Ruling description

In the judgment of 7 February 2014, case no. II FSK 347/12, II FSK 419/12, the Supreme Administrative Court (NSA) considered that if the performance of an option is effected through instructing a broker in the USA to exercise the option together with the immediate resale of the acquired shares for the current market price, the obligation to pay the income tax occurs only after selling the shares for consideration.

A natural person employed by a Polish company was granted an option for shares of a US company of the same corporate group as his employer. The exercise  of the option takes place through instructing a broker in the USA to do so together with the immediate resale of the acquired shares for their current market price.

The employer receives from the broker the difference between the purchase price for the shares (arising from the exercised options) and the sale price multiplied by the number of sold shares. The amount is then transferred to the employer’s bank account.

Having analyzed the above factual background, the tax authority and then the Provincial Administrative Court considered that the taxpayer is obligated to declare taxable income both at the moment of exercising the option (equal to the excess of the market value of the received shares over the price for which they were acquired by the taxpayer), and at the time of selling the shares (equal to the difference between the sale price for the shares and expenses incurred on the acquisition of the shares and expenses related to the sale, if applicable).

The Supreme Administrative Court did not accede  to the above position and stated that it breaches the Polish Constitution (in particular Art. 32 sec. 1 of the Constitution). In light of tax law the constitutional

principle of equality means the commensurateness of taxes and the introduction of common and proportionate taxes. In a situation involving the simultaneous acquisition and sale of shares, a beneficiary may not gain any benefits from the sole acquisition of the shares, because the acquisition and sale of shares occurs at the same moment. As a result the only income of the beneficiary is the income from the sale of shares received as a result of exercising the option.


The judgment of the Supreme Administrative Court discussed above deserves positive assessment. In the said case the Court not only applied the literal interpretation of the provision of the PIT Act, but it also conducted an economic analysis and rightly considered that a taxpayer who at the same time acquires and sells shares may obtain taxable income only once, i.e. in relation to the sale of shares. It is worth noticing that the Supreme Administrative Court limited its conclusion to this particular situation, i.e. a situation where the acquisition and resale of shares occurs simultaneously. The Supreme Administrative Court did not challenge the legitimacy of the negative interpretation line prevailing in the recent years, pursuant  to which the obtaining of shares within a share plan generally involves income arising on the beneficiary’s part (though in practice a beneficiary of an option plan may never sell the shares and never obtain any actual proceeds). In accordance with this interpretation line, the deferral of taxation until the sale of shares is only possible in instances referred to in Art. 24 sec. 11 of the PIT Act (i.e.  in situations where a beneficiary is entitled to acquire shares under a resolution of the general meeting of a company issuing the shares and the issuer is a company from the European Union or the European Economic Area). As a result, companies which provide their employees with an opportunity to participate in option plans should still pay attention to the proper organization of such plans so as to mitigate tax burdens on the taxpayers’ part.