With effect from 1 January 2024, the President signed an amendment to the law regarding the taxation of employee share and option plans. A detailed summary of the new legislation, which brings a number of uncertainties, was provided in our previous article (here).

1. Deferral of the moment of taxation of an employee option

In view of the ambiguities in the interpretation of the language of the new legislation, the Ministry of Finance of the Czech Republic (“MFCR”) issued a statement on its website confirming previous unofficial interpretations that the deferral of the moment of taxation also applies to the exercise of employee (non-transferable) options. Only so-called transferable options, which are hardly used in employee stock option plans, will be taxed at the time of use.

2. Temporal mismatch between taxation and payment of public insurance contributions

On the negative side, the Ministry of Finance further confirms in its press release that the deferral of the time of taxation in the case of the acquisition of an interest in a business corporation (i.e., the exercise of an employee option or the acquisition of shares from an employer for free) was not (apparently inadvertently) tied to social security and health insurance legislation. The postponement of the moment of taxation now applies only to the advance payment of employment tax, not to the payment of public insurance contributions.

Employers who, depending on the specific terms of the employee stock plan setup, are required to tax employees’ income from these plans as part of their payroll records, are therefore, under the current wording of the law, required to pay social security and health insurance premiums at the time the option is exercised, while withholding and remitting advance tax only at the time of deferred taxation (e.g., when the employee sells the stock). Instead of simplification, therefore, the amendment brings further complications into practice and an increase in administrative complexity on the part of employers.

The Ministry of Finance, in cooperation with the relevant ministries, has already initiated amendments to the social security and health insurance legislation to ensure that there is no temporal inconsistency. We will continue to monitor developments in this area for you and keep you informed of relevant changes.