As a driver of employee motivation and engagement, the Employee Stock Ownership Plan (ESOP, or more generally, Employee Equity Program) has become an increasingly popular form of compensation. Appealing not only to startups, it captures the attention of forward-thinking companies eager to align employee incentives with long-term business growth. How is the ESOP landscape in the Czech Republic evolving and what do these changes mean for businesses adapting to this trend?
Understanding the ESOP
ESOP, at its core, gives employees the opportunity to become stakeholders in their company, directly participating in the success and value growth. This is particularly valuable for early-stage startups, where offering competitive salaries may be challenging.
ESOP can have different forms, from Employee Stock Option Plans offering the employees the right to purchase shares at a predetermined price after fulfilling certain conditions, to phantom shares paid as bonuses without transferring actual shares, or direct sales of shares making employees instant co-owners. We cover the principles and implementation of the ESOP in more detail in our legal manual.
Changes in Czech Legislation
Effective from January 1, 2024, the Czech Republic introduces a change in the taxation of employee stock acquisition. The key shift is the deferral of taxation of income from acquiring employee shares or stock options. The income will no longer be taxed at the moment of acquisition, but instead upon the following future trigger events:
- termination of the employment;
- the employer’s entry into liquidation;
- the moment when the employer or employee ceases to be a tax resident of the Czech Republic;
- transfer or transition of shares or transferable options;
- exercise of a transferable option;
- change in the total nominal value of the employee’s shares following a share exchange; or
- the lapse of 10 years from the date of the share or option acquisition.
The good news is that in case the value of employee shares or options falls between the time of their acquisition and the time of deferred taxation, the taxable income will be reduced. However, in such a case, any profit shares paid in the meantime or other benefits arising from the holding of shares will be taken into account.
Currently, the deferral only applies to the payment of income tax, not the social and health insurance contributions (although discussions are underway to ensure consistency between tax and insurance regulations).
How Czech ESOP Legislation Could Fall Short for Startups
While the intention behind the changes was to bolster ESOPs for startups and postpone tax payments until employees have actual resources to cover them, in reality, these adjustments don’t quite hit the nail on the head and don’t fully embrace the “tax-after-cash” principle. Particularly, issues arise with taxation being triggered by the termination of employment. Considering the dynamic nature of startups, this tax trigger could introduce unwelcome financial pressures for the employees and the company.
While the legislative changes take steps toward a more startup-friendly environment, these do not yet provide the robust support that companies need. However, the door isn’t closed on this issue, and further refinements to the legislation can be anticipated as the real-world implications for startups become clearer and their feedback is taken into account.
If you’re looking to make sense of these ESOP changes or want to create a tailor-made plan for your company, reach out to us at adam.konecny@sparring.io. Let’s ensure your journey into ESOP is as rewarding for your business as it is for your team.
