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Taxation of Employee Stock Incentive Schemes in Slovenia

Taxation of Employee Stock Incentive Schemes in Slovenia

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Stock incentive schemes granted by listed or unlisted companies such as s stock options, stock appreciation, restricted shares and stock awards are a common way of rewarding employees. Employees participating in stock incentive schemes are subject to individual income tax.

The Financial administration of the Republic of Slovenia (FURS) has recognised an increasing trend in the payouts of such rewards from abroad. Since the taxation of these types of rewards changed recently they have issued guidance on the tax treatment of various payouts.

Namely, under the old rules, if a Slovenian employer did not bear the cost of rewards that were granted to its employee from abroad, he was not responsible for paying the taxes or social contributions on those rewards. The personal income tax and social security contributions had to be declared and paid solely by the individual - recipient of the reward. Since 2018, Slovenian employers have been obliged to pay all the social security contributions regardless of whether they were the ones bearing the cost of a reward from abroad or not. This represents not only an additional burden of paying social security contributions for the employer, but it also authorizes FURS to collect information on all rewards and to determine the social security contributions and personal income tax due.

According to Article 5 of the Personal Income Tax Act (ZDoH-2), an employee reward paid out from abroad is deemed as a benefit in kind derived from an employment relationship and therefore taxable as employment income in Slovenia.

Obligations regarding social security contributions are regulated by the Pension and Disability Insurance Act (ZPIZ-2). Specifically, Article 144 provides that any additional employment income (such as awarded shares) is included in the basis for calculating social contributions.

There is however a distinction between the obligation to report, calculate and pay social security contributions and personal income tax, which may lie with different legal entities depending on who bears the cost of such employee rewards: 

  1. IF THE REWARDED SHARES ARE PAID BY A FOREIGN COMPANY:

When a foreign parent company rewards Slovenian employees in its subsidiary without charging these costs to the subsidiary, the Slovenian employer shall pay social security contributions and income tax for any kind of fringe benefits, which includes equity compensation rewards.

In this case, the Slovenian employer is not regarded as the payer of tax for such income but has to pay the social contributions on the employer’s and the employee’s behalf. Such an arrangement requires an agreement with the employee in advance so that any social security contributions paid by the employer on behalf of the employee are deducted from the employee’s salary.

The personal income tax is not paid through payroll but through a special monthly tax return of the employee that received the reward.

  1. IF THE SLOVENIAN EMPLOYER REIMBURSES THE FOREIGN COMPANY FOR THE COSTS OF REWARDED SHARES:

If an income is provided to the employee by a foreign company and is borne by the Slovenian employer, who is considered to be the payer of tax for such income, then this employer is obliged to calculate the payment of personal income tax as well as social security contributions. 

SUMMARY

In stock incentives schemes where stock rewards are granted from abroad and the work is performed in Slovenia, there is a need to assess whether the Slovenian employer is considered to be a payer of tax for such reward or not.

If not, the personal income tax is not paid through payroll but with a special monthly tax return of the person liable for taxation. Also, the income will need to be grossed up if the net salary of the employee does not cover his tax and social security liabilities arising from the reward.  Social security contributions on the other hand are paid directly by the Slovenian employer in both cases, regardless of whether the cost of the share reward is paid by a foreign company or not.

By Janja Ovsenik, Partner and Head of the Tax Department, Miro Senica & Attorneys

 

Miro Senica and Attorneys at a Glance

For over 35 years Law firm Senica has been building trust and providing top legal services to companies, international corporations and individuals. It is due to its expertise, global-mindedness and business-oriented approach that the firm has grown to become one of the biggest and most prominent law firms in Slovenia and the region of Western Balkans.

Law firm Senica has 6 partners and more than 30 experts specializing in various legal fields. It provides comprehensive and tailored legal advice in all areas of law in Slovenia as well as cross-border. The firm is constantly developing new approaches in its working practice as invention and creativity in resolving complex legal questions is why clients come and stay with the firm for many years.

In September 2019 Law firm Senica marked an important milestone by entering into collaboration agreement with Andersen Global. The firm was chosen for exclusive collaboration in Slovenia after Andersen Global completed a detailed analysis of Slovenian law firms. Andersen Global is an international association of legally separate and independent firms which enables clients first class legal and tax advice anywhere in the world. By joining Andersen Global Law firm Senica expanded its range of tax service and is now providing clients with specialised services such as transfer pricing, tax consultancy and tax compliance. Within Andersen Global the firm also serves as a regional coordinator for the Western Balkans.

For further information about Miro Senica and Attorneys Law Firm, please visit our website at https://www.senica.si/en/.