An Employee Stock Ownership Plan (ESOP) can be established for boosting the company’s economic performance by providing the company's workforce with business interest in the company. As a result of the newly adopted Hungarian legislation on ESOP, financial institutions and insurance companies are no longer excluded from the possibility of creating an ESOP, which, nevertheless, remains an available tool for other companies as well.
Thanks to the new rules, the ESOP provides a more flexible structure for companies with more favourable taxation than the existing employee incentive programs, such as the employee share benefit plan, the employee shares, premium and/or bonus schemes.
From a financial perspective, a significant advantage of an ESOP is that the payments made to the employees within the ESOP is only subject to 15% personal income tax. In other words, the 27% social contribution tax or the health care contribution in case of private individuals can be saved.
Employee Stock Ownership Plan – What is it?
As a form of employee-ownership programs, the Employee Stock Ownership Plan had been introduced as a privatization tool in Hungary by Act XLIV of 1992 (the “ESOP Act”), which, however, has significantly lost its importance after the privatisation in the 90s. As of 28 November 2015, the ESOP Act was amended in a way to create a new form of ESOP, which may attract again the companies’ attention towards this incentive tool.
In the framework of the ESOP, the founding company may allocate business shares or stocks to the ESOP organization to be established by the company itself. The ESOP organization then provides membership to the employees participating in the ESOP in accordance with the terms and conditions of its remuneration policy.
Upon meeting the conditions set by the founding company, the employees may exchange their membership in the ESOP organization into cash or business shares/stocks in the company. As long as their membership is not exchanged, the employees are entitled to receive dividend, which may improve their ‘stakeholder’ approach. All other ownership rights related to the company’s business shares/stocks are solely exercised by the ESOP organization.
Depending on the company's corporate strategy, an ESOP may be an exclusive or an additional incentive tool for motivating the company’s employees, in which the company's subsidiaries and affiliates can also be involved.
The main advantages of the new form of ESOP:
- Improves the company’s business performance;
- Encourages the ‘stakeholder’ approach of the employees;
- Ensures that control remains with the employer (i.e. the founding company) over the business shares provided to the ESOP organization;
- Favourable taxation;
- Flexible rules compared to other remuneration schemes;
- Opportunity to replace other remuneration methods in a more cost-efficient way.
Due to its attractive tax structure and flexible rules, the new type of ESOP might be of general interest for companies seeking to strengthen their employees’ performance, which may become an effective remuneration tool for companies.
By Eszter Kamocsay-Berta, Attorney at Law, KCG Partners