Tax benefits of employee participation in ESOPs

An employee’s participation in an ESOP comes with financial benefits and certain tax advantages. Upon meeting certain conditions, an employee beneficiary of an ESOP does not have to pay income tax directly on the acquisition of shares under such a plan and may be entitled to preferential tax rates on dividends. What other tax benefits are possible?

Delaying taxation

Employees of joint-stock companies taking up shares under an ESOP, after meeting certain conditions, do not pay income tax at the time of acquisition of the shares, but only upon their disposal. This means that capital gains tax is delayed until the actual sale of the shares and, just as importantly, a capital gains tax of 19 percent will apply, rather than a progressive tax. Employees of limited liability companies cannot count on similar privileges. It should be noted that according to the prevailing interpretation of the tax authorities, delayed taxation does not extend to those who cooperate with joint-stock companies on the basis of B2B contracts. However, due to the ambiguous position of the tax authorities on this issue, it is worthwhile in each case to consult a law firm, which, after analyzing the specific case, will provide guidance on the possible tax course of action and key risk factors.

Tax on dividends

Employees who have taken up shares under the ESOP are entitled to dividend payments, which is an additional source of income for them. The tax authority levies a flat-rate capital gains tax of 19 percent on income derived from dividend payments.

Revenue from ESOPs vs. contributions to Social Security.

ESOPs also have the advantage that income received under such programs is not subject to social and health insurance contributions to the Social Security Administration (ZUS). In comparison, employees receiving financial bonuses face such an obligation.

Jakub Kozioł Managing Partner

jakub.koziol@theheart.legal

(+48) 600 818 015