Incentive programs taxation | KPMG | PL

Incentive programs taxation in the light of amendment of the Personal Income Tax Act | Natalia Wytrykowska

Incentive programs taxation

On 27 October 2017, in the Journal of Laws (item 2175) there was published the Act on Amendment of the Personal Income Tax Act. The amendment introduces numerous vital changes in the PIT provisions, e.g. it determines in detail issues related to taxation of revenues deriving from participation in the so-called employee incentive programs. The changes will enter into force on 1 January 2018.

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Incentive programs consist in providing employees, gratuitously or against a partial payment, on the terms and conditions specified in applicable rules and regulations, with financial instruments, i.e., for example, stock options or participation units that, in certain circumstances, give their holders the right to exercise entitlements deriving from a certain instrument, including, among others, the right to acquire certain number of stocks at a certain moment.

Problems with interpretation

Problems, which up to now have occurred with reference to taxation of revenues deriving from participation in incentive programs, have been connected with classification of the source of revenue and the moment of its generation, and have resulted from an inconsistent standpoint of Polish tax authorities. As recently as in 2015 and 2016 said standpoint was contrary to decisions consistently made by administrative courts.

On the one hand, tax authorities held that the revenue was generated upon the share acquisition as the revenue from other sources. On the other hand, however, in accordance with the consistent case-law made by the courts, financial benefits are generated as late as upon the share disposal against payment, and the revenue so generated constitutes capital gains.

In its answer to the above-mentioned problems, the legislator decided to introduce numerous provisions that regulate the above-mentioned matters in a more detailed way.

Double taxation avoidance tools – general principle of determining the source of revenue

Art. 10 sec. 4 of the PIT Act introduces a general principle, in accordance with which revenues obtained gratuitously as part of incentive programs do not constitute capital gains, but are calculated towards the source of revenue, as part of which such revenue is generated (e.g. employment relationship).

The above-mentioned provision is an answer to an illpractice of generating artificial remunerating structures with the use of financial instruments for the purpose of a tax gain, a warning about which was included in a notice issued by the Head of the National Fiscal Administration in August 2017 about application of provisions on avoidance of double taxation in the context of the so-called incentive programs.

According to the National Fiscal Administration, the construction consisted in reclassification of remuneration deriving from employment relationship and having the nature of a financial prize – taxed in accordance with a progressive scale with 32% tax rate – to the source of revenues deriving from capital gains – in order to apply 19% tax rate.

The problem occurs in a situation where a financial instrument’s settlement takes the form of paying money to an employee. Thus, the payment of remuneration is artificially divided into remuneration based on employment relationship and payment of a financial prize deriving from employment relationship and artificially hidden in an execution of a financial instrument.
 

Tax point deferral

The legislator provided for a possibility of deferring the revenue generation date applicable to the acquisition of shares as part of incentive programs until the final sale of such shares provided that certain conditions indicated in the act are satisfied and the incentive program meets certain requirements:

  1. An incentive program, in which an employee participates, must be organised by a joint-stock company (or its dominant entity), from which a taxpayer receives performances or other amounts due based on an employment relationship or an activity performed in person.
  2. An incentive program must be set up under a resolution of the general meeting of shareholders of the company.
  3. As a result of performance of an incentive program established by the company, a taxpayer actually takes up or acquires shares in that company or its dominant entity.

The above does not apply to a situation where an employee receives only a cash equivalent for his participation in the program and is not given the right to actually take up or acquire shares.

In the contemplated situation there actually occurs a tax deferral as, although the revenue is generated as early as at the stage of the share acquisition, the revenue is not recognized then. The tax point occurs upon the share disposal against payment, which is subject to 19% tax rate.
 

Natalia Wytrykowska, Specialist of the PIT Team

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