Taxation of stock options in the Baltics
Rapid economic growth and increasing competitiveness on the labor market has compelled employers to remunerate their employees and board members with securities, including stock options.
In Estonia, taxation of the options given by an employer to its employee is regulated quite clearly, though in some cases there are varying interpretations. Accord-ing to current legislation, a free-of-charge transfer, or sale or exchange at a price lower than the market price of stock options will be considered a fringe benefit. Granting a stock option free of charge will trigger the imposition of 23/77 income tax on the market value of the option payable by the employer. Furthermore, the employer will be required to pay a social tax of 33 percent on the value of the option plus the income tax paid on granting the option.
A subsequent sale of the stock option or acquired share by an employee will be subject to 23 percent capital gains income tax. The gain is determined by reference to the difference between the sale price and the acquisition cost.
These taxation principles are clear in cases when the local employer grants stock options to employees. However, taxation treatment becomes quite complicated when a foreign parent company grants stock options to employees of an Estonia subsidiary. The unofficial position of the Estonian Tax and Customs Board is that it will focus on the substance of the transaction and not its form.
Latvian tax laws do not provide a clear guidance on the tax treatment of stock options, except for certain types of share (stock) options for employees called personnel shares. The individual income tax of 25 percent is levied from the repurchase of personnel shares. The individual income tax is applied to the remaining amount of the difference between the amount received by an employee for the aforesaid stock and the amount of expenses pertaining to the acquisition of the same stock.
Lithuanian tax laws do not provide clear and detailed regulation on taxing stock option benefits. In order to clarify taxation of such options, the Lithuanian State Tax Inspection issued an explanatory note, pursuant to which a taxable event for an employee will occur only (a) upon sale by the employee of shares that had been acquired by exercising the stock option or (b) transfer of the option to a third person. Income tax of 15 percent will be applicable on the capital gains realized from the share/option transfer (sales price minus acquisition price).
However, capital gain will be totally exempt from taxation provided that (a) the shares have been sold no sooner than one year after the day of acquisition and (b) the seller during last three years has not held more than 10 percent of all shares in the issuer.