As anticipated in our September 2017 Clients & Friends Newsletter, the Polish Ministry of Finance has announced plans to amend Poland's income tax laws (personal and corporate). These amendments include provisions affecting the taxation of equity incentive plans. Under the new legislation, effective January 1, 2018, income tax on equity awards may not be due until the time the underlying shares are sold (at which time, a flat 19% rate will apply), pursuant to a tax deferral that currently applies only to grants made by EU/EEA-listed companies.
There are three requirements for the deferral:
i. shares are actually acquired under the equity incentive plan;
ii. the equity incentive plan is approved by shareholders of the issuing company (which can be the parent company of a Polish company employing the participants as employees or dependent contractors); and
iii. the issuing company is based in a country which has entered into a tax treaty with Poland (such as the US).
In cases where tax deferral does not apply, the legislation allows any taxes due at exercise/vesting/purchase to be deducted at sale. Previous legislation allowed such a deduction only in some cases, creating the risk of double taxation upon the sale of shares. Therefore, the draft legislation eliminates the risk of double tax at sale where tax deferral does not apply.
However, due to the lack of clarity in recent years surrounding the characterization of equity award income in Poland, we believe a risk still exists that the Polish social security authorities could seek to impose social tax at exercise/vesting/purchase, based on the possible characterization of equity awards granted by the foreign parent as income from employment.
Depending on the development of the new legislation, it may be necessary to apply for a ruling from the Polish tax or social security authorities to confirm that no employment income is earned at exercise/vesting/purchase.