Motivating key employees with employee options plans

Petra Konečná

You have the opportunity to be part of an interesting business project and you need to motivate your key employees. Although there’s no one size fits all strategy, I would encourage you to consider employee options plans.

At present in the Czech legal environment, there is most often the opportunity to acquire shares of the company itself or the parent company.

The tax options vary according to how the options programme is set up. In general, the granting of an options right or the promise of an option does not itself create a tax liability or the obligation to pay social or health insurance. This also applies when the conditions for vesting the option are fulfilled (i.e. the employee is now entitled to vest the option without incurring tax obligations). The decisive moment for the creation of a tax liability is the vesting of the option.

The vesting of the option by the employee constitutes non-cash income from a dependent activity, which is subject to income tax. The amount of income is based on the current market value of the shares at the time the option is vested.

If the Czech company as an employer shares the costs of vesting the option (either the option plan is provided by itself or the parent company re-invoiced these costs on the company), the Czech company shall complete tax together with the employee’s monthly salary for the period when the employee vested the option. This non-cash income will be part of the “super-gross” wage and will affect social and health insurance contributions on the part of the employee and the employer.

If the costs are borne by the parent company and these are not re-invoiced to the Czech company, the wage cannot be taxed. Employees are required to include non-cash income in their annual income tax return and to tax such income. In this case, non-cash income is not subject to social or health insurance.

In practice, employee shares are often paid with some additional remuneration, for example corresponding to dividends, for as long as the right of option was granted until the right was exercised (without it being a dividend). In this case, it is cash income of the employee, who is subject to income tax on dependent employment. This income is taxed as part of wages and affects social and health insurance.

The subsequent sale of shares may be taxable or exempt employee income. The tax exemption may be applied if three years have passed between the acquisition of the shares and their sale, or if the amount of income does not exceed CZK 100,000 in the tax period. In the case of tax exemptions, there is no obligation to notify such a receipt to the Tax Office unless the exempt income exceeds the amount set in the Income Tax Act (in 2018 the amount is CZK 5,000,000). In other cases, this constitutes taxable income with the obligation to file a tax return. However, the acquisition price of the shares may be used as an expense against such income.

When deciding whether to implement an options programme, employees and employers should pay attention to how the programme is set up in legal and tax terms. Options programmes can even be set up for limited liability companies.

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