Amendments in the taxation of options are enforced in Estonia

On August 1, 2017 the rules concerning the taxation of options in the Income Tax Act change. The amendments are enforced retroactively from July 1, 2017.

Jõustuvad tulumaksuseaduse muudatused seoses osalusoptsioonide maksustamisega

According to the general rule if an employer (a company) does not wish to pay taxes on the share of the company transferred to the employee, there has to be a 3 year waiting period between entering into an option agreement with the employee and the actual transfer of the share to the employee. With the amendments to the Income Tax Act, three exceptions were regulated from this general rule. The general rule is not fully applied in three cases: (i) all shares of the company are transferred to an investor (full exit), (ii) the employee becomes permanently incapable to work, (iii) the employee dies. If one of those events occurs before the 3 year waiting period has passed, the employer does not have to pay taxes on the part of the share that has vested by the time the event occurs. If the employer affords the employee to acquire the unvested part of the share also, the employer has to pay taxes on that unvested part.

In order for the employer to profit from the amendments described above, the employer has to forward the option agreement concluded with the employee to the Tax Board in five days from concluding the agreement. This requirement does not apply to digitally signed option agreements and option agreements authenticated by a notary, since the Tax Board is reliably able to detect when such agreements were signed.

The amendment applies only to option agreements concluded after July 1, 2017.

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