A New Regime For Taxation Of Worker Inventory Choices In Latvia: What Will Change? – Tax

Latvia:

A New Regime For Taxation Of Employee Stock Options In Latvia: What Will Change?

05 January 2021

lus Laboris

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On 17 December 2020 amendments to the Personal Income Tax Law

were approved by the Latvian Parliament. As a result of the

amendments, the exemption from payroll taxes for employee stock

options will also cover options issued by limited liability

companies.

Despite regulatory hurdles, the number of Latvia–based

employees that receive stock options is constantly

increasing.

In the past, stock options were typically received by employees

of Latvian companies that belonged to large international groups,

and tax rules for stock options that were introduced back in 2013

were tailored with large internationals in mind.

Now the situation has changed. The main demand for stock-options

comes from start-ups, as, at their early stage of development, they

are typically unable to pay high or even middling salaries.

Meanwhile, a number of stories about freshly minted start-up

millionaires have been widely publicised.

As a result, Latvian start-up companies are increasingly eager

to use the stock option tool to attract and motivate employees.

We are also seeing growing demand for stock option

plans from other small and medium–sized companies, which have

good chances for growth but are unable to increase salaries at

the current time.

Under the previous regime, an employee’s income

from stock options is exempt from payroll taxes in Latvia provided

that:

The stock options were granted pursuant to a stock option

plan.
The holding period of the options (the period between when the

option was granted and when it was exercised, i.e., by acquiring

shares) is at least 36 months.
During the entire period from the date of grant until the date

of exercise the individual remained employed either by the company

that granted the stock option or by an affiliate.
the Revenue Service is notified about the grant of stock

options no later than two months from the date of grant or the

date at which the employee can apply for the stock

options.

The majority of start-ups and small and medium–sized

companies could not benefit from this tax exemption, as

the vast majority of them are incorporated as limited liability

companies, and the Ministry of Finance and the Revenue Service

interpreted the law to mean that the exemption is available only

where the stock options are issued by a joint stock company. This

applied even where the issuer of options was incorporated

abroad.

What will change?

The amendments approved on 17 December extend the tax

exemption to options issued by limited liability companies. The

minimum holding period is reduced from 36 months to 12 months. In

addition, it will be possible to exercise the option within six

months after employment is terminated without losing the tax

exemption.

According to the amendments the tax exemption will be available,

if at the moment of the exercise of the option there is no

outstanding loan due from the employee to the company (its

affiliate) which has granted the options.

The adopted amendments will significantly improve

competitiveness of Latvia. This change is particularly relevant for

start-ups that usually are incorporated in the form of limited

liability companies.

The amendments still need to be promulgated by the president of

Latvia in order to become effective.

The content of this article is intended to provide a general

guide to the subject matter. Specialist advice should be sought

about your specific circumstances.