Changes to the current deferred tax regime

We have kept you informed about several legislative changes related to the introduction and changes to the deferred taxation regime of income from the acquisition of employee shares that have been adopted in recent years in  articles on our blog.

The proposed amendment should introduce further partial changes to the deferred taxation regime in the list of moments in which deferred taxation of income from the acquisition of employee shares, as defined in the Income Tax Act, takes place. Specifically, these are:

• deletion of the moment of change of tax residence of the employee or employer; and
• extension of the maximum period for deferring the taxation of income from the acquisition of employee shares from 10 to 15 years.

According to the explanatory memorandum, the deletion of the moment of change of tax residence is proposed primarily in connection with unclear interpretations of the applicability of the deferred regime to employee shares acquired by tax non-residents and the overall complexity of determining tax residence. The extension of the maximum deadline for deferred taxation is a response to reservations, especially from startups, that the original ten-year period for completing the development and sale of a startup is usually too short.

If approved, these changes are proposed to take effect on 1 January 2026, but these changes should not apply to employee shares acquired before the amendment came into effect.

Introduction of an alternative tax regime for income from qualified employee options (startup amendment)

A more significant intervention in the Income Tax Act is the introduction of another preferential tax regime for income from ESOPs, which, however, unlike the deferred taxation regime, will only be applicable to a narrower group of companies (it is mainly intended to target start-ups and young innovative companies) and only if a number of conditions are met, of which we list the most important ones:

• Shares in a business corporation must be provided to the employee by their employer in the form of a gratuitously provided option (non-transferable promise) to purchase an interest in this employer or in its directly controlling person for an agreed option price;
• the option must take the form of a written contract;
• the option must be set in such a way that the acquisition of shares by the employee can take place no earlier than 3 years after it is granted (except for the situation of an earlier IPO or exit defined by law);
• both the grant of the option and its exercise or financial settlement must be notified to the tax administrator within the deadline for filing the employer’s single monthly report for the given month;
• the shares that the employee has acquired or is entitled to acquire on the basis of exercising the option under this regime may amount to a maximum of 5% of the business share in the registered capital of the employer or its controlling entity at the time of granting the option;
• the employee must perform employment for the employer for at least 12 months in the period between the granting of the option and its exercise or financial settlement, and the monthly income thus achieved must be at least 1.2 times the minimum monthly wage valid at the time of granting the option;
• other conditions are imposed by law on the size of the employer – as we have mentioned, this regulation is primarily intended for start-up companies – these include, for example, limits on accounting turnover (CZK 2.5 billion) and total assets (CZK 2 billion), even within the group of the qualified employer defined by law, and the exclusion of certain business sectors (e.g. banks, insurance companies, lawyers, etc.) from using this regime.

If the conditions defined by the law are met, the income from the exercise of the option by the employee or from its financial settlement (in the amount of the difference between the market price of the share at the time of exercise/financial settlement of the option and the agreed option price) will be considered as so-called other income under Section 10 of the Income Tax Act (not as employee income) and will not be subject to social security and health insurance contributions. The income under this regime will be taxable only for the tax period in which the underlying shares are sold, but the taxation must take place no later than 15 years from the exercise of the qualified option. However, with respect to the income from the (future) sale of the shares, it will not be possible to apply tax exemption based on the fulfilment of the time test (exemption of income from the sale of shares if the period between their acquisition and sale exceeds 3 years for shares or 5 years for shares in limited liability companies).

Overall, this is a major milestone for Czech startups.  If this proposal is approved, new opportunities will open up for the Czech startups to motivate employees and build teams.

We will continue to monitor this topic and keep you updated in articles on our blog and on our webcasts.

Parliamentary Document No. 926 is available on the website of the Chamber of Deputies.