Tax treatment of income from employee stock and option plans - amendment to the Act and information from the GFD

In recent months, there have been significant changes in the timing of the realisation of income arising from the acquisition of options or shares on preferential terms in connection with the exercise of dependent activities. On 1 April 2025, the long-awaited amendment to the Income Tax and Insurance Regulations Act came into force to address the unpopular changes of 2024. We bring you a summary of the developments in the tax regime together with the expected approach of the authorities according to the information issued by the GFD in this context.

Generally, if an employee acquires a share on preferential terms under employee stock or stock option plans, taxable employment income arises to the extent of the difference between the market price and the employee's consideration for the acquired share. In the case of an acquisition of a share without consideration from the employee (free of charge), the employee's income is the full market value of the share. Such income is then either taxable in wages together with the obligation to pay the related insurance contributions (social security and health insurance) or, if specific conditions are met, such income is taxable in the tax return without the obligation to pay the insurance contributions.

 

Adjustment valid until the end of 2023 - taxation immediately

Until the end of 2023, the employee income described above was taxable immediately. I.e., under payroll, the employee's income was taxable and subject to insurance in the month in which, for example, the

1. the exercise of a non-transferable share option (so-called exercise)
2. to acquire a transferable option, or
3. to acquire a share.

If the obligation to tax the income through wages did not arise, the employee was obliged to subject the income to taxation in the tax return for the tax year in which any of the above occurred.

Example: an employee acquired a share on preferential terms in September 2023. The employer taxed the related non-cash income in the September 2023 payroll and paid the related insurance premiums. The tax and premium obligations have thus been properly met.

 

Adjustment from January 2024 to March 2025 - deferred taxation

Until the end of March 2025, a regulation was in force which obligatorily postponed the moment of taxation into the future, for example until the moment of termination of employment, sale of the share or 10 years after the acquisition of the share. At the same time, it was possible, in certain circumstances, to adjust the amount of taxable income if the value of the share decreased over time (e.g. between the time of acquisition of the share and its sale). This change was intended to relieve employees from being taxed on non-cash income at a time when they had not yet received any cash benefit. The adjustment also applied to employee stock and option plans already in operation.

At the same time, from January 2024 to June 2024, if an obligation to pay a premium arose in this context, its payment was not deferred, unlike at the time of taxation. This discrepancy in the payment of tax and insurance premiums was corrected by an amendment effective 1 July 2024.

Example: an employee acquired a share on preferential terms in March 2024. The employee sold the shares in December 2024. Thus, the employer should have subjected the related income to payroll taxes for March 2024 and payroll taxes for December 2024.

Example: an employee acquired a share on preferential terms in September 2024. The employee sold the shares in December 2024. The employer should have taxed the related non-cash income in wages and paid the premium for December 2024.

 

New arrangements from April 2025 - optional retrospective deferral of taxation

However, practice has shown that the adjustment from 2024 was unpopular due to the complexity of the related administration, especially for larger employers, or due to complications in applying double taxation. Thus, the legislators met the public's demands and promised to return to the situation where taxation occurs immediately after the acquisition of the shareholding (the regime until the end of 2023). The deferral of taxation thus became optional, retroactive to the beginning of 2024. Unfortunately, the amendment did not manage to be approved by the end of 2024, which brought practical problems.

If the employee acquired the share between January 2024 and March 2025, the employer must make a decision by 2 June 2025 whether or not to defer taxation:

• If the employer wishes to apply deferred taxation, it must give notice by 2 June 2025. The income is then taxable at the time of, for example, termination of employment, sale of shares or 10 years after the acquisition of the shares. A possible adjustment of the taxable income when the value of the share decreases is also an option.
• If the employer chooses not to use the deferral, it will not make the notification. In that case, the income will be treated as earned for payroll purposes in May 2025 or as realized in the 2025 tax year for tax filing purposes.

If the employee acquires shares from April 2025 onwards, again the employer will decide when the income is subject to tax:

• Deferral of taxation and contribution may be applied if the employer notifies the employer by the 20th day of the month following the month of acquisition of the share.
• If the employer does not file a notice, the income is deemed to be realised for tax and insurance purposes at the time the share is acquired ("taxed immediately").

The employer therefore determines the time of taxation. In the case of employee share plans from a foreign company in the employer's group, the  person makes the tax treatment decision.

 

GFD information - tolerance of immediate taxation in the transitional period

On April 7, 2025, the GFD published an Information for Employers and Employees in  to Employee's Income in the Form of Acquisition of an Interest in a Business Corporation in 2024 and 2025. In it, the GFD informs that if employers or employees did not follow the regulations in effect until March 2025, and did not defer taxation, the GFD will tolerate this approach of immediate taxation. The Department of Revenue has also joined the Department of Health and so the tolerance of immediate taxation also applies to health insurance. However, the Czech Social Security Administration will require an approach strictly in accordance with the applicable legislation (see example below)

Example: an employee acquired a share on preferential terms in September 2024. The employer taxed the income in the September 2024 payroll and paid the related insurance premiums in "contravention" of the legislation in force at the time. He does not notify the election of the tax deferral scheme until 2 June 2025.
Solution: In accordance with the GFD Information, the Tax Administration will consider the employee's income as duly taxed and the health insurance company will consider the premiums as duly paid.
However, the employer will have to correct the social security contributions by May 2025.