At the time of total re-legislation of the cafeteria taxation, employers are actively seeking new instruments for the remuneration of their employees. Stock option plans now get even a higher emphasize than earlier, especially considering the potential high values that are not limited, and the long-term loyalty effect that is becoming ever more important in this fluctuating and demand-driven employment market.
Firms may award selected employees (including the employees of a Hungarian subsidiary, branch or representative office) by granting stock options. Exercising the rights deriving from such options, the employees may get stocks of the parent company or other publicly traded stocks. If the employees are entitled to the stock issued by the company group of the employer, it can significantly increase not only their loyalty but also their performance as, directly or indirectly, it is also reflected in the value of the stocks.
Taxation of stock options is linked to the period from when the private person gets the value. This is usually not when the offer is made, or at the granting of the stock option itself, but a little latter, as such plans usual require a grace period from the employees. At that time, the participants can purchase shares at a discounted rate or maybe even free-of-charge. The tax base will need to be determined as the fair market value at the time of acquiring the securities minus the purchase price of the securities (if any) and the costs associated with it.
The tax liability for the income deriving from the securities shall be determined based on the relationship between the parties concerned and the circumstances under which the income was obtained. In an employment stock option plan, it is generally an employment relation even if the provider is a foreign parent company. This means that the stock vesting is taxed as employment income in Hungary, with 15% personal income tax, 19.5% social tax and 18.5% employment contributions.
If the provider is a Hungarian company, the employer is obliged to withhold and pay the tax; however, if the stocks are granted by a foreign entity, the private person will have the liability to pay the tax on the income. Considering the fact that the individual does not get money but stocks, taxes are usually covered by selling a minor part of the securities (i.e. net accounting). The employee has to report the taxes only in the annual personal income tax declaration by May 20 of the following year.
Hungarian legislation, however, gives the possibility for the Hungarian employer to take over the payment of the social tax from its employee; the private person then remains liable to pay and declare the social security contributions only.
The advantage is that the private person can achieve additional income from the stocks, like dividend income if he or she keeps them, or capital gains if sold. These both generate 15% personal income tax, but no social security taxes over a threshold which is usually reached in a stock option situation.
The Hungarian tax legislation also provides for an Approved Employee Security Benefit Program (“MRP” in Hungarian) with a more preferential taxation. In such a program, the securities income of the private individual is not taxable within the determined compulsory deposit period. During this period, at least by the end of the second consecutive year, the shares should be deposited. After the deposit period, income up to HUF 1 million should be taxed as capital gain (i.e. 15% personal income tax only over the social security threshold); taking the income earlier would generate employment taxation again. This preferential taxation, however, is subjected to more conditions determined by law.
LeitnerLeitner is one of the most influential tax consulting, accounting and auditing companies in Central Europe. We have comprehensive knowledge on the legal and tax environment of the region. With the help of our other experts we can provide high quality advise on taxation aspects of special income from investments, stocks and other capital transactions, entrepreneurship, and much more.