Incentive programs – PIT tax optimization

The current situation on the labour market has forced employers to look for new methods of remunerating employees. The basic salary for a job is no longer the primary determinant of the employee’s choice of work. Currently, the growth popularity of incentive programs prepared by the employer is noticeable. Paweł Dyrduł, lawyer from KG Legal Kiełtyka Gładkowski Sp.p, based in Krakow, discusses the issue of incentive programs in the context of tax optimization.

What are incentive programs?

The incentive programs that an employer creates are usually financial instruments. Very often these are simply shares or derivatives. The employee (beneficiary) has the possibility to purchase the financial instrument on preferential terms, for a nominal fee or free of charge. The beneficiary is usually a member of the management team. The financial instrument he acquires grants him the right to receive cash in the future. Generally, the amount of benefits received depends on the economic performance of an enterprise, such as the achievement of specified value of EBIT (operating profit). At the end of the period for which the financial instrument (incentive program) was issued, it is settled. Settlement is simply the payment of cash due to the employee. So the employee receives cash, which in a very simplistic way can be called as bonus.

The essence of incentive programs

The essence of the introduction of incentive programs can be traced on many levels. First and foremost, the company’s management decides on this element of remuneration policy towards employees who are in their opinion necessary to ensure smooth running of the company. Hence, often the beneficiaries of incentive programs are high-level executives (directors, management staff), whose loss would be costly. Incorporating this employee into the incentive program will strengthen his loyalty to the business and will ensure the management that he does not leave the job before the time when the financial instrument is exercised.

The motivational programs can also be analysed in psychological terms. Owning a financial instrument, has already been mentioned, allow to build a sense of loyalty to employer. In addition, the mere fact of receiving a financial instrument by an employee is built for him. The beneficiary is aware that not everyone receives this type of reward. Thanks to that he realizes that he is a valued employee. Building a sense of self-worth in employees is a very important process. The rewarded employee will not want to lose the privileges which he has earned, so it can be assumed that his performance will not deteriorate (in the worst case, he will remain unchanged). Also, employees who are not beneficiaries can show better performance. The desire to participate in incentive programs can stimulate desire for them to work even better, because there will be a need for them to appreciate and reward their efforts.

Concluding remarks about the essence of creating incentive programs by employers, one more reason for their emergence is worth pointing out. The current situation on the labour market, as well as the current economic situation, creates opportunities for employees (professionals in the field) to freely choose an employer. The employer will seek a specialist, not the reverse. Hence, the nominal remuneration of such employee in the form of remuneration for work, and in particular his / her salary, is no longer the only determinant of the employee’s choice of place of work. Increasingly, future employees are paying attention to the additional opportunities offered to them by employers, such as the opportunity to participate in incentive programs.

PIT tax optimization

Personal income tax optimization is nothing less than a legal reduction the amount of income tax. Participation in an incentive program that is based on the realization of property rights derived from the acquired financial instrument de facto allows such action.

The issue of PIT optimization is best to start with the indication that the benefit received through the incentive program is a cash benefit. The cash benefit received by the beneficiary is de facto his remuneration for work. However, it is paid as a reward, a bonus for the exercise of property rights from a financial instrument. Such treatment allows lowering the PIT tax base. The payment of all financial resources to the employee, and therefore the remuneration and the bonus due to him, will be treated as payment of remuneration. Bearing in mind that the substantial remuneration of senior executives is a high premium, it could result that the employee exceeding the second tax threshold and the PIT rate would be 32%. The division of remuneration into two parts: the part paid as a remuneration for work and the part that constitutes income from the realization of property rights resulting from the financial instrument is intended to limit the risk of exceeding the second tax threshold (the first threshold – 18%). The artificial division of the remuneration into two parts results in a 18% PIT tax rate and cash received by the employee as a result of the property rights resulting from participation in the incentive program will be taxation by capital gains tax – 19%.

Strengths and weaknesses of incentive programs

Incentive programs are not ideal, and therefore are not devoid of defects. When analysing this problem from the beneficiary’s point of view, it can be stated that the participation in the incentive program involves both benefits and costs for the beneficiary.

The table below shows strengths and weaknesses of incentive programs

Abstract: Corporate law, incentives programs, tax optimization

The article was prepared by KG LEGAL KIEŁTYKA GŁADKOWSKI based in Cracow, Poland, specialising in cross border cases, with its focus on new technologies, IT and life science. It discusses incentives programs as a method to personal income tax optimization.  

Paweł Dyrduł, lawyer (specializing in banking law, financial law) from KG LEGAL KIEŁTYKA GŁADKOWSKI – PARTNERSHIP office in Cracow, specializing in cross border issues and servicing life science and IT companies, analysis incentive programs and discusses the personal income tax optimization.