As of 1 January 2024, Act No. 586/1992 Coll. on Income Taxes ("ITA") sets new conditions for the taxation of employee shares and transferable options ("Employee Shares"). The amendment will thus apply to employers who, for example, offer employees to acquire Employee Shares without additional payment or at a reduced price compared to the market price as part of their incentive schemes. The employee will then receive non-cash income from the employer.
The fundamental change brought by this amendment is the modification (postponement) of the moment when the income from the acquisition of Employee Shares by an employee is to be subject to taxation. Under the legislation in force until 31 December 2023, the moment of taxation of the Employee Share was determined by the moment of acquisition of the Employee Share itself. In contrast, the amendment does not change the tax treatment of a subsequent sale of Employee Stock by an employee, dividends received or the acquisition of a non-transferable option from an employer.
The amendment is also intended to address situations where, especially for smaller companies and start-ups, there is a risk that the company will not be successful and the value of the Employee Share will decrease in the future or the start-up will disappear. Under the old regime, the employee was taxed on the value of the Employee Share, the future value of which could be significantly lower. The amendment is intended to prevent these situations. If the value of the Employee Shares in the company decreases and is lower at the time of taxation than it was when the Employee acquired the Employee Shares, such decrease will be taken into account in the Employee's taxation by calculating the tax on the lower amount.
Changing the time of taxation
For an Employee who has acquired Employee Shares from an Employer or Group Company, the time of taxation is the first of the following:
A bill is currently being discussed which should ensure consistency between tax and insurance regulations and postpone the moment of "taxation" for the purposes of social security and health insurance, retroactively from 1 January 2024.
When the Taxable Moment occurs, the employer withholds tax and insurance contributions from the employee as part of the monthly payroll processing. If the employee decides that he or she wants to transfer (e.g. sell) the Employee Share, the employee has a new notification obligation to the employer to notify the employer when the Employee Share is transferred (otherwise, the employer may not have known about it and would not have known that the Employee's Taxable Moment has occurred).
This amendment applies not only to an Employee's acquisition of Employee Shares from his or her legal employer, but also to the acquisition of Employee Shares by a parent, subsidiary or otherwise capital linked company of that employer (a "Group Company").
Please note that Employee Shares acquired from a Group Company may have a different tax treatment where the tax liability on the acquired Employee Shares passes to the employee. He or she must then subject such income to taxation through a tax return (i.e. the employer does not withhold tax and levies during monthly payroll processing). In the case of an acquisition of Employee Shares from a Group Company, we recommend consulting a tax adviser for a proper assessment of taxation.
The new regime applies to income received from 1 January 2024 and also applies to employee plans started before that date. Thus, an employee plan that commenced in 2023 (a "grant") and Employee Shares acquired (the "vest date") in 2024 will be subject to the new regime.
Illustrative example
The Employee will acquire Employee Stock worth 300 without additional payment. The Employer will retain the value of 300 for tax purposes. The Employee sells the share after 2 years (i.e., the Employee Share is transferred and no other Taxable Time has previously occurred). For purposes of the illustrative example, we abstract from the possibility of an exempt sale of the Employee Share.
Situation 1
Employee sells Employee Stock after 2 years at a market value of 400.
In such a situation, the Employer will subject the Employee's income to tax at 300, which is the original value of the Employee Stock when acquired by the Employee.
Situation 2
After 2 years, an employee sells a share at a market value of 200.
The Employer shall take into account the decrease in the value of the Employee Stock. For these purposes, the Employer will make a taxable income adjustment of [300 - (300-200)] and the Employee's taxable income will be 200. As a result, the taxable income has been reduced by an amount of 100 as the value of the Employee Share has been reduced by this amount since the Employee acquired the Employee Share.
Situation 3
After 2 years, an employee sells a share at a market value of 200. At the same time, before selling the Employee Share, the Employee received a profit share (dividend)1) after tax2) of 20.
The Employer shall take into account the decrease in the value of the Employee Stock. At the same time, however, the Employer must take into account the profit-sharing received which has defacto reduced the value of the Employee Share. Therefore, in the calculation, the Employer shall increase the value of the Employee Share at the Tax Time by the after-tax profit share received, i.e., [200+20]. If no profit share had been paid, the value of the Employee Share would (in simplified terms) be 220.
The employer makes the following adjustment [300 - (300-(200+20))] and the employee's taxable income is 220. As a result, the taxable income has been reduced by 80.
1) In addition to the profit share, income from the settlement share, the return of the share premium, the return of the non-share premium and benefits similar to these benefits paid on the basis of the share premium are taken into account in this way.
2) The above income is always reduced by the tax on that income, i.e., for the purposes of the calculation it is taken into account on a net basis.
The fundamental change brought by this amendment is the modification (postponement) of the moment when the income from the acquisition of Employee Shares by an employee is to be subject to taxation. Under the legislation in force until 31 December 2023, the moment of taxation of the Employee Share was determined by the moment of acquisition of the Employee Share itself. In contrast, the amendment does not change the tax treatment of a subsequent sale of Employee Stock by an employee, dividends received or the acquisition of a non-transferable option from an employer.
