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| November 21, 2023

Changes to the taxation of income from employee share plans

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In addition to modifying the support for old-age security, the Chamber of Deputies of the Parliament of the Czech Republic approved the amendment proposal No 474, which concerns the postponement of the moment of taxation in the case of the provision of a non-monetary benefit resulting from participation in employee stock or option plans. This change will apply to the following cases:

  • An employee acquires an interest in the employer’s business corporation or
  • An employee acquires an interest in a business corporation that is a parent, subsidiary, or equity affiliate of the employer; or
  • The employee acquires an option to acquire such interest or shares.

Non-cash income, which accrues to an employee in the form of receiving shares or interest from his employer at a price lower than the normal price, is taxable under current legislation at the time of acquisition of the shares or interest. The new regulation introduces several key moments, to which the generation of taxable income will relate, which occur after the acquisition of the share or interest, even within a few years of the acquisition.

Under the proposed legislation, which, if approved, will be effective from 1 January 2024, the time of taxation of income arising from participation in employee share plans will be postponed until one of the following moments:

  • An employee ceases to perform an activity for his employer
  • The employer of that employee enters into liquidation
  • Employee or employer ceases to be tax resident in the Czech Republic
  • Time of transfer or passing of the share/option
  • Time of option exercise
  • The time of exchange of the share, in which the total nominal value of the employee’s share changes
  • The moment of expiry of 10 years from the date of acquisition of the share or option.

Therefore, at the time of the sale (transfer) of the share, the taxpayer will not only be required to follow the value and time test for the potential exemption of income from the sale of the security, but will also be required to notify the employer that the sale has occurred (and no later than the end of the month, in which the sale took place). Due to the postponement of the time of taxation, the employer will now be obliged to settle in the payroll records the employment income tax related to the employee’s acquisition of shares in the past. Depending on the terms of the particular employee stock plan, the employer may also have obligations with respect to public social security and health insurance premiums.

In the event that the value of the acquired share decreases between the time of acquisition of the employee’s share and the time of the sale, this difference in value may be taken into account when calculating the taxpayer’s taxable income; however, in such a case, other benefits (e.g. dividends) paid to the employee on the basis of holding the share will also need to be settled.

With a critical eye, it should be noted that the moment of exercise of the option is already a taxable moment, regardless of the statutory amendment. In this case, therefore, there is no shift in the time of taxation, which in our opinion was not the meaning and purpose of the presented statutory amendment. However, according to unofficial statements of the Ministry of Finance, the amendment targets only the so-called transferable options, not employee options, which are in principle related to non-transferable securities. In other words, the deferral of the time of taxation should also apply to the exercise of the employee option, although the language of the proposed amendment does not lead to this conclusion. If it were not so, income from the exercise of an employee option would generally be subject to taxation at the time the option is exercised, i.e. when the employee does not have sufficient funds to pay the advance tax or public insurance premium. The amendment would thus not bring any change to the taxation of exercised employee options (the so-called exercise moment), as the moment of exercise of the option is already a taxable moment.

Another problematic aspect is the taxation of non-cash income from share plans implemented by a Czech tax non-resident. The proposed amendment does not make it clear if, in addition to Czech tax residents, Czech tax non-residents (e.g. an employee who lives with his/her family abroad but works in the Czech Republic) are also entitled to benefit from deferred taxation, which may lead to significant complications in the calculation of employment tax.

We will monitor the approval process of this amendment and interpretations of the tax administration closely for you and keep you informed of any changes.