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basic tax aspects of ESOP programs by vestbee.com
26 February 2024·7 min read

As businesses strive to attract and retain top talent in an increasingly competitive landscape, Employee Stock Ownership Plans (ESOPs) have emerged as useful tool. ESOPs do not only incentivize employees by offering them a stake in their company’s success. They also align their interests with that of their organization and strengthen the bonds between employees and company (which is often appreciated by investors in the context of new investment rounds or exits). 

Obviously, there is no one-size-fits-all model for implementing an ESOP in Poland, especially for startups. However, there are a few common approaches that are often used based on the nature of the company and the participants’ employment/co-operation form. Such forms differ also in terms of tax treatment.

From a practical perspective, navigating these tax implications, particularly in a complex regulatory environment like Poland, is crucial. Therefore, whether you are a company considering offering an ESOP or an employee weighing up the tax implications of participating, this guide aims to shed light on the essential tax considerations within the Polish context. These include: events that trigger taxable income, rules for calculating the tax, tax payment deadlines, and identification of the party liable for tax payment in most common ESOP models.

Basic ESOP model

In Poland, the basic statutory model for ESOPs is quite specific and tailored to the country’s tax laws. The model requires that the ESOP be established on the basis of a resolution of the general meeting by (1) a joint-stock company (or simple joint-stock company) for its employees or (2) a joint-stock company (or simple joint-stock company) which is a parent company in relation to the company hiring the participants. Furthermore, the seat of the company must be located in a EU/EEA country or in a country which has implemented a double tax treaty. Additionally, the participants shall actually acquire the shares either directly or as a result of the exercise of rights from derivative financial instruments, securities or other rights (defined in detail in the relevant laws). 

The tax benefit of the basic statutory model for ESOPs is that income tax is deferred until the sale of shares. The employee who subsequently sells the shares is the taxpayer responsible for the income tax payment. The capital gain tax is 19%. A solidarity tax (4%) is due if the taxable base exceeds PLN 1,000,000. 

Other common ESOP models

As the need for the creation of incentive programs also arises in entities other than joint-stock companies / simple joint-stock companies (especially in limited liability companies which are the most common form of companies in Poland), as well as for contractors hired based on agreements other than employment contracts (in particular, on a B2B basis), other ESOP models have also evolved. The most common include:

1. Direct share issues other than within the statutory model (in particular, in limited liability companies): 

This is the simplest form where participants acquire newly-issued shares either immediately or according to a predetermined vesting schedule in consideration for cash, usually at a price equal to their nominal value.

In this model, similarly to the statutory model, income tax is generally deferred until the sale of shares. The ESOP participant who subsequently sells the shares is the taxpayer responsible for income tax payment. The capital gain tax is 19%. A solidarity tax (4%) is due if the taxable base exceeds PLN 1,000,000.  

2. Various share options

Under this model, participants are granted the contractual right (option) to purchase shares in the future, usually at a predetermined, discounted price. The possibility of exercising options may be tied to the performance of the company or the individual performance of the participant. 

This model is the most complex from a tax perspective and thus requires proper structuring. There are three events which may be considered tax “points”, i.e. (i) granting contractual rights, (ii) exercise of the option (acquiring shares), and (iii) sale of shares.

As a rule, granting contractual rights is not considered a tax point as long as the contractual rights do not envisage definite gain or do not irrevocably and unconditionally promise specific profits to be achieved in the future. This would be the case for instance if contractual rights are canceled if the contract between the company and ESOP participant is terminated.

However, exercise of the option is already considered a tax point. Typically, the company granting the contractual rights that are exchanged for shares is required to settle the tax on behalf of the employees. The tax base is the market value of the shares acquired. The tax is calculated at the progressive tax rates (which are 12% and 32%). The total tax to be paid depends on numerous factors including annual income and family situation (e.g. filing a joint tax return with a spouse, taking child deductions). If, however, the ESOP participant is not an employee but a B2B contractor, it is their responsibility to settle the tax. 

The third tax point in this model is straightforward – sale of shares triggers capital gains tax subject to the same rules as described in the previous models.

3. Phantom shares (cash settlement)

“Phantom shares” is the customary name for the mechanism of calculating deferred compensation tied to the market value of shares in a given company.  The ESOP organizer grants the participants with hypothetical units that mirror the value of actual company shares. The participants receive then cash payouts based on the increase in value of these phantom shares over a specified period, typically tied to the company’s financial performance or other business metrics. This model works best if the aim of the ESOP is a financial reward for key managers rather than expanding the shareholding structure of the company. The cash payouts in fact are just a form of bonus payment for work or services performed for the company. As a result, they are subject to the same taxation rules as the basic remuneration received under an employment contract or B2B agreement respectively. For the employee, the tax is calculated and paid by the employer according to progressive tax rates (12% and 32%). Also, social security contributions and health care contributions must be paid by the employer. 

On the other hand, under a B2B agreement, the contractor is personally liable for calculating and paying the tax. The taxation rules will vary depending on what taxation model the contractor has chosen for their business. As a rule, there are three models to choose from. Typically, the contractors choose a flat income tax which is 19% or a lump sum tax paid on revenue. In the latter case, the tax rate depends on the scope of services performed and may generally amount to 15%, 14%, 12% or 8,5% of revenue.

Summary

Each of these models requires careful consideration of the tax implications under Polish law, as well as the specific circumstances of the employees involved. Companies should consult legal and tax professionals to ensure that their ESOP programs are structured correctly, understandable for ESOP participants and comply with all the relevant tax regulations, including tax filings and similar formalities.  It is critical to make sure that ESOP is thoroughly though out from the very beginning to avoid legal and tax complications when the value of the ESOP shares is significant and there is not too much time for changes (e.g., due to upcoming exit).

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