There has been a substantial legislation amendment changing the rules for taxation of income derived by an employee from Employee Stock Option Plan (“ESOP“) that came into effect on 1 April 2025.
You have most likely already noticed that certain changes in this area are forthcoming, as this topic has recently resonated strongly among legislators, employers, and employees. Although this amendment of the Income Tax Act is fundamental for all taxpayers participating in ESOP, it does not introduce entirely new approaches of taxation. On the contrary, it takes a step back by combining the old and new approaches.
For the sake of completeness, we would like to briefly summarize the previous rules beforehand. The income derived by an employee from ESOP received:
- by 31 December 2023 was taxable at the moment of Vesting (for shares) or Exercise (for stock options);
- since 1 January 2024 was taxable at the moment in which the first of respective taxable events occurs (e.g. the moment when the employee sells the shares acquired), i.e. so-called deferred taxation was applied.
However, as of 1 April 2025, the income derived by an employee from ESOP is taxable at the moment of Vesting (for shares) or Exercise (for options), unless the employer submits a notification to the Czech Tax Authority expressing intention to apply a deferred taxation. In other words, the deferred taxation approach can be applied only under the condition that its application is announced to the Tax Authority within a respective deadline. Otherwise, the “old“ approach in taxation is applicable.
How and when to file a notification
The aforementioned notification has to be submitted with the Tax Authority no later than by 20th day of the month following the month in which the income occurred. According to the information provided, it is possible to include all employees for which the deferred taxation shall be applied on one notification; however, it will have to be submitted separately for each month when the income is derived by an employee from ESOP.
The notification does not have any official form; however, the Tax Authority has already announced to publish a unified notification for these purposes.
Uncertainties related to the legislation amendment
There are several situations when employees receive the income derived from ESOP not from their legal employer (i.e. a Czech company), but from a foreign parent company. In such a situation, the notification must be submitted by the company that provides the employee with the income in a form of company’s shares, i.e. the foreign parent company. This obligation can neither be transferred to the legal Czech employer of the employee, nor to the employee him-/herself. This procedure has also been recently confirmed by the General Financial Directorate of the Czech Republic.
However, it has not been clarified yet, how and to which locally relevant Tax Authority, the notification should be made by a foreign company that provides the income derived from ESOP if the foreign company is not registered for tax purposes in the Czech Republic.
We stay in the loop
If there are any further updates/changes in this area, we will inform you, to ensure compliance. If you have any questions and/or need any assistance with implementation of the aforementioned changes, please feel free to contact us.
Autor: Daniel Mechl, Martina Laubert Smilnická
