It is a key objective for companies to retain employees and executives and also to attract appropriate professionals. As a tax-efficient alternative to employee benefits, securities benefit based incentive programs are able to efficiently support this objective.
The securities benefit based incentive system, a program specifically identified in the personal income tax act, provides companies with a motivation opportunity that can be tailored to their individual needs. Within this framework employees and senior executives may receive securities representing membership rights (business quota, shares) or related property rights (call options, subscription rights) that, compared to salaries, can be provided under much more favourable taxation conditions.
Up to HUF 1 million market value, it is possible for companies to distribute securities to their employees and senior executives free of tax, within the framework of an employee securities benefit program. Going forward, the parties receiving the securities benefit will be able to share in the profit of the company through dividend payments or, by selling the securities, can generate income that, again, is taxed more favourably than salaries. Thus, employees will take an interest in the short term profitability of or even in increasing, in the medium run, the goodwill of their company. In order to generate this income, it is necessary to hold the securities for a period of at least 2 years; that is this incentive system can also help companies to retain employees and increase their loyalty.
In addition to open and closed companies limited by shares, it is also possible for limited liability companies to apply to this program, as, under the personal income tax act, business quotas qualify as securities.
This benefit solution can primarily be useful for companies that intend to include all their employees in the program under certain conditions. The HUF 1 million per person and year benefit are in line with their objectives while their securities retain their public marketability or it is even possible for the companies to repurchase the transferred securities.
When the securities are individually deposited with an investment service provider or when call options, subscription or other similar rights concerning the securities are acquired no tax payment obligation arises.
Tax liability will ”only” arise
The tax burden levied on income one can generate under this program is set out in the following table (as compared to the tax levied on salary):
|Tax consequences of 1 million forints of income||Cost to the employee (HUF)||Gross benefit (HUF)||Net benefit (HUF)||Proportion of net payment|
|As a part of a recognised benefit program||*Controlled capital market transaction1||1,000,000||1,000,000||850,000||85,00%|
|*Exchange rate gain2||1,000,000||1,000,000||850,000||85,00%|
* As a part of a recognized benefit program
1Assuming that the securities included in the securities benefit program are not privately traded securities.
2 Assuming that the securities were traded privately and that including other incomes, the employee’s income reaches the cap on social contribution tax payment.
The rate of (personal income) tax burden levied on exchange rate gain, dividends and income deriving from controlled capital market transactions is equally 15 %. However, from 2019 onwards, another 19.5% social contribution tax is levied on the first two items. The cap on the base of the social contribution tax is 24-times the minimum wage. In the course of determining this base, it is necessary to consider capital incomes to be included in the combined tax base and, primarily, separately taxed capital incomes (e.g. dividends, revenues withdrawn from companies, exchange rate gains, etc.). In case the total amount of incomes referred to above is more than 24-times the minimum wage, not even the obligation to pay the social contribution tax arises.
It is important to stress that in case the employee sells the securities during the mandatory holding period or withdraws them from custody management in any other manner, then – apart from several exceptions – the difference between usual market value (regarded as income) and the amount spent on acquiring the securities plus additional expenses shall become subject to taxation at the same rate as salaries. Similarly, any amount over HUF 1 million accumulating within one tax year that was established as set out above, will also be taxed at the same rate as salaries.
In case the recognised employee securities benefit program aroused your interest or maybe you are interested in further tax planning opportunities, you can contact our colleagues with confidence.
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