Employee Share Options in Lithuania, Latvia, Poland, Slovakia, Estonia

In today’s competitive business world, attracting and retaining top talent is crucial to the success of any organization. One effective way to achieve this is through an employee share option scheme, which provides a powerful incentive to employees and helps to align their interests with those of the company.

An employee share option scheme is a compensation plan that offers shares of a company to its employees. These shares give employees the right to acquire a specific number of shares at a pre-agreed price or even for free, after a certain period of time. If the company’s value increases, so does the value of the shares, providing a substantial financial benefit to the employee.

Flexibility and long term benefits for the company

One of the significant advantages of employee share options is their flexibility. A company can choose to offer options to a specific group of employees or to all employees, depending on its goals and strategy. The company can also specify performance goals or other criteria that must be met before the employee can exercise the options. This helps to ensure that the employees are motivated to work towards the long-term success of the company.

Tax advantages

Employee share options also offer significant tax advantages. In many countries, the tax treatment of share options is more favourable than that of other forms of compensation. This can result in substantial savings for both the employee and the employer.

There are several ways to structure an employee share option plan, depending on the specific needs of the company. For example, the company can offer phantom shares, which are not actual shares of the company, but rather a cash bonus linked to the company’s value. This can be an effective way to incentivize employees without diluting the ownership of the company.

While there are many benefits to an employee share option scheme, it is essential to understand the legal and tax requirements in the country where the company operates. Different countries have different regulations and tax laws that govern the issuance of share options. Failing to comply with these laws can result in significant legal and financial consequences for the company.

In summary, an employee share option scheme is an excellent way to incentivize and retain top talent while aligning their interests with those of the company. By offering employees a stake in the company’s success, the company can motivate employees to work towards the long-term goals of the business. However, it is crucial to understand the legal and tax requirements of the country where the company operates to avoid any negative consequences.

Legal Considerations of an Employee Share Option in different jurisdictions

Below you can find the summary of regulatory framework and taxation in different countries, such as Lithuania, Poland, Slovakia, Estonia, Latvia.

Lithuania

Currently, the procedure for granting share options and concluding such agreements is not regulated in the Lithuanian legal system. Therefore, to have more detailed regulations in this area, amendments to the Law on Companies of the Republic of Lithuania are proposed.

The general rule is that the fringe benefits from share options is taxable as salary. The employer has the obligation to pay the applicable taxes.
Applicable tax exemption is applied for income tax and social security contributions if a share option is held (but not exercised) by an employee for at least 3 years. The fringe benefits from share options are exempt from personal income tax provided that a share option agreement is concluded after 1 February 2020. It is important to note that taxation is applicable not at the moment of granting the share option but only when the share options are exercised.
The capital gain which the employee derives from the sale of the acquired shares is subject to the personal income tax.
The Law on Personal Income Tax of the Republic of Lithuania does not define the mechanism for calculating the fair market value. In principle, fair market value is an economically reasonable price agreed between independent persons. The State Tax Authority shall consider the price of the asset or service declared by the taxpayer to be correct until it is established otherwise.

Poland

Currently, the procedure for granting share options is not covered by corporate law. It is however possible both in limited liability company and joint stock company under existing legal frame. In limited liability company the options can be introduced in relevant agreement and resolutions In joint stock company options are introduced by using subscription warrants and conditional capital increase.

The general rule is that the non-pecuniary benefits resulting from employment are taxable as salary. The employer has the obligation to pay the applicable taxes and social security contributions.
In case of joint-stock companies the share options issued under option incentive scheme are not subject to taxation. The profit which the employee derives from the sale of the shares acquired as result of option incentive scheme is subject to the flat personal income tax of 19%. This rule however applies only to option incentive scheme in the meaning of Act on Personal Income Tax.

