Lithuania’s Personal Income Tax Exemption for Shares Acquired Under Share Option Agreements

The Parliament of Lithuania has adopted amendments to the law on personal income tax that will exempt certain share option agreements from personal income tax.

Beginning on February 1, 2020, the law on personal income provides that shares acquired under qualifying share option agreements may be exempted from personal income tax if: (1) the share option agreement was concluded on or after February 1, 2020, (shares acquired under earlier share option agreements cannot be exempted from personal income tax); and (2) the employee must not obtain a right to acquire the shares before February 1, 2023.

The exemption covers all employees including the manager of the company, members of the supervisory board and/or the management board who are employees of the company. The shares may be acquired either from the employer or from the shareholder of the company.

However, the tax exemption only applies to situations in which the employee has an actual right to acquire the shares. A Lithuanian court judgment (Case No. I-2692-38/2008) stated  that where an employee receives monetary compensation instead of acquiring shares, then the exemption is not available. Instead, the compensation is taxed as the salary of the employee and subject to social insurance contributions and personal income tax.

Comments

Share option agreements are becoming more attractive as a motivational tool for employees, especially for start-ups. However, despite this new tax legislation, the Lithuanian tax authority has not yet provided any binding rules over which transactions may be recognized as qualifying share option agreement subject to the exemption from personal income tax.

Written by Indrė Mažeikaitė and Vytautas Šilinskas of TGS Baltic and Roger James of Ogletree Deakins

© 2020 TGS Baltic and Ogletree, Deakins, Nash, Smoak & Stewart, P.C.