Do you provide employee shares in your company? And have you already considered what impact the new changes in this area will have on your company? In the following article, we summarize the news in the taxation of employee shares, as well as what is not yet fully resolved in terms of legislation.
The tax period for employee shares is changing. What are the reasons?
As you probably noticed, the amendment to the Income Tax Act entered into force on January 1, 2024. It fundamentally changes, among other things, the way employee shares, and transferable options are taxed. The new taxation regime postpones the moment when employee shares are taxed until they are actually sold (or in other cases). These include the following:
- terminate the employment contract,
- the employee or employer ceases to be a tax resident of the Czech Republic,
- this share or option is transferred, or the option is exercised,
- 10 years have passed since the share or option was acquired.
According to the Ministry of Finance, the reason for the adoption of the new legislation in this area is the intention to help start-ups and smaller companies postpone the tax deadline for employees. Therefore, employees will not have to tax the income of the shares immediately after their acquisition (as was the case until now), but the date of taxation will be shifted to the future. This is because there is a real risk that smaller companies and start-ups will not do well, which could lead to a decrease in the value of employee shares, or even to the demise of the company. According to the original arrangement, employees paid tax on the value of shares, the future benefit of which could be significantly lower. Thanks to the amendment, it will be ensured that if the value of employee shares decreases below the level at which they were acquired at the time of taxation, the employee will be able to pay tax on this lower value.
This amendment is followed by an amendment to the Act on Social Security and Health Insurance effective from July 1, 2024, which unifies the deadline for the payment of insurance with the deadline for income tax. In the first half of the year, it was not yet clear whether the insurance payment deadline would be calculated according to the original wording of the law, or whether it would be the same as the income tax deduction.
Where does confusion still arise?
Several other question marks appear in current practice. One of them is, for example, how to best handle the administrative burden, which mainly affects employers. They now naturally have to record more data in their payslips than was the case up until now. Data on shares acquired, such as date, number of shares and market price at the time of acquisition for individual employees, will be the bare minimum to be recorded for a period of 10 years (or for the duration of the employee's employment).
Another burden for employers, especially from among foreign companies, will be the registration of the tax residency of employees and its possible changes. Also unclear is the case when the employee receiving the shares is not a tax resident at the time of their acquisition, but it is possible that he will become one in the future. In such circumstances, it is therefore not clear when the deadline for taxation occurs.
As is often the case, putting it into practice shows where the shortcomings remain. We are monitoring the entire situation regarding employee shares and are already solving specific cases with our clients. If you need advice or are looking for professional help in this area, we would be glad to assist you with professional advice in this area.
