Taxation of employee stock and option plans

All the changes should aim to fulfill the "no tax before cash" principle, i.e., the payment of taxes should only be made when the employee sells the acquired shares and has the resources available to pay taxes. Whether this has been achieved is left to the discretion of the attentive reader.

First of all, it is important to note that income that flows to an employee in connection with participation in an ESOP is treated as income from a dependent activity. The moments when the given income is to be taxed are precisely defined as follows (the one that occurs first always takes precedence):

• the termination of an employment relationship;
• the entry of the employer into liquidation;
• the employee or employer ceases to be a Czech tax resident;
• the employee transfers (sells) the shares or transferable options;
• the employee exercises a transferable option;
• there is an exchange of shares which changes the total nominal value of the employee's shares;
• 10 years elapse from the date on which the employee acquired the share in the corporation or the transferable option.

At the time of taxation, social and health insurance is also levied (both on the side of the employee and on the side of the employer). The harmonization of the date of taxation and payment of social and health insurance occurs from 1 July 2024, when the relevant regulations refer to the Income Tax Act. In this context, it is necessary to emphasize the employee's obligation to notify his employer about the fact that one of the stated taxation moments has occurred. This must be announced by the end of the month in which the taxation moment occurred.

The amount of taxable income from dependent activity is determined as the difference between the current fair market value and the price that the employee paid for the shares. However, it is possible to take into account when calculating this taxable income the decrease in the value of the share from the time of acquisition till the moment of taxation, i.e. that a lower amount is subject to taxation.

In conclusion, we would like to state that if the employee does not hold shares long enough and does not meet the time test for exemption, the income from the sale of shares is subject to taxation as other income.

If your company is considering motivating its employees with ESOP or if you already have one, we will be happy to help you set up or assess the current status of the ESOP from a tax point of view.