We have written in more detail about the contents of the amendment in our previous blog article. The aim of the amendment is to postpone the taxation of non-cash income from the acquisition of shares in a business corporation by an employee at a reduced price until the first of a number of defined points in time (e.g. sale of the shares, the employee leaving the company or the expiry of 10 years from the acquisition of the shares). Thus, employees should ideally pay employment income tax on the acquisition of shares at a reduced price only when they realise cash proceeds from the sale of the shares.

However, subsequent analyses, confirmed by the information published by the Ministry of Finance, show that the legislators probably unintentionally failed to initiate subsequent amendments to the regulations governing the assessment bases for social security and health insurance contributions. Thus, according to the prevailing conservative interpretation of the current wording of these provisions, the acquisition of shares by employees at a reduced price results in a different moment of taxation for personal income tax and the moment for social security and health insurance contributions. If employers are in the position of a payer of employment income in respect of ESOP income and include income from shares acquired by employees in their payroll records, they would be obliged to pay social security and health insurance contributions already when the shares are acquired by the employee (as they do now), but would only pay tax at the time of deferred taxation (e.g. when the shares are sold).

However, this different approach would, in our view, be completely contrary to the logic of the amendment that employees should ideally only be subject to levies when they receive cash from ESOP. Accordingly, the Ministry of Finance has announced on its website that it is initiating a further amendment to the regulations governing premiums together with the Ministry of Health and the Ministry of Labour and Social Affairs, which should take place at the earliest opportunity. We will continue to monitor further developments in this matter.

The amendment to the ITA in relation to ESOP is effective from 1 January 2024. As it does not contain a transitional provision, it should apply to shares in a business corporation acquired by employees after 1 January 2024.

In connection with the amendment, we recommend that employers revise their current ESOP income reporting and communication processes to ESOP participants.  If you are interested in our assistance in assessing the impact of the amendment on the ESOP income established in your company or if you have other related questions, please do not hesitate to contact us – we will be happy to assist you.