Changes in the taxation of income from employee shares, interests, and options

After incorporating amendments proposed by the Senate, the Chamber of Deputies of the Parliament of the Czech Republic approved an amendment to the Income Tax Act concerning the taxation of income from employee stock ownership plans (ESOPs) as part of Chamber of Deputies Document No. 926/7. The bill now awaits the President’s signature.

Changes to the deferred tax regime for employee shares

We have informed you several times in the past about the modifications to the deferred taxation regime for income from the acquisition of employee shares. This time, within the deferred taxation regime, the amendment introduces two generally positive changes, namely:

1. Abolition of the moment of change of tax residence
   Due to unclear interpretations that prevailed in practice not only in connection with the preservation of deferred taxation for Czech tax non-residents, the condition regarding tax residency was deleted from the law, which should increase legal certainty for taxpayers.
2. Extension of the maximum period for deferred taxation
   The time limit will be extended from 10 to 15 years. The aim is to accommodate startups in particular, which have long claimed in the Czech Republic that 10 years is too short a time to complete the development and sale of a company.

The new legislation is expected to come into force on 1 January 2026. The new rules will not apply to shares acquired before that date.

Introduction of an alternative tax regime for income from so-called qualified employee stock options (startup amendment)

The amendment also introduces a new alternative preferential tax regime that will coexist with the current deferred tax regime, as this new regime will apply only to a selected group of companies (especially start-ups and young innovative companies) and under strict conditions.

A groundbreaking change for the taxation of ESOP income brought about by the newly introduced tax regime is that shares acquired on the basis of exercised options will no longer be considered taxable income from employment and thus will not be subject to social security and health insurance contributions. The realised income (the difference between the market price of the share/unit at the time of exercise of the option and the pre-determined purchase/option price for the employee) will be treated as other income under Section 10 of the Income Tax Act (ITA).

The income will only be taxable in the tax year, in which the acquired share is sold, or at the latest 15 years after the exercise of the option, if the share is not sold earlier. As this is income under Section 10 of the Income Tax Act, the employee will have to settle his tax obligations himself in the personal income tax return filed.

However, income from the sale of shares acquired under the qualified employee stock option scheme will not qualify for personal income tax exemption if the time test (3 years of holding for shares and 5 years of holding for a business share) is met. This measure can be seen as a kind of “penalty” for not subjecting the income to public insurance.

The conditions set out in the amendment to the law for joining the new qualified employee stock option scheme are briefly summarized below.

Form of provision

The employee receives a gratuitous and non-transferable option from his employer to purchase interests (stock/shares) in his employer or its controlling party. The option must be in the form of a written contract.

Exercise of the option

The option must be set up so that the acquisition of shares by the employee can take place no earlier than 3 years after the option is granted (an exception is, for example, the company’s initial public offering – IPO).

Notification obligation

Both the grant and exercise of the option (or the financial settlement thereof) must be reported by the employer to the tax authority within the time limit for filing the single monthly employer report for the relevant month.

Limitation on the value of shares and minimum duration of the employee’s employment relationship

When an option is granted, the aggregate of all shares so acquired may amount to a maximum of 5% of the share capital of the employer or its controlling party. The employee must have been working for the employer for at least 12 months and the income from the employer must be at least 1.2 times the minimum monthly wage.

Access to the platform limited to selected employers

Given that this regime is targeted at start-up companies, entry to the platform is limited by the size of the employer – a maximum accounting turnover of CZK 2.5 billion and total assets not exceeding CZK 2 billion. Furthermore, certain sectors of the economy are excluded from this regime, e.g. banking institutions, insurance companies, auditing companies, tax consultancy companies, law firms, etc.

This amendment will bring very positive changes to practice, especially for Czech startup companies, which will have significant new opportunities to attract new talent to their business and motivate existing ones to perform better.

We are constantly monitoring the legislative process for you and will keep you informed of further developments.

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