Many industrial engineering companies have substantial work forces in Poland.
There is often a need to incentivise them, especially where they are part of a global organization and their counterparts in other jurisdictions are used to receiving share incentive awards.
The tax treatment of share based incentives is always a key factor in the effectiveness of the reward ultimately delivered to employees. It is vital to ensure that tax does not arise unexpectedly, or perhaps more importantly, at a time when the employee has yet to realise value from the award they have received.
Unfortunately, the Polish tax legislation does not address the tax treatment of most forms of share incentives. For a long time the tax legislation did not address this issue at all and the current regulations only deal specifically with option based instruments granted by companies resident in the European Union or in the European Economic Zone.
This means that the tax treatment of any incentive arrangement which does not fall within the narrow scope of these regulations, such as, awards of Restricted Stock, Restricted Stock Units, Performance Shares etc, remains uncertain.
Position in relation to options
If options over shares are granted to Polish resident employees by a company which is resident in the European Union or in the European Economic Zone, then it is clear that under the modified provisions of the Polish Income Tax Act:there should be no tax consequences arising on the grant of the option to the employee – at the moment of grant, no revenue is placed at the disposal of the employee and therefore the employee should not be taxed at that point in time;
- no tax should be due on the exercise of the option by the employee - Polish Income Tax Law provides an exemption from the tax due on the income resulting from the difference between the option exercise price and the market value of the stock at the date of exercise; and
- taxation will occur at the moment of actual sale of the shares resulting from the exercise of the option.
Companies which are not resident in the European Union or in the European Economic Zone are however not covered by these provisions.
Fortunately, there are numerous rulings issued in the name of the Minister of Finance, where it has been confirmed that in cases where the Stock Option Plan is established and operated by a company residing outside the European Union or the European Economic Zone, the benefit received by the Polish employee pursuant to the option should not be subject to taxation until the sale of shares resulting from its exercise.
However, companies which are not resident within the European Union or the European Economic Zone wishing to grant options over shares to Polish employees, are recommended to obtain an individual tax ruling from the Ministry of Finance, in order to ensure that the tax treatment described above can be applied to the options concerned.
Position in relation to other types of share incentive
As stated above, stock option plans are the only share-based incentives that are directly provided for under Polish law. All other types of share-based incentive such as, Restricted Stock, Performance Stock, Restricted Stock Units, Performance Stock Units, etc, fall to be assessed on general tax principles.
Usually, the time at which a Polish employee should become subject to taxation on any such award would be the moment when the actual benefit pursuant to the award concerned is placed at the disposal of the employee.
Despite this, it is not uncommon inPolandfor the tax authorities to take the approach that the tax point on share-based awards other than options, arises as soon as they are granted to the Polish employee on the basis that at this point in time the employee receives a benefit that can be expressed in monetary terms.
Most Polish tax advisors would disagree with such an approach, namely because:
- it is not until the moment of vesting of the award concerned that the individual has a right to actually receive underlying stock or its cash equivalent;
- in many cases, the employee may never receive the underlying stock or cash benefit at all, either because his award lapses or is only capable of vesting to a lesser extent than expected at grant due to certain performance conditions not being met – taxing an employee on a benefit that may never be received is wholly unfair.
However, as the Polish tax authorities will be the ultimate arbiter of how such an award is taxed, it is advisable that the employee (or their employer) apply for an individual binding ruling from the Ministry of Finance to confirm that it is not until the moment of vesting, i.e. the moment of receiving the underlying stock or its cash equivalent that the employee will be subject to any tax.
The tax regime in Poland can make the introduction of share-based plans other than stock option plans established by companies residing in the European Union or European Economic Zone, complicated.
Any Polish company whose employees are to be incentivised using share-based awards other than an option falling within the exacting provisions of the Polish tax legislation may face:
- a degree of uncertainty as to the company’s tax reporting or remitting obligations;
- difficulties in answering questions from employees as to the tax consequences for them of participation.
Such uncertainties may undermine the incentive value of the proposed awards. Accordingly, in almost all cases where Polish employees are to participate in a share-based incentive programs it will be necessary that they (or their employer) turn to the Ministry of Finance for an individual binding tax ruling, to confirm the tax treatment of the particular award concerned.
Doing so, should help alleviate the uncertainty and tensions caused by not understanding the tax consequences of making the awards to the Polish employees and be conducive to the incentive program successfully meeting its primary objective of incentivising and rewarding the employees concerned.