A new Personal Income Tax incentive in Lithuania comes into force in February 2020 to make employee stock options more attractive to use. Under the new rules, fringe benefits from share options are exempt from personal income tax if a share option is held by an employee (but not exercised) for at least 3 years and if a share option agreement is concluded after 1 February 2020.

Employee stock options have become an ever more popular way of motivating and attracting the best employees, ensuring their loyalty and eagerness to contribute to the success of the company. Stock options enable replacement of cash salary payments with trust in the company’s future success as a currency. Tax laws treat share options mostly as salary payments made in kind. However, being taxed similarly to salary would make it unreasonably expensive to use share option schemes. Thus states, also eager to encourage share options as a means of attracting the best talent, offer different tax incentives.

Benefits to be offered to companies and employees

The new incentive will allow postponing payment of personal income tax to the moment when the employee actually earns money from subsequent sale of shares acquired by way of exercising the share option. The difference between the market price and the purchase price of the shares would be taxed. This provision will also eliminate a difficulty arising when companies have to evaluate the benefit received by the employee in the form of shares, especially in the case of start-ups. Moreover, this incentive should also effectively reduce the tax burden, as capital gains received from the sale of shares are taxed at 15/20% personal income tax compared to 20/27% applicable to salary.

A similar tax incentive is already established and valid with respect to social security contributions. Fringe benefits from share options are exempt from contributions if the share option is exercised (the shares are acquired) not earlier than 3 years from grant of the option.

NB If shares are substituted by cash, the cash would be treated as a salary payment taxable in the same way as with payroll taxes.

Tax incentives for employee stock options in Latvia and Estonia

Similar tax incentives for employee stock options are already applicable in Latvia and Estonia. Exercise of a share option after three years from grant of the option is not treated as a fringe benefit and therefore not subject to fringe benefit taxes. Personal income tax only applies upon sale of shares. Share option plan details must be notified to the tax authority (in Latvia) or option agreements must be digitally signed, notarised or forwarded to the tax authorities (in Estonia). Note: in Latvia share options can be issued by public limited liability companies (AS) only but not by private limited liability companies (SIA).

No special regulation in relation to share options in Belarus

No special regulation in relation to share options exists in Belarus. General rules on transfer of shares apply. Option agreements are regulated only for Hi-Tech Park residents. An employee exercising an option must be able to prove that he has exercised the option in return for payment rather than free of charge. Otherwise 13% personal income tax from the nominal value of the shares is payable by the employee.