Employee securities benefit program

What this employee securities benefit program is all about?

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.

Why does it make sense to use the employee securities benefit program?

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.

For whom is it worthwhile to introduce an employee securities benefit program?

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.

How much saving companies can make with the introduction of an employee securities benefit program?

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 

• when, following the expiry of the mandatory holding period, the securities are sold; the tax liability will arise with respect to exchange rate gain (in case of publicly issued securities: according to rules applicable to controlled capital market transactions),and
• in case there was no movement in the portfolio of the securities affected, it is necessary to assess the obligation to pay personal income tax or – from 2019 onward – any possible social contribution tax provided dividends were paid.

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):

^{As a part of a recognized benefit program}

^{*Assuming that the securities included in the securities benefit program are not privately traded securities.}

^{**Assuming that the securities were traded privately and that including other incomes, the employee’s income reaches the cap on social contribution tax payment.}

^{***Assuming that the employee reaches the cap on social contribution payment obligation taking other incomes into account.}

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.

The most important conditions for implementing an employee securities benefit program

1. In the framework of the program, it is possible to acquire securities and (rights related thereto) issued by a business venture or their affiliated company.
2. In the framework of the program employees and senior executive of business ventures can acquire securities.
3. Rights vested in the securities can be exercised only after the mandatory holding period, that is after two years following the year of distribution.
4. The program must be advertised in writing among all employees and senior executives of the affected company and a second counterpart of the memorandum or other similar document issued to them about the announcement of the program must be submitted to the tax authority by no later than the 20th day of the month following the starting day of the mandatory holding period. 
5. The Program Policy outlining the program’s details must be elaborated.
6. The organiser of the program must accept an irreversible liability for complying with provisions set out in the program with the proviso that the benefit may be subject to meeting a condition that falls within the sphere of interest of the company, was specified in advance and cannot change after the announcement of the program.
7. The percentage of senior executives cannot exceed 25% of private persons participating in the program.
8. Senior executives can acquire no more than 50% of the combined face value of all securities distributed.
9. Within the framework of the program, the accounting manager and supervisory board member (and their close relatives) of the affected company cannot acquire securities.
10. The entitlement to participation in the program cannot depend on the individual performance of the employee.
11. Entitlement to the benefit can in no way be associated with the individual performance of the employee or senior executive.

Why does it make sense to entrust RSM with the implementation of the securities benefit program?

• Our experienced professionals help assess the expected tax burden and feasibility of the benefit program.
• Once a decision is made, we prepare a tailored package for the employer outlining the full description of the process of the recognised securities benefit program.
• We prepare the Program Policy, by taking the individual needs of the distributor into account.
• We inform employees participating in the program and prepare a written summary for them about provisions affecting them.

Who to turn to with any questions you have?

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.