On 10 September 2025, the Chamber of Deputies passed, by the Senate once already returned, amendment to the Income tax Act that introduces an attractive employee stock option program the so-called ESOP (Employee Stock Ownership Plan). This is a major innovation at the time when employers face an increasingly competitive labour market and are looking for effective tools to motivate and retain key employees.
After the president signs the bill and it is published in the Collection of Laws, employers will receive, starting on 1 January 2026 – especially start-ups and technology companies – will gain a legal framework for allocating equity to employees with significant tax benefits.
What is an ESOP?
ESOP is an employee ownership program that allows employees to acquire equity in the company they work for, usually in the form of shares or ownership interests. These programs can take various forms, ranging from the direct purchase of shares at a discounted price, through the free allocation of shares, to the creation of special funds that hold shares on behalf of employees.
The purpose of ESOP is to align the interests of employers and employees so that everyone pursues a common goal – increasing the value of the company. This makes employees more committed, strengthens their loyalty and reduces staff turnover. In many EU countries, ESOP have proven to be an effective tool for long-term motivation. The Czech Republic is now moving closer to this trend.
New legal framework for ESOP in the Czech Republic
Until now, there has been no separate legal regulation of ESOP in the Czech Republic. Employers therefore had to rely on the existing Business Corporations Act and general tax regulations, which tended to make the creation of ESOP more difficult. The new bill, which is part of the package for the so-called unified monthly reporting, introduces qualified employee stock options, which will now enjoy tax advantages.
ESOP are most used by joint-stock companies, but limited liability companies may also implement ESOP. It is important to mention that the new legislation does not introduce a new type of employee share as a separate legal institution. The new regulation is purely tax legislation, which only specifies the conditions, under which a more favourable tax regime (including exemption from insurance contributions) can be used when offering own shares to employees. The legal basis for obtaining a more favourable tax regime will continue to be the existing substantive law. The legal title for the allocation of shares to employees will be a written contract or written acceptance of the ESOP terms and conditions by the employee. Given that, it will not be possible to rely only on comprehensive substantive law, the creation of exact contractual arrangements concerning the rights and obligations of ESOP participants, the type of shares (ownership interests), their transferability and the voting rights attached to them will be crucial for setting up a functional ESOP.
How will qualified employee stock options work
For the new framework to be used, i.e. for the employer and employee to benefit from tax relief and exemption from insurance deductions, the employee stock option program must meet the conditions set by law for both the employee and the employer.
a) Conditions on the employee’s part:
- performance of dependent work for the employer for a period of at least 12 months between the granting and exercise of the option (contractors, in particular self-employed persons, cannot be ESOP participants);
- acquisition of shares by an employee no earlier than 3 years after the option is granted;
- gross monthly income of the employee for the period of employment at least 1.2 times the minimum wage at the time the option is granted; and
- the ownership interest acquired through all options granted to employees may not exceed 5% of the company’s share capital.
b) Conditions on the employer’s side:
- a written contract granting the option;
- the option must be granted gratuitously as an employee benefit (this is without prejudice to the employer’s right to require the employee to pay the option price for the shares acquired);
- revenue not exceeding CZK 2.5 billion and total assets not exceeding CZK 2 billion;
- turnover and asset limits are assessed at the level of the whole group if the employer is part of it;
- the company must not be a bank, insurance company, law firm, auditing or tax consultancy company;
- the grant of the option and its parameters must be notified to the tax authorities (in case of non-notification, the more favourable tax treatment cannot be relied upon).
Tax effects of the new regulation
The main advantage of the new regulation is a lower tax burden for employees and employers, especially the exemption from social security and health insurance deductions.
According to the current regulation, the taxation and insurance of income arising from the acquisition of ownership interests or stock based on an option is determined on the basis of the market value of these ownership interests or stock at the time of exercise of the option right based on the option, and possibly deferred to the moments defined by the ITA, not on the value at the moment of granting the option. As a result, the taxation is effectively significantly higher compared to a situation where ownership interests would be transferred outright, which is why option programs constructed in this way are not used by startups in the Czech environment, even though it is a common practice abroad, which is also supported by specific tax regulations.[1]
Income from option plans will therefore be exempt from compulsory insurance and, in addition, the so-called “no tax before cash” principle will be applied to taxation of personal income when the employee sells the shares and therefore receives real income from them (e.g. if the employee is granted an option in 2026 and exercises it in 2029 (i.e. acquires the ownership interest) but does not sell the ownership interest until 2033, the employee will pay income tax as other income for the 2033 tax year).
