Change in the Taxation of Employee Stock and Option Plans

The amendment applies to the acquisition of options and shares in a business corporation that is the employee's employer, as well as the acquisition of options and shares from the parent company of the employer, subsidiary, or a company financially (capital-wise) connected to the employer.

While previously income was taxed at the moment of acquiring the share or execution of the option, the amendment now explicitly defines the moments when taxation of this form of non-monetary benefit on the employee's side should occur, whilst the moment which comes first is decisive. These defined moments are as follows:

• the employee ceases to perform dependent activity for the employer,
• the employer enters into liquidation,
• the employee or the employer becomes a Czech tax non-resident,
• the employee transfers (sells) shares or options,
• the employee exercises an option (according to interpretation, only a transferable option),
• 10 years have passed since the day the employee acquired a share or (transferable) option in the business corporation.

The Ministry of Finance confirmed that the provision deferring taxation to the moment of exercising the option applies exclusively to transferable options.

New Responsibilities for Employees and Employers

Employees will have an information obligation towards the employer at the moment they transfer/sell shares. Here it is necessary to mention that the timing of taxation of the income from the sale of shares or received dividends remains unchanged. Employers will now have to, among other things, monitor and assess whether and when any of the above-mentioned moments has occurred. Such a moment can e.g. arise as soon as the assignment of a foreign employee in the Czech Republic is over and the employee might no longer be considered a Czech tax resident, leading to the taxation of the relevant non-monetary benefit for the employee.

The Discrepancy between the Taxation Moment and the Moment of Insurance Contributions Payment

Another problematic area of the amendment is that, unfortunately, the amendment of the moment of taxation of income from employee share and option plans did not lead to an analogous adjustment in social security and health insurance laws, resulting in potential discrepancy between the time of taxation and the time of the obligation to pay insurance contributions. The fact that the timing of the tax advance payment and insurance contributions payment, which were previously paid at the same time, will not temporally coincide represents another significant administrative burden for employers.

The Ministry of Finance has announced that work is underway to remedy this, and based on our information, a draft amendment to the laws on social security and health insurance has already been submitted to the external consultation process. This proposal is unifying the timing of payment of the social security and health insurance contributions from income in the form of employee options and shares with the moment of the income tax payment. The proposed amendment is expected to take effect on 1 July 2024.

We will keep you informed about further processing, which we will carefully monitor. In case of any questions, do not hesitate to contact our experts.

Authors:

Gabriela Ivanco, Tax Manager

Anna Klímová, Tax Senior