The beneficial regime of share option’s taxation in Latvia
There are several ways how company can motivate there employees- rise in salary, bonuses, health insurance and other benefits. Most of these cause extra tax burden to employer and also employee. More advantageous tool with lower tax burden is to grant to employees special share purchase options, involving employees in company as shareholders. This system is especially interesting and beneficial because employees will become more interested in performance of the company and level of loyalty to company will increase, as later when the period of share option vesting is over, the employee may become as one of the shareholders of the company.
The three phases – granting, vesting, exercising
There are three periods in share option plan. First of all, the share options are granted, meaning that the employee is included in share option plan.
The next is vesting period, meaning that in this period of time employee is not yet entitled to act with shares as the owner. The length of the vesting period is determined in the share option plan. However, in the best case scenario the employer may allow to receive dividends after at least 1 year of vesting.
The third phase is exercise of the share options. Thus, the employee becomes the owner of the shares.
The criteria of personal income tax (PIT) act regarding share option
According to PIT act, exercise of share options of the company is not subject of PIT or national social insurance (NSI) contributions if the certain criteria stated in PIT act are met. Share option as extra benefit for employees from tax perspective it is beneficial for both parties- company and employee
Following criteria have to be fulfilled in order for exercise of share option to not be subject to payroll taxes:
- Period of share option is longer than 36 month;
- Employee is in working relations with company issuing share options;
- Necessary information submitted to States Revenue Service.
Also in period of two month after the employee is included in share option plan company have to submit following information to State Revenue Service consisting of: information about involved companies, criteria for workers, terms and conditions for purchase of share options, minimal period of holding of share options, possibility to exercise rights of share options if work relations are terminated, rights to sell or inherit share option rights, conditions of purchase of share options, information about employees participating in share option program.
Value of share option is determined:
- For publicly tradable options- average daily price in day of sale of options.
- For publicly non-tradable options- value stated in independent written valuation.
If aforementioned criteria are met, share options will not be subject to application of payroll tax.
Employee will be liable to pay tax only for capital gain when sale of share options will occur. Employee will be liable to pay tax of 15% from difference of price, if any, that employee bought share options and sale price of options. Without this special tax regulation share purchase option would be applicable as any other bonus with personal income tax 23% and social security tax 34.09%.
From tax and business perspective this regulation is more advantageous for both parties. Employee will be interested because financial gains will be higher compared to bonus and for employer this system will increase interest of employees in performance of company and motivate them to continue work for company.
In case you would like to receive our legal and tax assistance regarding the shares please contact our lawyers and tax consultants in Latvia, Lithuania and Estonia at firstname.lastname@example.org.