Foreign investment in Poland has resulted in an increase in the popularity of instruments that provide for employee equity participation. This is a relatively new phenomenon on our labour market and one that specifically applies to managerial staff and to the IT sector.
Employees are usually offered stock options, so-called Restricted Stock Units (RSUs), restricted shares and other instruments of various nature (e.g. employee stock purchase plan). Under similar schemes, employees can also be offered the option of acquiring shares in their employer (or another member of the employer’s capital group) at either no charge or at a reduced price.
Both parties to an employment relationship benefit from such solutions. The employee is offered a chance to gain a significant financial benefit if the shares increase in value. For the employer, it is an incentive tool. The company’s success translates into the greater value of the company shares held by the employee. Employee retention is also a significant factor. Shares are usually acquired in batches after a certain period of employment, namely, the so-called vesting period. Employees can therefore face negative financial consequences if they tender their resignation or if their employment contract is terminated by the employer for disciplinary reasons. Sometimes, a vesting offer can be interesting enough to convince an employee to take up employment despite a lower basic salary than the salary they would otherwise expect. Similar benefits are usually offered by businesses with foreign capital (especially, of American or British origin).
Agreements concerning stock options (or other benefits of a similar type) are concluded between the employee and the foreign company (the parent company of the Polish employer) without the participation of the Polish employer. They are governed by foreign law and their wording is consistent with Anglo-Saxon templates and practices. Usually, the employment contract with the Polish employer makes no mention of stock options (or any other benefits of a similar type). Although these instruments are gaining in importance, no case law has developed in this area thus far. Legal commentaries on the subject are also limited. We believe that the issues identified below merit discussion as they have not been clearly resolved to date and remain open to various interpretations.
The question of governing law and the potential application of Labour Law
We believe that contracts granting stock options and other equity benefits to employees can be governed by foreign law (when the contract is signed with a foreign company, which is true of a majority of contracts). As a rule, they are neither governed by nor assessed from the perspective of Polish labour law. This also applies, in principle, in the case of contracts concluded directly with a Polish employer that offers shares to its employees and there is no obligation to take into account Polish labour law standards.
However, there are instances in which certain contractual institutions or terminology are not congruent with the principles of Polish law or local market practice and in such cases, it advisable to adapt them to Polish standards (e.g. the so-called good leaver and bad leaver provisions related to contract termination).
Furthermore, although this issue has not been assessed by the courts to date and is controversial, in our view, the terms and conditions of offering stock options or other similar benefits are subject to assessment from the angle of equal treatment and non-discrimination provisions, including even when shares are offered by a parent company. Similar terms and conditions should be applied to comparable employees, also with regard to share schemes. Discriminatory terms should not be applied (e.g. the exclusion of fixed-term contract employees from the scheme unless adequately justified, which is not uncommon in the case of stock option schemes developed in the USA).
We do not exclude the possibility that in the future it might subject to debate as to whether to include the value of stock schemes (or other benefits) in the calculation of severance pay, compensation, holiday pay or other benefits of the employment relationship. In our view, such demands would be unfounded, but the matter is still debatable at this point. In practice, stock schemes are already relevant when terminating employment contracts, including, inter alia, when negotiating termination agreements or when assessing the extent of the employer’s compensation obligation in the event that termination by the employer is found to be defective.
What about the regulations on public offerings (a prospectus, an information memorandum, share registration with the FSA and the like)?
Employers sometimes fail to analyse this aspect of stock option schemes. The vast part or all of the obligations stemming from public offering rules are excluded in the majority of the schemes under which stock options and/or other equity benefits are offered to employees. However, this is not a universal rule. Depending on the design of a given stock option scheme, certain legal obligations do apply.
To put the complex problem more simply, in practice, the majority of doubts and potential obligations pertain to schemes providing for the “direct” acquisition of securities, namely, schemes that are based, for example, on “restricted shares” or “an employee stock purchase plan” or subscription warrants in the case of schemes offered by a Polish employer. On the other hand, fewer problems pertain to schemes involving stock options or so-called RSUs.
Applicable taxation and social insurance premiums
What is relevant in this respect is whether the scheme run by the employer (or its parent company) meets the conditions to qualify as an incentive scheme under the PIT Act. The table below presents the differences. The issue is a controversial one. The authors of legal commentaries present divergent views.
