As reported in our January 2018 Clients & Friends Newsletter, the Polish Ministry of Finance amended Poland’s income tax laws, including provisions affecting the taxation of equity incentive plans, effective January 1, 2018. Under the new legislation, income tax on equity awards may be deferred until the time the underlying shares are sold if certain conditions are met.
However, even when the conditions for tax deferral are met (and even if the Polish subsidiary is not charged with the cost of the equity awards), it is unclear whether the new deferral provision also will apply to Polish social insurance contributions. More specifically, the Polish social security authorities may characterize equity awards granted by a foreign company as employment income, and thereby seek to impose social insurance contributions at exercise / vesting / purchase.
Under Poland’s previous tax regime, social insurance contributions generally did not apply to equity awards granted by US multinationals because the tax authorities and Polish courts viewed equity incentive plans of foreign companies as separate and apart from the local employment relationships (unless, the equity awards were specifically addressed in the local employment agreements).
However, because Poland’s income tax laws have been amended, Polish courts have not yet interpreted the new provision providing for deferred taxation. As a result, whether equity compensation awards now will be characterized as employment-related, and if so, whether the new deferral provisions also will apply to social insurance contributions, is uncertain.
If the Polish social securities authorities conclude that social insurance contributions apply to equity awards at exercise / vesting / purchase in Poland, both employee and employer social taxes would be due. The local entity would be required to withhold the employee’s portion and remit both the employee's and the employer's portions. Significantly, the applicable social insurance contributions may be uncapped, as the Polish government has announced plans to abolish the caps on social taxes in 2018. Employee and employer social insurance contributions total approximately 22% each, although a portion of the employee’s social tax is tax-deductible.