Employee incentive programs are a crucial element in motivating and retaining talent within companies. There are many ways to implement them, and the choice of legal form can impact the effectiveness and consequences of such a program. It's worth understanding how different legal forms impact the operation of incentive programs and the tax treatment of employee benefits.
An employee incentive program can be implemented in any commercial company, regardless of its legal form. Therefore, it can cover partnerships, such as general partnerships, limited partnerships, or professional partnerships, as well as corporations.
An incentive measure is the possibility of awarding shares to employees. In the case of capital companies, such as limited liability companies or joint-stock companies, shareholders are not personally liable for the company's actions. Furthermore, such legal forms allow for more flexible voting rights and profit sharing, and an unlimited number of shares can be established. All of this makes such companies a more common venue for implementing incentive programs. By awarding shares to employees, the company becomes more attractive to potential employees and can more effectively motivate current ones.
However, granting shares to employees requires tax settlement. Legislators have introduced tax preferences for incentive programs, which apply to joint-stock companies and simple joint-stock companies. This preference allows employees to tax the shares they receive only upon their disposal, which provides a significant simplification. In such a transaction, the income will be the price the seller receives for the shares, while the expense will be the cost of acquiring them (which is usually nominal in incentive programs).
It's worth noting that tax benefits may vary depending on the form of implementation of the incentive program. For example, receiving shares under an incentive program is considered tax-preferred, while case law disputes the granting of tax benefits, for example, in the case of warrants.
Regardless of tax preferences, there are many ways to design an incentive program. Granting existing shares, issuing new shares, and granting warrants or stock options are all tools that can be used to create an effective incentive program.
However, it is important to understand the legal and tax consequences of each of these forms. For example, in the case of warrants, the Supreme Administrative Court (in its judgment of November 30, 2021, file reference II FSK 808/19) found that the exercise of rights arising from warrants does not constitute an incentive program under the Personal Income Tax Act.
The above does not exclude the construction of an incentive program based on warrants, but it may turn out that it will lose the advantage of preferential taxation.
The above does not apply to the purchase of stock options. Options are not securities. Their price cannot be determined. In such a case, income will not arise upon the exercise of the option right, but only upon the sale of the share itself – in accordance with the taxation rules of the incentive program.
In summary, an employee incentive program is an important tool for motivating your team and retaining key talent within your company. Choosing the legal form of your company and the method for achieving your program's goals significantly impacts the effectiveness and tax implications of your incentive program. Therefore, before implementing one, it's important to carefully analyze all available options and consult with legal and tax experts.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of March 6, 2024
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