Employee Share Plans in Europe and the USA - Sorainen

Employee Share Plans in Europe and the USARepublic of Estonia5. Taxation of share options 3The general tax treatment of an option may differ if the option is granted by anon-resident parent company of the employer and the costs of the option are notrecharged to the Estonian employer (a "non-resident option").5.1 Taxation of share options5.1.1 Grant: As a general rule, no income tax or social tax liability arises onthe grant of a share option. However, income tax may arise on the grantof a non-resident option if it has a monetary value i.e. it has a marketvalue by virtue of being openly and regularly traded and may be sold bythe employee. The amount of tax charged would be based on themonetary value of the option.5.1.2 Exercise: As a general rule, there is no income tax charge for theemployee on the exercise of an option. However, income tax may ariseat exercise if a non-resident option had a monetary value on grant. Inthis case, the taxable amount would be based on the market value of theshares at exercise less (1) the price paid for the option (if any) and (2)the exercise price (if any).5.1.3 Social security contributions: There is no social tax liability for theemployee on the exercise of an option.5.2 Employer tax and social security contributions5.2.1 Corporation tax deduction: Under the Estonian corporate income taxsystem, undistributed corporate profits are exempt from tax, andcorporate income tax deductions are not available. The profits of anEstonian company are instead taxed when they are distributed (ordeemed to be distributed).5.2.2 Tax and social security contributions: The employer will be liable toincome tax and social tax on the fringe benefit (unless the option is anon-resident option). Fringe benefits are subject to income tax at therate of 26.58% and social tax at the rate of 33%.5.2.3 Timing of fringe benefit tax: The tax liability arises at the time thefringe benefit is provided. If the option has no monetary value the fringebenefit is provided at option exercise. If the option does have a market3As of September 2010, there are no regulations in Estonian law which specifically address the taxationof share options. However, amendments to the Income Tax Act, which are expected to come into forceon 1 January 2011 will, if adopted, bring greater clarity to this issue.UK/1729295/03 45 September 2010