Ruling description

In its decision of January 30, 2014 (case ref. II FSK 324/12), the Supreme Administrative Court ruled that, if a company president exercises the right to submit virtual shares so that the same may be redeemed by the company, the revenue on the said redemption should be found to constitute revenue on activities conducted personally, representing the consequence of the revenue under the management contract, i.e. such that is subject to the 18-32% tax scale. The contract made between the company and the president thereof for the purchase of virtual shares is of an accessorial nature in relation to the management contract.

In the case under analysis, the company issued so-  called virtual shares pursuant to a resolution of the extraordinary shareholders’ meeting and the said shares were taken up by an individual, i.e. the president of the management board (also cooperating with the company based on a management contract that is subject to taxation at the progressive 18-32% tax rates). The virtual shares in question did not constitute shares in the meaning of the Commercial Company Code and did not offer any shareholding rights in relation to the company to their purchaser. The virtual shares were not share options, i.e. they were not convertible into shares. The holder of the virtual shares purchased them at a specific price and, upon the submission of the shares or upon the occurrence of the events referred to in the agreement, he had the right to receive remuneration equal to the book value of the shares represented by these stocks.

The company argued that the aforementioned virtual shares constitute derivative financial instruments in the meaning of Art. 5a point 13 of the PIT Act. As a result, the revenue on the realization of these virtual shares is subject to income tax at the rate of 19% pursuant to Art. 30b of the PIT Act, and the company is not under the obligation to withdraw an advance on the income tax on the amounts paid out to the president in respect of the profit from the virtual shares. The tax authorities, and then the administrative courts, questioned the stance taken by the company finding that, if the president of the company exercises the right to submit the virtual shares so that the same may be redeemed by the company and if he obtains revenue in this respect, the said profit should be deemed revenue generated by activities conducted personally. The said revenue is a consequence of the revenue under the management contract made between the company and the president. The nature of the contract made between the company and its president for the purchase of virtual shares is that of an accessory. The revenue on the virtual shares does not constitute revenue on cash capital subject to income tax at the rate of 19%, but it represents additional revenue under the management contract subject to tax at the progressive 18-32% tax rates.


Offering virtual shares, or other financial instruments based on the valuation of profitability of the company, has recently become a popular tool used to remunerate management personnel. Such a solution offers an evident benefit in that it offers an incentive to managers in terms of taking steps to improve the financial condition of the company. Moreover, pursuant to the latest administrative court rulings and the practice of the tax authorities, this solution has rendered it possible to tax the profit on virtual shares or financial instruments at the flat income tax rate of 19%. The NSA decision under discussion – if it starts a new line of court rulings – may constitute a material obstacle to the realization of the tax benefits of programs of remunerating managers. The entities that have introduced similar remuneration schemes, and which do not have their own tax rulings to confirm the favorable tax classification of the offered instruments should verify the program introduced from the point of view of any potential risk. On the other hand, the companies that are planning to introduce remuneration programs based on virtual shares should verify the assumptions of these programs and consider their modification.