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Employee incentive compensation plans in the context of PIT

Employee incentive compensation plans in the PIT

Employee incentive compensation plans which operate on the basis of enabling an unpaid or partly paid acquisition of shares or stock options by employees are still one of the most popular compensation systems in companies belonging to international corporate groups. Because these plans have been implemented abroad for years, this issue is not unknown to the local tax systems. The situation is different in Poland, where the lack of explicit reference to rewards in the tax law, along with the shaky line of interpretation of the tax authorities causes that both employees and employers have to confirm their approach by obtaining a tax ruling issued by the Minister of Finance to protect their interests.


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General remarks

The operational principle of incentive compensation plans is simple. Employees receive stock options or restricted stock units which after the so called vesting period can be reclassified into shares. During this period the employees have no rights related to the participation in the program. No income arises on their part, they have no rights to dividends or voting rights at the shareholders’ meetings. They only gain these rights after a certain period of time, as laid out in the regulations, and sometimes after meeting additional conditions. At this point they become shareholders of the company. This is precisely when tax-related issues arise.

Income at the time of purchase?

For a long time tax authorities took the view that at the moment of the acquisition of shares or stock options income arises from the employment relationship which is the basis for social security contributions and taxes. It wasn’t important for the authorities that the de facto organizational entity of the compensation plan is not the employer, that the remuneration is not derived from an employment contract or remuneration regulations or that the entity selecting groups of positions which take part in the program is not a Polish entity. However, the line of interpretation has changed and at the moment, as a rule, authorities do not qualify the acquisition of shares or stock options as income from an employment contract.
The issue here lies in the substantive qualification of the acquired shares from the point of view of the Personal Income Tax Act. The current dispute on the line taxpayer - tax authority - administrative court is based on the recognition whether:

  • The acquired shares or stock options constitute income at the moment of purchase and whether it is considered to be income from other sources, hence taxable under the general rules (progressive rate), or
  • The acquired shares or stock options do not constitute income at the moment of acquisition, hence the value of the shares sold by the employee constitutes income only at the moment of disposal (flat tax rate, 19%).

Until recently, the tax authorities recognized that at the moment of acquisition the taxpayer should tax the value of the acquired shares as income from other sources. This value (value of acquired and reported shares) can be considered, however, as deductible costs at the time of the disposal of shares, Administrative courts, however, have gotten in the way of the tax authorities… which created quite a big problem in the line of interpretation.

The jurisprudence of administrative courts

The first significant judgments, which shed new light on this issue were the two judgments of the Supreme Administrative Court (ref. II FSK 1665/10, II FSK 111/12 and 601/12 II FSK), in which the judges considered that the acquisition of shares by employees under the incentive compensation program does not result in income arising on the part of the employees.

According to the administrative courts a taxable event occurs only at the moment of the disposal of shares. In the judgment of the Supreme Administrative Court of 13 March 2013 (ref. II FSK 1433/11), the judges declared that “income obtained by the beneficiary of the program in connection with the fulfillment of rights conferred onto him by the company through stock acquisition options by the payment of the difference between the price of the valuation and the share exercise price should be qualified as income from capital gains within the meaning of art. 17 paragraph 1 point 10 of the PIT Act.”

In other rulings administrative courts have repeatedly indicated that the interest of the state is included and secured by systematically taxing the sale of the shares as income from capital gains.

The judges have given the widest interpretation in its judgment of 13 February 2014 (ref. II FSK 601/12), explicitly rejecting the argumentation presented by the tax authorities concerning the possibility of recognizing the value of the acquired shares as deductible costs at the time of the disposal of shares, and considering that such a structure cannot be used by the taxpayer, meaning that the only option to avoid double taxation of the same income is considering it as income only at the moment of disposal of shares, not their acquisition.

The presented jurisprudence may be regarded as established and stable (Supreme Administrative Court of Poland judgments: 13 February 2014 (ref. II FSK 640/12), 13 February 2014 (ref. II FSK 665/12), 19 February 2014 (ref. II FSK 650/12), 3 February 2015 year (ref. II FSK 3136/12), as well as judgments of the Voivodship Administrative Court of Gliwice dated 11 August 2011 (ref. I SA / Gl 572 / 11), 14 May 2014 (ref. I SA / Gl 288/14), 19 August 2014 year (ref. I SA / Gl 522/14), judgment of the Voivodship Administrative Court in Krakow of September 18, 2015 (ref . I SA / Kr 1000/15) and the judgment of the Voivodship Administrative Court in Poznań of 14 June 2016 (ref. I SA / Po 353/16).

The issue is still relevant, as evidenced by the recent judgments of Voivodship Administrative Court / the Supreme Administrative Court of Poland from 2015 and 2016 related to this matter. This means that, despite the well-established case law, the position of the tax authorities is unstable and negative decisions / interpretations have to be appealed to the administrative courts by the taxpayer.

Steps for the future?

Until the dispute is not be settled by the legislator in the form of a binding tax provisions, the only solution for safeguarding the interests of the taxpayer is to approach the tax authority to issue an individual tax ruling As has been emphasized, there is a risk that the authorities will issue a negative ruling which will make it necessary to proceed to an administrative court. Here, however, given the high volume of jurisprudence, there is a possibility that the Voivodship Administrative Court will accept the arguments presented by the taxpayer and repeal the negative interpretation of the Minister of Finance. The process of obtaining interpretation is longer in this scenario, yet worth considering from the point of view of the potential tax savings which the taxpayer can get.

Mateusz Wąsik, Counsel, Tax Adviser of the PIT Team

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