ESOPs in the Czech Republic: Changes to employee share and option plans starting from 2024 | News Flash

As part of the amendment to the legislation in connection with the development of the financial market, the Czech Income Tax Act was also amended, which changes the moment of taxation of employee income from ESOPs in the Czech Republic. When shares are granted on preferential terms, such advantage is considered an income from dependent activity, which is subject to income tax and social security and health insurance premiums. Prior to the amendment, such income was taxed at the time of acquisition of the share or exercise of the option. From 1 January 2024, this income is taxable when:

• the employee ceases to perform a dependent activity for the employer,
• the employer goes into liquidation,
• the employee or employer ceases to be a Czech tax resident,
• the employee sells shares or options,
• the employee exercises the option,
• there is a share exchange, during which the total nominal value of the employee’s shares changes,
• 10 years have passed since the employee acquired the share or the option.

This change affects not only legal but also economic employers.

The moment of taxation and premium payments for ESOPs in the Czech Republic

Unfortunately, the legislation in the field of social security and health insurance premiums have not been amended. Therefore, the moment of taxation changes only for income tax, and the moment of income tax payments and the moment of insurance premiums payments diverge (if the income is taxed through the payroll). According to insurance premiums legislations, it is necessary to make insurance premium payments at the time of transfer of the share to the employee or when the option is exercised, i.e. insurance premium payments occur before income tax payments. According to information from the Ministry of Finance, the postponement of obligations in the field of insurance premiums legislations will be regulated in the nearest amendments.

On the employer’s side, this amendment brings a significant administrative burden, i.e. they will have to monitor when one of the moments of taxation above occurred. Employees will have the obligation to notify the employer when they sell shares/options, change of residence, etc.

It is necessary to mention that this change does not affect the moment of taxation of the sale of shares or dividends received, as well as the eventual exemption of income from the sale of shares under the conditions set by the Czech Income Tax Act.

The amendment brought a number of practical ambiguities, which is why its next amendment is expected, or issuance of a methodological instruction. We will continue to monitor this area for you and provide you with an update in our future articles.

Lan Anh Mai

Senior Tax Consultant | Accace Czech Republic

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Kateřina Hrůzová

Tax Director | Accace Czech Republic

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