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:
- 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.
- 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.
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