The modern mentality concerning the relationship between employers and employees has led to the creation of mechanisms aimed at increasing the loyalty of the latter. One such mechanism that has become very popular in recent years is the Stock Option Plan.
An SOP, according to the Romanian Tax Code, is a program initiated within a company through which its employees, administrators, directors, and/or affiliated legal entities are granted the right to purchase a certain number of the company’s shares at a preferential price or even free of charge. SOPs are popular in joint stock companies, and they can be implemented through either capital increase or share buybacks. Either way, they must be approved by the General Assembly of the company.
Until recently, when the pandemic changed the labor market paradigm we were all used to, this mechanism was used mainly by technology companies. Now, as employers are starting to rethink their employee-retention strategies, SOPs are becoming more and more mainstream, which is why the applicable tax regime is a topic of great interest. In Romania, the Tax Code encourages such operations.
General Aspects Regarding the Tax Regime
In addition to the definition provided above, the Romanian Tax Code states that, to qualify as an SOP, a program must include a minimum period of one year between the granting of the right by the company and its exercise (more precisely, when the employee/administrator/director/legal affiliate purchases the shareholdings).
Therefore, regardless of whether the transfer of the shares is free of charge or comes at a preferential price, the one-year period is an imperative condition in order for the preferential tax regime to be applicable.
According to Romania’s Tax Code, benefits granted in the form of stock option plans are not subject to income tax either at the time they are granted or at the time of their exercise. Thus, the benefits obtained from SOPs are taxed only when beneficiaries choose to sell their shareholdings. Similarly, the benefits are not subject to the obligation to pay the social security contribution at the time of grant or exercise.
Moreover, according to the same legal act, in transactions with shares acquired free of charge or at a preferential price, the gain is calculated as the difference between the sale price and their tax value represented by the preferential purchase price, including costs related to the transaction. For those shares acquired free of charge, the tax value is considered equal to zero.
When the beneficiaries sell shareholdings received under the SOP program, they will owe income tax (currently, at 10%) for the profit made (i.e., sale price less purchase cost; if received free of charge, the cost of purchase is zero). Depending on their personal situations, beneficiaries may also owe an additional social health insurance contribution if their estimated annual income obtained from investments (e.g., dividends, interest, and capital gains), and from other categories expressly mentioned by law, exceeds the level of 12 minimum gross wages.
One important aspect that needs to be taken into consideration when analyzing the tax regime applicable to employees is when they are residents of a foreign state. In such cases, it’s common for double taxation conventions concluded by Romania and that foreign state to apply, which can lead to the application of rules other than those set out above.
Lastly, the Tax Code expressly stipulates that expenses related to the implementation of the SOP are non-deductible for the employer. However, when the beneficiary sells the shares, they will be subject to taxation.
By Alexandru Matei Basarab, Partner, and Adina Ionescu, Attorney at Law, Vertis Legal