Employee incentive schemes based on shares are an effective tool to attract and retain talents. They also motivate employees to long-term involvement in the development of the company. Companies, in particular international ones, are keen to implement them and include employees of their branches in Poland.

It is easy however to get lost in the maze of regulations governing the tax consequences of such schemes. On the one hand, there are very complex and restrictive statutory regulations, on the other hand, there is the increasingly liberal approach of administrative courts. In the last year, many favourable judgements have been passed for participants of such schemes, which means that it is a good moment to analyse the principles of incentive schemes already in place in companies and fight for their preferential taxation. In most cases it will probably not be possible to avoid applying for an interpretation of the tax law. However, the benefits for the company and the employees outweigh these temporary inconveniences. It is worth taking this step!

Employee incentive schemes in Poland

Incentive schemes have become a necessary element of human resource management strategies in many Polish companies. The need to fight for employees, the willingness to attract talents, increase involvement of employees, contribute to their application on an increasingly wider scale, not only by companies with foreign capital, but also by domestic entrepreneurs.

From the point of view of employers, they are an effective tool not only of building involvement, loyalty, and effectiveness of employees, but also creating long-term relations based on trust, safety, and career perspectives. For the employees they are a way of gaining additional income.

Taxation of benefits from incentive schemes

Determining tax consequences of incentive schemes is not easy. On the one hand, we have complicated regulations in the Personal Income Tax Act (“PIT”), on the other hand, we have to know how these regulations are interpreted by tax authorities and administrative courts. Taking into account that these schemes vary significantly, both in terms of their structure and the way of delivering benefits to their participants, the situation gets really complicated.

In simple terms one can say that in a situation in which we receive financial instruments free of charge from a company employing us and then exercise the rights arising from them, the income arising at that time should be qualified to the source under which such a financial instrument was received. In other words, if a manager employed on the basis of a managerial contract has received an option or other financial instrument, at the time of its realisation (i.e. receiving cash settlement or shares) the income will be qualified as income from activities performed personally. Similarly, if such a benefit is received by an employee, the income will be qualified as income from the employment relationship. As a consequence, apart from PIT taxation, it is also subject to social insurance and health insurance contributions. Additionally, it should be noted that in case of incentive schemes based on shares, there will be another point of time when tax obligation arises. It will be the sale of shares.

There is however an exception to the above rule for share-based incentive schemes. In such schemes when certain conditions are met cumulatively, the first (and only) time when the tax obligation arises is when shares are sold. In this case, the income gained at this stage is qualified as capital gains and taxed at 19% tax rate, with no obligation to pay social insurance and health insurance contributions.

In order to benefit from this option, the following conditions must be met:

1. the incentive scheme as part of which the benefits are received, is a remuneration system,
2. it has been formed on the basis of the resolution of the general meeting of shareholders,
3. it has been formed by a joint stock company directly employing its participants or a joint stock company which is its parent company,
4. the participants of the scheme are employees or persons working under civil-law agreements (e.g. mandate agreements, contracts of specific work, managerial contracts),
5. as a result of this scheme the entitled persons, directly/as a result of exercising the rights from derivatives/exercising the rights from specific securities/exercising other property rights, acquire the right to actual taking up or acquisition of company shares in which they are employed or its parent company,
6. the participants receive shares of the company the management board or registered seat of which is located in the territory of the European Union member state, a state which is in the European Economic Area or a state with which Poland has signed a double taxation agreement.

Direct effect –What is to be done?

The structure of this provision indicates therefore, that failing to meet any of the above conditions should result in the lack of preferences involving deferring the moment of arising tax obligation until the date of sale of shares.

For example, if: (i) the scheme were to be organised by a limited liability company, not a joint stock company, (ii) as a result of this incentive scheme its participants were given shares in a limited liability company, rather than shares in a joint stock company, (iii) the scheme were to be organised on the basis of other document than a resolution of the general meeting, (iv) it were offered to persons conducting business activity, not employees and persons carrying out personally performed activities or (v) shares in a company with a registered seat outside the EU or EEA were to be received, its participants could not count of deferring the moment of tax obligation arising.

Beneficial judicial practice
In the last few years administrative courts have issued a number of decisions in which they interpreted the tax consequences of participation in employee incentive schemes in a way beneficial for their participants. In their judgements the courts found that, among other things:

• receiving shares in itself does not grant any benefits, because they are an asset which generates income in future, i.e. at the time of disposing by way of sale or exchange,
• in case of taking up shares of a limited liability company at a nominal value lower than their actual value, “the actual income” arises at the time of disposing of these shares,
• even if the share-based incentive scheme is organised by a company with its registered seat in Hong Kong, with which Poland has not signed a double taxation agreement, the income arises only at the time of sale of shares received as part of the scheme,
• considering that incentive schemes may be organised not only by Polish entities, but also by foreign entities, the requirement of passing a resolution of a general shareholders’ meeting should not be interpreted in a strict way. In other jurisdictions incentive schemes may be formed e.g. by the management board or the board of directors and in such cases it should be allowed that a given scheme is adopted not necessarily by a general shareholders’ meeting, but also by a different body which on the basis of a foreign law is entitled to perform such activities,
• participation in a given incentive scheme of co-operators (i.e. persons with whom the company entered into service agreements) does not rule out the possibility of finding it to be a remuneration system.

What can a company do

Taking into account the changing approach of administrative courts, more favourable for the participants of incentive schemes, now is certainly a good moment to verify the manner of taxation of benefits arising from incentive schemes adopted in companies and consider whether it is possible to apply more favourable principles. In many cases it will be necessary to confirm such an approach in an individual interpretation of the tax law. However, it is worth doing, as the benefits for the employees and the company definitely outweigh any inconvenience related to this process.

Read more about Polish HR law – PRO HR Year Book 2024