Issue of Shares for Employees

Issue of Shares for Employees in Unlisted Companies

New tax rules concerning employee share issues in unlisted limited liability companies took effect on 1 January 2021. These rules apply to share issues where the decision was made after the law came into force.

Valuation of Shares

Under the new legistlation, taxable earned income arises only if the subscription price of the employer’s shares is lower than the share’s mathematical value (calculated with certain adjustments).
The mathematical value and the company's net assets are determined based on the latest approved financial statements, which must be confirmed by the general meeting before the start of the subscription period.
This is a significant change. Previously, any discount exceeding 10% of the fair market value of the shares was taxed as earned income, even when the share issue was directed at the majority of employees.
The reform removes uncertainty related to determining the fair market value of shares in unlisted companies.
Any benefit received through the subscription becomes taxable capital income only upon sale of the shares.
When an employee sells shares received in the issue, standard capital gains tax rules apply, and the profit is considered taxable capital income.

Available to the majority of employees

The new employee share issue provisions apply only when an employee subscribes to shares in the company that is their employer.
- This also applies to the CEO and members of the board, provided they receive salary from the company.

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As under previous regulations, any benefit received in the form of a low subscription price must be available to the majority of employees. 'Majority of employees' means more than half of the workforce, and it is sufficient that this majority has the opportunity to participate in the share issue.
When calculating the majority of employees, persons excluded from the regulation due to ownership or voting restrictions before the start of the subscription period are not taken into account. Board members who are not employed by the company are also excluded from the calculation.

According to the legislative preparatory materials, fulfilling the majority of employees requirement does not require that all eligible participants be able to subscribe to the same number of shares.The benefit may be considered available to the majority of employees even if different employees have the right to subscribe to different amounts of shares.

Employees' rights to subscribe for shares may vary between different employee groups and units.

It is essential that the terms of the employee share issue are determined objectively and uniformly for all those entitled to participate. No one's share should be merely nominal.

For example, it is considered acceptable for employees to subscribe for shares based on the value of their contribution to the company. This is typically reflected in the benefits offered to employees, such as salary and other fringe benefits.

It is essential that the share issue is genuinely aimed at the majority of employees, who also have a real opportunity to participate, and that the terms of the issue are defined objectively and on equal grounds for all eligible participants.

Other conditions

The new regulations would not apply if the employee subscribing for shares, their family member, or their jointly owned shares exceed ten percent of the company's shares.

If the shares granted to an employee lack all essential ownership rights, such as the right to dividends, the right to the company’s assets upon liquidation, or voting rights at the general meeting, the issue would not qualify as an employee share issue under the proposed provision 66 a §.