Taxation of stock options

21 August 2014

Stock options are far from being a wide-spread instrument in Latvia. This does not come as a surprise given the shallowness of Latvian equity capital market and investor society traditions. Nevertheless, stock options do happen to pop-up at Latvian companies being part of international groups which offer stock options to their employees. And, given certainty provided by tax rules thereof, which were brought into use in 2013, it is worthwhile to consider stock options for planning remuneration policies.

The key taxation elements of stock options are as follows:

  • The grant of stock options to employees (inclusive of Board and Council members) by employer or a company related to employer, as defined by corporate income tax act, does not attract any immediate tax obligations.
  • Income tax charge arises at the point of exercise of a stock option. Standard personal income tax rate is used for assessment purposes (in 2014 the personal income tax rate for Latvian residents is 24%).
  • An employee will be subject to social security contributions at the point of exercise of a stock option, taking into account the cap on the amount of an employee’s earnings that attract social security contributions (€46 600 for 2014) , if the cost of the share plan is borne by the employer.
  • Taxable income is computed on the difference between the market value of the shares at the date of exercise and their acquisition cost. The law provides specific regulations with regard to assessment of market value for different types of shares.
  • If the cost of a share plan is borne by the Latvian employer, it is responsible for withholding income tax and employee social security contributions.
  • Disposal of stock option rights by employee will attract the same tax consequences as those arising under exercise of stock option rights.
  • Capital gains on disposal of shares will usually be liable to tax at a rate of 15%.
  • No income tax and social security charge at the point of exercise of stock option will arise if inter-alia the minimum holding period of stock option being 36 months is complied with and employee remains employed with employer or an entity related to employer during the minimum holding period of stock option.