| Is the right to stock options and/or the right to acquire RSUs subject to taxation when obtained? | Is executing the right to receive shares, i.e., executing the stock options and/or the right to receive RSUs (i.e. acquiring shares from the employer or the employer’s parent company) subject to taxation when exercised? | Are the previously acquired shares subject to taxation when they are being sold? | |
| Incentive Program | NO, IT IS NOT | NO, IT IS NOT | YES, THEY ARE The source of income is capital gains; they are subject to taxation at the rate of 19% |
| A Program other than the incentive program | NO, IT IS NOT | YES, IT IS Taxation takes place at the time when the ownership of the shares is transferred. Taxation is based on the fair value of the shares acquired less any prior expenses incurred in connection with their acquisition. The level of taxation follows the applicable general rules, i.e. 12/32/36%. Income earned is combined with other income taxed on a general basis (tax scale), including income from employment relationships. | YES, THEY ARE The source of income is capital gains; 19% tax applies; the share price is the basis for calculating tax less any prior expenditure for the share acquisition plus the income taxable at an earlier stage (as described in the previous column). |
The provisions of Article 24 (Section 11 to 12b) of the Personal Income Tax Act define incentive schemes and the conditions to be met for such schemes to enjoy treatment under more favourable rules. In practice, several problems arise in connection with this definition and conditions, namely:
- for a scheme to qualify as an incentive scheme, there must be an actual acquisition or purchase of shares. Thus, for example, programmes based on “phantom” shares will not be recognized as incentive programmes and less favourable taxation rules will apply;
- the scheme must involve shares in an employer that is a joint stock company (a simple joint stock company) or shares in a joint stock company (a simple joint stock company) which is the employer’s parent company within the meaning of Article 3(1)(37) of the Accounting Act (The Accounting Act of 29 September 1994, Journal of Laws of 2023, item 120). Therefore, if shares in a sister company within a capital group are offered to the employees of a Polish company (as it is sometimes the case), it will not be possible to apply the more favourable rules. Nor can the more favourable rules be used if shares in a limited liability company are offered (or any similar shareholding rights in a foreign company are offered);
- the rules relating to the incentive scheme apply to income obtained from the subscription for or acquisition of shares in joint stock companies (simple joint stock companies) seated in or managed from the territory of an EU Member State, a member state of the European Economic Area or a country with a double taxation treaty concluded with Poland;
- more favourable rules concerning the incentive scheme may apply (if the other conditions are met) only if the scheme was established on the basis of a general meeting resolution.
Leaving aside the incomprehensible reasoning for including the latter condition in the PIT Act, the condition generates problems for schemes established by foreign companies. Rules for similar schemes provide for scheme adoption by the board of directors of a foreign company with their subsequent approval by the foreign company shareholders. Most frequently (e.g. in the USA), such approval is not a requirement stemming from corporate regulations but is a condition precedent when the shares are admitted to stock exchange trading or some more favourable tax rules are to be applied in the foreign company’s country of domicile. Similar provisions give rise to doubts as to whether a scheme adopted by the board of directors and approved by the foreign company’s shareholders is “created by a resolution of the general meeting” within the meaning of the Polish PIT Act. No uniform position of the tax authorities in this respect has been established to date. According to the literal wording of the provision, it seems that the mere approval of the plan by the shareholders is insufficient. However, we can also find some tax rulings that resolve this issue in favour of the taxpayer; - as regards schemes offered directly by Polish employers (and not a foreign company), they are frequently based on subscription warrants. Namely, employees receive warrants that give them a future right to acquire shares. In this respect, in the latest (controversial) case law based on a very restrictive, literal interpretation, administrative courts have adopted the stance that shares taken up on the basis of subscription warrants do not constitute an incentive scheme within the meaning of the PIT Act.
If a given scheme is not deemed an incentive programme, some more favourable tax rules will not apply and, additionally, there is a risk that the employer will be recognised as a remitter of personal income tax (a risk that mainly applies to the schemes run by Polish companies), and, moreover, that it could be viewed that Social Security contributions should be paid with respect to employee income.
In terms of social security contributions, the risk is greatly limited in the case of schemes in which the shares are offered by the parent company (but still, this issue is not entirely clear-cut either). In the case of a non-incentive scheme offered directly by a Polish company, the demand for contributions by the Social Insurance Institution (ZUS) is more likely as long as the employee income is treated as income from an employment relationship within the meaning of the PIT Act. For example, in the case law concerning subscription warrants, the administrative courts held that this would not be the case, but this was due to the specific nature of the arguments concerning warrant-based programmes.
Incentive scheme rules will not apply to those cooperating with an employer on the basis of a B2B contract (which is a common solution used especially in the IT sector). However, the views expressed in this regard differ. In our view, in such cases, the revenue will already be generated when the shares are received. The revenue should then be treated as deriving from business activity (with all the consequences of such categorization, in terms of both personal income tax and social security contributions). B2B contracts are often a practical solution used in the IT sector (a separate issue being whether such use is correct in the context of replacing employment contracts with B2B contracts) because of the taxation and social insurance contributions involved. However, if we analyse them in more detail (such as the chosen form of taxation), it may turn out that in the case of stock schemes and similar benefits, the status of a sole proprietor will continue to be more advantageous in some cases, while in other cases the status of an employee may be more profitable as long as the employer scheme meets the conditions for being treated as an incentive scheme.
Personal data processing
Offering stock options (or other benefits) to employees entails the processing of personal data. Such processing must be reflected in stock option documents. This particularly applies to schemes offered by a parent company (e.g. from the USA) and when the transfer of personal data takes place.
This is the English version of the article published in the guide on employment, mandate and specific works contracts in the leading Polish legal journal Dziennik Gazeta Prawna on 26 June 2023.
For further information, please contact:
Mateusz Bednarski, Bird & Bird
mateusz.bednarski@twobirds.com
