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An employee option scheme is an equity compensation plan where business owners offer shares of their company to employees of their choice The share option is a right to acquire a specific amount of the company’s shares after some time in the future at a pre-agreed price or free of charge The employees who have this instrument are entitled to exercise their share options, i e , to buy the shares after a specified period of time at the price fixed at the date when the options were received regardless of the prevailing market price or get them free of charge Then, if the employee decides to sell the shares later, significant earnings are recorded

The employer may provide that the granting and implementation of share options would be subject to certain goals, such as performance indicators or sales results In other words, the employee will have a right to use his/her share options when the set goals and agreed indicators are met

Some companies choose to offer share options to the key employees ensuring that the company’s strategy is executed by the team that has a long-standing history with the company while others offer share options to all employees The common goal of both parties of the share options agreement is to motivate the employee to take a long-term approach, thus increasing the value of the employer as the company and aligning the interests of the parties Share options are of personal nature and are inseparably related to the employee as the member of the particular company The company wants to have longer employment relations, therefore, usually an essential condition is to set a long period after which the employees can exercise their right to acquire shares in the company

The alternative to the share options are so-called phantom shares where the actual shares in the company are not granted but the cash bonus provided to the employee is linked to a change in the value of the company The phantom shares are becoming more popular among FinTech companies in Lithuania, who, first of all, choose options to encourage employees who work longer or hold higher positions This encourages the employee to become involved in the growth of the company’s value, although he/she doesn’t become a shareholder of the company

Advantages of Employee Share Option

• Helps you to attract high-quality talent
• Most companies are painfully aware of the difficulty in attracting talented staff
• While stock options are seldom substitutes for compensation increases, as part of a solid benefit program, they help make employment packages more attractive
• Offering meaningful share options both attracts better, more talented employees and helps keep them for the long term
• Keeps staff motivated
• Employees can reap some of the financial benefits of a successful business
• This can result in employees making far more money above and beyond their annual salaries
• Partial owners of a company have a vested interest not only in their own performance, but in the long-term success of the whole company
• Individual employees will directly benefit from the success of a company and will feel a sense of ownership
• Offers tax advantages
• The only significant costs to the company are the lost opportunities to sell some stock at market value (since employees usually buy at a discounted rate) and the expense of administering the plan
• An Employee Share Option can be a very attractive option, particularly because of the tax benefits available and the simplicity of the rules, resulting in lower costs of implementation
• Instead of depleting cash resources to pay people top rates and large bonuses, why not incentivise them via shares or options?
• It’s highly flexible
• Companies have flexibility in deciding how many stock options you can grant to employees
• They can also choose to offer additional shares for people with seniority or special skills

The applicable taxes are an important aspect in granting of the share options The general rule is that if the shares are granted to the employee based on the share option, the difference between the fair market value of the shares and the price paid by the employee for the shares may be subject to taxes In such cases, personal income tax and social security contributions are applied

However, certain tax exemptions could apply to facilitate the conditions for start-ups and the whole business

Legal Considerations of an Employee Share Option in different jurisdictions

Below you can find the summary of taxation and regulatory framework in different countries, such as Lithuania, Poland, Slovakia, Estonia, Latvia

• The general rule is that the fringe benefits from share options is taxable as salary
• The employer has the obligation to pay the applicable taxes
• Applicable tax exemption is applied for income tax and social security contributions if a share option is held (but not exercised) by an employee for at least 3 years
• The fringe benefits from share options are exempt from personal income tax provided that a share option agreement is concluded after 1 February 2020
• It is important to note that taxation is applicable not at the moment of granting the share option but only when the share options are exercised
• The capital gain which the employee derives from the sale of the acquired shares is subject to the personal income tax
• The Law on Personal Income Tax of the Republic of Lithuania does not define the mechanism for calculating the fair market value
• In principle, fair market value is an economically reasonable price agreed between independent persons
• The State Tax Authority shall consider the price of the asset or service declared by the taxpayer to be correct until it is established otherwise
• In case of joint-stock companies the share options issued under option incentive scheme are not subject to taxation
• The profit which the employee derives from the sale of the shares acquired as result of option incentive scheme is subject to the flat personal income tax of 19%
• This rule however applies only to option incentive scheme in the meaning of Act on Personal Income Tax
• The general rule is that income (pecuniary and also non-pecuniary) resulting from employment is taxable as salary, as well as benefits with some statutory exceptions
• The employee has the obligation to pay the applicable taxes, social security and health care contributions (levies)
• With respect to shares traded on a regulated market, Slovak Income Tax Act provides income tax exemption, if period between acquisition and sale exceeds one year
• The granting of share options on the employer’s company is considered a fringe benefit
• All types of fringe benefits are taxable as a salary
• The employer has the obligation to pay the applicable taxes
• Under the Income Tax Act of Estonia, share options have a tax exemption on certain conditions, on the basis of which options with an exercise time of at least three years are not considered fringe benefits
• That means there must be at least three years between granting the option and acquisition of the assets underlying the option
• the minimum period for holding of a stock purchase option (a period from the day of granting of the stock purchase option until the day when an employee is entitled to commence the implementation of the stock purchase option) is not less than 12 months;
• during the minimum period for holding the stock purchase option, the employee is in an employment relationship with the company which has granted the stock purchase option;
• the employer has submitted required-by-law information to the State Revenue Service;
• the stock purchase option is implemented not later than within six months from the day when the employment relationship with the company which granted the stock purchase option has been terminated;
• the company which has granted the stock purchase option to the employee has not granted a loan to the employee which has not been repaid by the moment of the implementation of the stock purchase option

If the above conditions are not met, the income from the implementation of a stock purchase option is taxable The rate depends on the amount

The content of this article is intended to provide a general guide to the subject matter If you need assistance regarding the specific situation related with employees’ shares option, or any other question related with this topic, please consult the experts of ECOVIS