Employee shares are one of the tools that start-ups can use to motivate and reward their employees for their contribution to the company’s growth and success. For startups, it is generally also an opportunity to compensate for the initially insufficient financial strength on the labor market.
For start-up companies, which often do not have enough funds for competitive salaries, employee shares are the solution to attract and retain talented and capable people.
But in the Czech Republic they are disadvantageous from a tax point of view. Although employees can get shares in their companies already today, the criticism fell precisely on the way of taxation. The employee must tax the shares as soon as he receives them. And this is an unpleasant obstacle for companies, and especially for their employees – perhaps because employees may not have enough money to cover the tax at the time they receive the shares.
A new law is supposed to change that, which would allow employees to pay tax on shares only when they are sold. But the amendment on the taxation of employee shares, which is being discussed by the deputies, does not ensure this standard.
“Although the new legislation is the first step in an effort to get closer to the states that set an example for Europe in this area, especially the Baltics, it is far from sufficient and, unfortunately, it will not yet bring a very fundamental change,” Jana Osecká, manager in the tax consultancy department, tells SZ Byznys of Deloitte.
When the international company IndexVentures evaluated the approach of individual countries to employee shares, they found that the aforementioned Baltic countries, Israel and Canada are the most receptive to this practice. On the contrary, the Czech Republic, together with neighboring Austria and Germany, faces a lot of administrative obstacles, and as a result it is placed at the bottom of the ranking.
The stumbling block remains when exactly in the future the actual moment of taxation will occur. Ideally, and in line with ESNA’s European Alliance for Innovation, Entrepreneurship and Startups, taxation should only occur when the allocated shares are sold and the employee receives cash income to cover the associated taxes and insurance premiums.
The problem, according to advisor Osecka, is that the newly proposed legislation represents up to seven moments when taxation can occur, while only one of these moments corresponds to the ideal scenario.
“In other cases, the moment of taxation occurs earlier, for example when the employment relationship is terminated, which can cause sudden financial complications for both the employee and the employer, or when the tax residence of the employee or the employer changes, which again complicates the situation also considering that the change tax residence can be difficult to determine in some cases,” explains the tax expert.
Osecká points out that it continues to be the case that income in the form of received shares is considered employment income, to which, in addition to income tax, social security and health insurance contributions for both employees and employers usually apply.
Therefore, the proposal does not change the classification to income from capital gains, which would be exempt from insurance premiums.
More advantageous for large companies
“Compared to one of the EU leaders in the field of employee shares, Latvia, where the principle of ‘no tax before cash’ is respected if certain conditions are met, i.e. the fact that the employee pays tax only when he receives the funds, and in addition income considered as income from capital gains, and not employment income, so the Czech Republic remains behind even in the case of approval of the new legislation,” sums up Osecká.
“The amendment of the legislation as we know it now is more accommodating especially to established and profitable companies, but it still does not bring many advantages for new companies, and on the contrary, in some situations it can cause complications for startups,” adds the consultant from Deloitte.
The amendment also takes into account situations where the employee acquires a share, but in the event of the company’s failure, he could suffer a loss when selling these securities.
“In the case of a decrease in value over time, the entire difference between the discounted price of the share paid by the employee and the market price of the share will not be taxed, but it will be possible to deduct the loss of value of the share from it. In practice, this means that if the project fails and the investment is unprofitable, then there will be no taxation at all,” said Jan Škrabka, advisor to the Ministry of Finance.
A sticker that doesn’t help much
Some Czech startups are critical of the amendment. For example, according to Lukáš Konečný from the startup fund Y Soft Ventures, amending the law will not help as much as it should.
“The saddest part of the whole story is that the entire proposal was created as a sticker to other legal amendments, was prepared without cooperation with stakeholders (interested persons – editor’s note), was not formally commented on, did not pass the Legislative Council of the Government, and the time between its drafting and loading can only be calculated in days, in the case of final changes only hours,” said Konečný on the LinkedIn social network, according to which there are more questions than answers about the proposal.
“Regardless of the fact that the Czech startup and business ecosystem deserves something more ambitious, it should at least get something carefully prepared, thoroughly thought out and properly discussed,” Konečný does not spare criticism.
“The current government in the Czech Republic, despite a lot of empty proclamations, does not want to support any innovations or startups,” added Vojtěch Roček, partner of Presto Ventures.
However, the executive manager of the Czech Fintech Association, Ondřej Machač, is trying to curb the criticism at least partially. In a recent comment for SZ Byznys, he expressed his disagreement with some domestic startups that are dissatisfied with the amendment. Machač, on the other hand, welcomes that the amendments in the law bring improvements compared to the current situation.