What taxation does the proposal account for:
- granting an option to an employee
- the option must be granted to the employee gratuitously;
- if the employee receives a discount on the price of the ownership interest at the time of the option grant (measured in relation to its market value) or receives it gratuitously, this income is subject to the standard tax regime, i.e.
- exercise of the option by the employee and subsequent sale of the ownership interest/shares
- exercise of an option means the exercise of the right to purchase the ownership interest/shares at the option price agreed in the option and the purchase of the ownership interest/shares by the employee;
- income from the exercise of the option is exempt from employment income taxation, which is subject to compulsory insurance;
- however, only the difference between (i) the market price of the ownership interest/shares at the time of their acquisition by the employee and (ii) the market price of the ownership interest/shares at the time the option was granted to the employee or the agreed option price (whichever is higher) is considered income from the exercise of the option (exempt from compulsory insurance). – any amount exceeding this limit is subject to compulsory insurance;
- on the contrary, when determining income, no account shall be taken of any increase in the market price of the ownership interest/shares resulting from the contribution, conversion or other transactions of a similar nature; similarly, no account shall be taken of transactions that violate transfer pricing rules;
- this income is taxed like other income pursuant to Section 10 of the Act (without compulsory insurance contributions);
- income from exercising the option is considered income for tax purposes in the tax period in which the ownership interest/shares were sold; no later than in the tax period in which 15 years have elapsed since its exercise, i.e. if the ownership interest/shares are not sold within 15 years of their acquisition by the employee, the employee is obliged to tax the income from the exercise of the option.
- financial settlement of the option (i.e. exit of all partners/shareholders)
- the only exception to the exercise of the option by an employee before the expiry of 3 years from its grant is the situation of an exit, i.e. the transfer or transition of 100% of the ownership interest or all shares to the employer or a person who controls the employer (has a direct or indirect ownership interest of at least 50%);
- the rules for taxation and calculation of income achieved through financial settlement of the option in the event of a joint exit are like those applicable to the exercise of the option and subsequent sale of the ownership interest/shares.
However, it is essential to mention that the proposed amendment will newly stipulate that ownership interests and shares acquired through the exercise of qualified employee options will not be subject to the income tax exemption granted by the ITA provided that the ownership interests are held for at least 5 years and the shares for at least 3 years, i.e. in the event of the sale of ownership interests / shares by an employee, this income tax exemption will not apply.
Conclusion
The proposed amendment to the tax relief for qualified employee stock options represents a significant step towards modern remuneration and making similar merit-based schemes more attractive to employees.
We consider the possibility of using an option program to reward employees without a direct financial burden to be a great benefit for employers, which will certainly be an advantage especially for start-ups with growth potential and, conversely, tight cash flow. In addition, in our opinion, the option program will also become a strong competitive advantage over employers who offer only “standard” benefits.
The conditions for ESOP tax benefits are relatively complex, and failure to comply with them has fatal consequences – such income from ESOPs is considered income from dependent activity and is subject to compulsory insurance contributions. At the same time, the new legislation does not create a new substantive legal institution of employee ownership interests/shares, and it will be necessary to draw up precise contractual documentation governing the rights and obligations of ESOP participants and employers.
A major issue will certainly be determining the market value of shares for the proper calculation of tax, where it cannot be ruled out that it will be necessary to have a relevant expert’s opinion prepared.
If you have any questions about the new ESOP and its suitability for your company, we at PEYTON legal are at your disposal.
[1] Explanatory memorandum to the amendment proposed by MPs Michael Kohajda, Marian Jurecka, Jiří Navrátil, Silvia Doušová, Tomáš Müller, Michal Zuna to the government bill amending certain acts in connection with the adoption of the Act on the Uniform Monthly Employer’s Report; Parliamentary Print 926; available at https://www.psp.cz/sqw/historie.sqw?o=9&t=926.
Mgr. Martin Heinzel, partner – heinzel@plegal.cz
Ráchel Kouklíková, legal assistant – kouklikova@plegal.cz
Barbora Součková, legal assistant – souckova@plegal.cz
18. 9. 2025