Reasons for the new regulation
According to information from the Ministry of Finance, the aim of the amendment to the ITA is mainly to help smaller companies and start-ups, or to postpone the moment of taxation for employees so that they have sufficient funds to pay taxes and insurance contributions in the future. Thus, employees will not be required to tax the acquired Employee Share immediately, but taxation will be deferred to a future point in time when the employee may already have the means to pay the tax and insurance contributions (e.g. by future sale of the Employee Share).The amendment is also intended to address situations where, especially for smaller companies and start-ups, there is a risk that the company will not be successful and the value of the Employee Share will decrease in the future or the start-up will disappear. Under the old regime, the employee was taxed on the value of the Employee Share, the future value of which could be significantly lower. The amendment is intended to prevent these situations. If the value of the Employee Shares in the company decreases and is lower at the time of taxation than it was when the Employee acquired the Employee Shares, such decrease will be taken into account in the Employee's taxation by calculating the tax on the lower amount.
Changing the time of taxation
For an Employee who has acquired Employee Shares from an Employer or Group Company, the time of taxation is the first of the following:
- the point at which the employee ceases to perform work for the employer,
- the moment that employer enters liquidation,
- the moment at which the employer or employee ceases to be tax resident in the Czech Republic,
- the time of transfer or transfer of that share or that transferable option,
- the moment of exercise of the transferable option,
- the point at which the total nominal value of the employee's shares changes,
- the expiry of 10 years from the date of acquisition of the share or transferable option
A bill is currently being discussed which should ensure consistency between tax and insurance regulations and postpone the moment of "taxation" for the purposes of social security and health insurance, retroactively from 1 January 2024.
When the Taxable Moment occurs, the employer withholds tax and insurance contributions from the employee as part of the monthly payroll processing. If the employee decides that he or she wants to transfer (e.g. sell) the Employee Share, the employee has a new notification obligation to the employer to notify the employer when the Employee Share is transferred (otherwise, the employer may not have known about it and would not have known that the Employee's Taxable Moment has occurred).
This amendment applies not only to an Employee's acquisition of Employee Shares from his or her legal employer, but also to the acquisition of Employee Shares by a parent, subsidiary or otherwise capital linked company of that employer (a "Group Company").
Please note that Employee Shares acquired from a Group Company may have a different tax treatment where the tax liability on the acquired Employee Shares passes to the employee. He or she must then subject such income to taxation through a tax return (i.e. the employer does not withhold tax and levies during monthly payroll processing). In the case of an acquisition of Employee Shares from a Group Company, we recommend consulting a tax adviser for a proper assessment of taxation.
The new regime applies to income received from 1 January 2024 and also applies to employee plans started before that date. Thus, an employee plan that commenced in 2023 (a "grant") and Employee Shares acquired (the "vest date") in 2024 will be subject to the new regime.
Accounting for uncertainty in company performance
As we have already mentioned in the introduction, the amendment also regulates situations where the value of the Employee Share decreases from the time of acquisition (e.g. value 300) to the Time of Taxation (e.g. value 200). If the value of the Employee Share is reduced by the Time of Taxation, the Employee's taxable value will be adjusted. In this situation, the amendment also takes into account, for example, the receipt of a dividend during the period between the acquisition of the Employee Share and the Taxable Time, which in practice has the effect of reducing the value of the Employee Share. This situation is illustrated below in illustrative examples in Situations 2 and 3.Illustrative example
The Employee will acquire Employee Stock worth 300 without additional payment. The Employer will retain the value of 300 for tax purposes. The Employee sells the share after 2 years (i.e., the Employee Share is transferred and no other Taxable Time has previously occurred). For purposes of the illustrative example, we abstract from the possibility of an exempt sale of the Employee Share.
Situation 1
Employee sells Employee Stock after 2 years at a market value of 400.
In such a situation, the Employer will subject the Employee's income to tax at 300, which is the original value of the Employee Stock when acquired by the Employee.
Situation 2
After 2 years, an employee sells a share at a market value of 200.
The Employer shall take into account the decrease in the value of the Employee Stock. For these purposes, the Employer will make a taxable income adjustment of [300 - (300-200)] and the Employee's taxable income will be 200. As a result, the taxable income has been reduced by an amount of 100 as the value of the Employee Share has been reduced by this amount since the Employee acquired the Employee Share.
Situation 3
After 2 years, an employee sells a share at a market value of 200. At the same time, before selling the Employee Share, the Employee received a profit share (dividend)1) after tax2) of 20.
The Employer shall take into account the decrease in the value of the Employee Stock. At the same time, however, the Employer must take into account the profit-sharing received which has defacto reduced the value of the Employee Share. Therefore, in the calculation, the Employer shall increase the value of the Employee Share at the Tax Time by the after-tax profit share received, i.e., [200+20]. If no profit share had been paid, the value of the Employee Share would (in simplified terms) be 220.
The employer makes the following adjustment [300 - (300-(200+20))] and the employee's taxable income is 220. As a result, the taxable income has been reduced by 80.
1) In addition to the profit share, income from the settlement share, the return of the share premium, the return of the non-share premium and benefits similar to these benefits paid on the basis of the share premium are taken into account in this way.
2) The above income is always reduced by the tax on that income, i.e., for the purposes of the calculation it is taken into account on a net basis.