.

Proposed changes

The new proposal from the Ministry of Finance brings fundamental simplification in the form of optional taxation methods. Employers will no longer have to mandatorily use the deferred taxation system but will be able to choose the option that better suits their needs.

To utilize the deferred regime, it will be necessary to inform the tax authority within 20 days following the month in which the employee acquired the shares. If this is not done, the original taxation regime known from the period before 2024 will automatically apply (i. e. the taxation moment occurs in the month of acquisition of shares or transferable options or exercise of non-transferable options, or within the taxable period in which the acquisition or exercise of shares or options occurred if the taxation is done via tax return). The chosen approach will apply to both income tax and social security and health insurance contributions.

Solution for 2024 according to transitional provisions

According to the proposed transitional provisions, employers who have been or will be following the new deferred taxation rules in 2024 can keep this regime for the transaction concerned. The condition is to notify the tax authority about this intention within two months from the effective date of the amendment. Without this notification, there will be an obligation to additionally pay tax advances for the period from January 2024. The good news is that if the procedure under the new regulation is followed, these late payments should not be subject to penalties. If also the payment of the social security and health insurance contributions was delayed, it will be possible to keep this regime, too, under the condition that the above mentioned notification is filed with the tax authority in time. If the notification is not filed, the relevant income is considered to be accounted for by the employer in the second month after the effectiveness of the amendment and it will be necessary to withhold and pay the social security and health insurance contributions from it in the relevant legal deadline.

The proposed amendment represents a welcome return of flexibility to the area of employee share and option plans. For employers, this means not only the possibility to choose an administratively more convenient taxation option and, in the case of international companies, easier coordination of global ESOP programs, but also an opportunity to regularize the situation for 2024 without risk of penalties.

The legislative change is to take effect on the first day of the calendar month following the promulgation of the law, and therefore, companies providing such benefits to their employees should be prepared to take the necessary steps as soon as possible.

If you have any questions, please do not hesitate to contact our experts.

Authors:

Gabriela Ivanco, Tax Department Manager

Anna Klímová, Newsletter Editor

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