In recent years, the interest of small and medium-sized companies in ESOP (Employee Stock Ownership Plan) has visibly increased. ESOP represents a plan on how to allocate a portion or full company ownership from the current owner to everyone, or to a specific group of key employees. Find out more about ESOP forms and their present status in Slovakia below.
ESOP can be part of a founder’s exit strategy, but in Slovakia, it is rather used as a form of an employee benefit or private pension plan created by a company for its employees.
However, within Europe, certain tax advantages for such plans are still missing, e.g. as we know them from the USA. There, for instance, the moment of taxation of employees’ income from their share in the company arises only at the time of their retirement or when leaving the company, and not in the moment when they are granted shares of the company they work for at preferential prices.
ESOP can have different forms, but recently, we can see a trend of setting up ESOP trusts into which a company allocates a specific part of its shares. These trusts then pay out the earned revenue as dividends from companies on behalf of its beneficiaries, or they repurchase them from employees under pre-determined conditions, for example in case of their retirement. These trusts can exist under various legal forms or tax regimes; therefore, it is important to choose the right form.
ESOP in Slovakia
Legislation in Slovakia doesn’t recognize trusts at all. Therefore, Slovak entrepreneurs are forced to use foreign structures. As usual, we note that the foreign structure shall not be deemed as illegal tax optimization. This is not the purpose of the ESOP structure. In the case of Slovakia, there is a presumption that the so-called institute of private foundation shall be introduced. The question is what its practical use for ESOP purposes will be.
In general, we believe that ESOP is still not a widely discussed topic in Slovakia, and not only in the start-up world, where this institute is already used a little more intensively. However, small and medium-sized companies are among the few companies that want to be more progressive and try to increase the involvement of their employees in the company’s success, or they think of their future once they leave the company. Nowadays, the most important thing, probably, is educating employees in companies, where the founder has opted for this form of benefit.
We often come across that employees don’t understand that it is uncommon for a company to pay 100% of its profit on behalf of its partners. Conversely, most of the profit remains in the company for investments and development.
Similarly, we need to explain the difference between net profit and free cash flow. Specifically, making a profit doesn’t automatically mean having free financial resources for profit payment. During discussions with employees, we try to explain them the meaning of net working capital and how its change may affect free financial resources. Sometimes, it is difficult to explain how the revenue growth of a company in some industries can increase the necessity to commit a bigger portion of funds in the additional stocks or liabilities with longer maturity. This has an obvious impact on the decrease of free financial resources. Of course, there are more topics to discuss.
On top of this, in Slovakia we must also deal with a simple shift in the way of thinking – having a share in a company which an employee works for is an investment in themselves, hence investing in assets that will bring financial advantage in the future. In our conditions, it is difficult to persuade people that e.g. payment of an annual bonus in cash will increase the employee’s income, but it commonly results only in higher household spending, thus consumption without any increase in value in the future.
ESOP in small and medium-sized companies is also called an “entrepreneur game” where you try to change the mindset from employee to business perspective. Personally, we believe that the popularity of ESOP among SMEs in Slovakia will grow over time. Of course, it requires time and a lot of education. A change in legislation and introduction of tax advantages when acquiring employee shares would surely help.
Having extensive experience with start-ups and SMEs, and a fully-digital tool ready to optimize and automate the ESOP process, we are prepared to discuss your possibilities when it comes to employee stock ownership plans and answer all your questions – simply just get in touch with us.