Slovakia

Currently, the procedure for granting share options is regulated in a very limited way, only for so-called “simple joint stock companies” (for employees or freelancers under specific conditions), and for joint stock companies (for employees on preferential terms). Slovak corporate law does not exclude (but also does not regulate) the acquisition of shares in other forms (phantom shares or share in LLC´s), as this possibility is foreseen by the Income Tax Act.

The general rule is that income (pecuniary and also non-pecuniary) resulting from employment is taxable as salary, as well as benefits with some statutory exceptions. The employee has the obligation to pay the applicable taxes, social security and health care contributions (levies).
The difference between the fair market value of the share and the price at which the employee acquired the share is subject to taxes and levies. Subsequently, income from sale of the share by the employee, after deduction of expenses, incl. paid purchase price and amount of non- pecuniary income taxed by the employee, is also subject to taxes and levies; this applies if all incomes from sale of shares in respective financial year exceeds EUR 500.00 (up to this amount, it is a tax-free income).
With respect to shares traded on a regulated market, Slovak Income Tax Act provides income tax exemption, if period between acquisition and sale exceeds one year.

Estonia

Currently, the procedure for granting share options for employees is not covered by law. It is however possible both in limited liability company and joint stock company under existing legal frame.

The granting of share options on the employer’s company is considered a fringe benefit. All types of fringe benefits are taxable as a salary. The employer has the obligation to pay the applicable taxes.
Under the Income Tax Act of Estonia, share options have a tax exemption on certain conditions, on the basis of which options with an exercise time of at least three years are not considered fringe benefits. That means there must be at least three years between granting the option and acquisition of the assets underlying the option.
The capital gain which the employee derives from the sale of the acquired shares is subject to the personal income tax.

Latvia

Since 13.07.2017, the corporate law in Latvia regulates issuance of stock options (personnel options) which give the right to officers and employees of a given company to acquire its stock. Personnel options may not be alienated unless it is otherwise provided for in the articles of association or the regulations for issuance of personnel options. The total amount of the stock which may be acquired by using personnel options may not exceed 10 per cent of the paid-up equity capital of the company at the time of taking the decision to grant personnel options.

Income from the implementation of a stock purchase option is a non-taxable income if the following conditions are complied with:

the minimum period for holding of a stock purchase option (a period from the day of granting of the stock purchase option until the day when an employee is entitled to commence the implementation of the stock purchase option) is not less than 12 months,
during the minimum period for holding the stock purchase option, the employee is in an employment relationship with the company which has granted the stock purchase option; · the employer has submitted required-by-law information to the State Revenue Service,
the stock purchase option is implemented not later than within six months from the day when the employment relationship with the company which granted the stock purchase option has been terminated,
the company which has granted the stock purchase option to the employee has not granted a loan to the employee which has not been repaid by the moment of the implementation of the stock purchase option.

If the above conditions are not met, the income from the implementation of a stock purchase option is taxable. The rate depends on the amount.

ECOVIS International is leading global consulting group operating in more than 80 countries worldwide. Excellent local knowledge and the unique international expertise of the interdisciplinary network of ECOVIS professionals make ECOVIS different from other service providers. ECOVIS is one-stop shop for all legal, tax, audit, corporate and business-related matters in the jurisdictions where ECOVIS operates. If you intend to introduce an employee share option scheme and apply related employee retention and motivation benefits, please do not hesitate to contact us. We will advise on the best way to design and properly implement such a scheme.

The content of this article is intended to provide a general guide to the subject matter. If you need assistance regarding the specific situation related with employees’ shares option, or any other question related with this topic, please consult the experts of ECOVIS.

Prepared by:

ECOVIS ProventusLaw partner, attorney-at-law Loreta Andziulytė

ECOVIS LEGAL POLAND partner, attorney-at-law Piotr Pruś

ECOVIS DT LEGAL partner, attorney-at-law Barbora Paulovicova

ECOVIS Accounting Estonia OÜ lawyer Dmitri Gurjev

ECOVIS CONVENTS managing partner, attorney-at-law Aivars Blūmiņš