Tax incentives for employees and executives receiving equity-based benefits in Greece
Dimitris Menexis of EY Greece discusses the new changes to equity-based compensation (shares) provided to employees in Greece.
The aim of the tax reforms introducing incentives for employees receiving benefits, is to create a streamlined tax framework in Greece. The change provides an attractive tool which has a binding effect on both executives and employees, contributing – along with other economic and fiscal policy measures – to increase productivity and propel economic growth.
Until December 31 2019, gains from equity-based plans where real shares were provided to individuals, were taxed to the employee as employment income, up to a marginal income tax rate of 44%, plus to a marginal tax rate of up to 10% for solidarity tax purposes.
The time of the acquisition of the shares was set as the tax trigger point. Such extreme taxation on equity-based benefits had a negative effect on incentivising individuals, as the perceived benefit from participating in such schemes was diluted by the extremely high taxation.
The new legislation, applicable for shares acquired from January 1 2020, has brought forth a 15% flat capital gains tax rate on such benefits in most cases (e.g. the 24-month holding period reserved only for stock option plans), while solidarity tax rates remained unchanged.
Under the new rules, if a benefiting individual’s marginal income tax rate is 44%, then the tax savings differential sits at 29% – a notable difference in tax – thus, clearly re-instating the incentivising nature of such plans.
The new rules for shares acquired from January 1 2020 onward are split into two components.
Stock option plan
One legislative change concerns the classic ‘stock option plan’, where the individual exercises the option, pays the exercise price and receives shares of the company. Under the new legislation, the gain at the date the shares were acquired is either taxed at a flat capital gain tax rate of 15%, or, according to the progressive income tax scale, as employment income.
The condition that will decide how such gains will be taxed, is whether the shares acquired are sold at least 24 months after the date the option was granted. If the shares are sold by the individual after 24 months since the grant date, then such gains will be subject to a 15% capital gains tax, while.
On the other hand, if the shares are sold prior to the lapse of 24 months from the option’s grant date, gains would be taxed as employment income, at a possible maximum tax rate of 44%. In both cases, solidarity tax applies. The tax trigger point for the individual, is the date when the shares are sold.
The other legislative change concerns free shares provided to executives/employees, in which case it is expected that the employee does not participate in acquiring the shares and that the free shares are provided to the employee after achieving specific objectives (e.g. key performance indicators or the occurrence of a specific event).
Under free shares legislation, gains are taxed at a flat rate of 15%, with no employment income tax considerations and, therefore, no 24-month holding period condition. Once again, in the case of free shares, the tax trigger point for the individual is the date the shares are sold, and tax is applied on the value of the shares at the date they were acquired.
A circular issued in December 2020 by the governor of the Independent Authority for Public Revenue, indicatively confirmed the type of plans that fall under the free shares legislation (i.e. restricted stock units – RSUs, performance shares or performance units, restricted shares plan, matching shares or employee stock purchase plan, deferred stock, etc.). This was announced to the extent that these plans are conditional upon the achievement of specific goals or the occurrence of a specific event, provided there is no employee participation in the plan.
Summary of stock option plan and free shares
In both the stock options and the free shares tax regimes, when the shares are actually sold by the individuals, any additional capital gain incurred – when compared to the value of the shares at the acquisition date of the shares – is not taxed for capital gain income purposes, unless the seller participates with an interest of over 0.5% in the share capital of the company whose shares they sold. However, solidarity tax of up to 10% is also applied on the incremental gain when compared to the price of the share at the date the shares were acquired.
The employee, in all cases above, would be obliged to declare the sale of the shares in their annual filing in the year the shares are sold, and pay the relevant tax, based on the value reported by their employer at the date their shares were acquired. This is in addition to paying any additional solidarity tax on any increase in the share price since its valuation at the acquisition date.
An issue that may arise due to the new legislation would be how a foreign tax credit can be obtained at a future point in time, when Greek tax is applied in the year the shares are sold and another jurisdiction has taxed the same income at the time the shares were acquired. In this respect, clarifications should be provided by the competent authorities.
Furthermore, it has not yet been made clear which mechanism will be used under this new legislation, to accurately capture the date the shares were acquired, when selling the shares at a future point in time, in case an individual already had an inventory of the company’s shares in their portfolio prior to January 1 2020 (Fifo v Lifo approach).
The above analysis concerns equity plans that provide listed shares to the benefiting individuals, serving the majority of the plans currently in the market. The new rules have also been expanded to include such equity programmes being provided by non-listed companies (small start-ups or very small businesses), under certain conditions not elaborated in this article. The new legislation also includes distribution programmes of affiliated companies’ shares (domestic and foreign).
Greece had never provided such tax incentives for these types of programmes, that could serve as a main driver of increasing productivity and, therefore, propelling economic growth. Now that the tax framework is in place, the results of such reforms are expected to eventually have a positive effect on the economy, in the long term.
Director, EY Greece