Taxation of Employee Stock and Option Plans: Overview of the Current Situation

Overview of ESOP Tax Regulation Development

Regime until the end of 2023

Until 31 December 2023, income from acquiring shares or options was taxed immediately in the month of acquisition, or within the tax return for the relevant tax period. This system was simple but burdened employees with taxation of non-monetary income at a time when they had not yet received any monetary benefit.

Change from January 2024

As we informed you in our December article HERE, an amendment effective from 1 January 2024, introduced mandatory deferral of taxation of ESOP income until the first of the following events:

• termination of the employee's employment at the particular employer,
• entry of the employer into liquidation,
• change in tax residency of the employee or employer,
• sale of shares or options by the employee,
• exercise of a transferable option,
• expiration of 10 years from the acquisition of shares or options.

In practice, however, this amendment brought a number of complications, especially in the areas of administration and international taxation.

Discrepancy between taxation and insurance premiums

From January to June 2024, there was also a discrepancy between the moment of taxation and the moment of insurance premium payment, which was rectified by an amendment effective from July 1, 2024, as we informed you in our March article HERE.

Current status – optional taxation regime from 1 April 2025

On 1 April  2025, a long-awaited amendment to the Income Tax Act came into effect, introducing an optional taxation regime with retroactive effect from the beginning of 2024. This modification allows employers to choose whether to apply:

• deferred taxation regime (according to legal regulations effective from 2024), or
• immediate taxation regime (according to legal regulations effective until the end of 2023).

How to proceed with income generated in the period January 2024 – March 2025

Employers have the option to make the following choice:

• If they decide to defer taxation, they must inform the tax authority about this decision. The deadline for this announcement is stipulated by the law to 2 June 2025. In such case, the income will be taxed upon sale of the share, termination of employment, after 10 years from acquisition, etc., as described above.
• If they do not make this notification, the income will be considered as accounted for in May 2025 (i.e., in the second calendar month after the amendment takes effect) or as income received in the 2025 tax period, which will be taxed in the tax return.

How to proceed with income generated from April 2025

For income generated from April 2025, the following rules apply:

• If the employer decides to defer taxation, he must notify the tax authority within 20 days of the month following the month of acquisition of shares or options.
• If he does not submit the notification, the income is considered realized at the moment of share acquisition.

Information from the General Financial Directorate

On 7 April 2025, the GFD issued important information responding to situations where some employers followed the original legal regulation (immediate taxation) during 2024 and early 2025 in anticipation of retroactive changes to the law.

The GFD states that:

• For the 2024 tax period and part of 2025 (until 31 March 2025), the Czech Financial Authority will accept procedures according to the legal regulations effective until 31 December 2023 (i.e., immediate taxation).
• The same approach applies when an employee includes the income in his/her tax return.
• The Ministry of Health agrees with this interpretation.

It is important to note, however, that the Czech Social Security Administration does not accept this approach and requires strict compliance with the valid legislation. This means that in some cases, corrections in the area of social security contributions may be necessary.

Recommendations for Employers

Given the complexity of employee stock and option plan taxation, we recommend:

• reviewing the current setup of your ESOP programs from the perspective of current legislation,
• considering an appropriate taxation regime for your company, especially with regard to international aspects,
• submitting notifications to the tax authority in time if you decide for deferred taxation,
• remembering the different requirements of the Czech Social Security Administration regarding insurance contributions payments.

If your company offers employee stock or option programs or is considering implementing them, please do not hesitate to contact us. Our experts will be happy to help you set up an optimal tax regime according to your specific conditions.

Authors:

Jana Nováková, Tax Department Manager

Anna Klímová, Newsletter Editor