Taxation of Share Acquisitions under Stock Option Plans
In recent years, company shares may be transferred to employees under share ownership plans in order to increase employee productivity and loyalty. After the fulfillment of predetermined conditions and the completion of a predetermined period of time, employees may be given free shares or an option to purchase shares at a low price.
The issuance of shares to employees, the receipt of dividend income through shares by employees or the disposal of shares have separate tax consequences.
All these transactions and their tax consequences are the subject of this article.
1. Share Acquisition and Fee Income under Stock Option Plans
Article 61 of the Income Tax Law No. 193 (Income Tax Law) stipulates that remuneration is the benefits that can be represented by money and benefits that are provided to employees subject to an employer and connected to a specific workplace in return for service; the fact that the wage is paid under the names of allowance, compensation, cash indemnity (financial responsibility indemnity), allocation, raise, advance, dues, attendance fee, premium, bonus, expense allowance or other names, or that it is determined as a certain percentage of the earnings, provided that it is not in the nature of a partnership relationship, will not change its nature.
Article 63 of the aforementioned Law stipulates that the monthly salaries given to the service personnel shall be valued according to the average retail prices on the day and place where they are given, and the benefits provided through the provision of housing and other means shall be valued according to the imputed rent of the housing or the imputed value of the benefit.
Accordingly, the benefits provided through the acquisition of bonus shares within the framework of the stock option plan should be treated as wage income since they are in return for the services rendered by the employees. Likewise, the difference between the purchase price of the shares and the price that can be acquired under market conditions as a result of granting the employees the option to purchase shares with a low price will also be considered as remuneration.
1.1. Date of receipt of wage income
The legal and economic ownership of the shares is transferred to the employee on the vesting date following the fulfillment of predetermined conditions within the framework of the stock option plan and the completion of the specified period. Wage income will be deemed to be earned at this stage.
The date on which the employee exercises the option to acquire shares at a reduced price is also the date on which the salary income is earned.
1.2. Withholding Tax on Wage Income
According to Article 94 of the Income Tax Law, employers are required to withhold income tax on wages paid to employees. Accordingly, employers are required to withhold income tax on the benefits provided to employees through the acquisition of free or low-priced shares.
Within the framework of the stock option plan, employees may be granted shares in companies domiciled in Turkey as well as shares in foreign group companies.
In the event that shares of a company resident in Turkey are given, as mentioned above, income tax is required to be withheld by the company in Turkey on the benefit provided by way of bonus share transfer or option exercise.
The issuance of shares in foreign group companies can take several forms. Accordingly, whether withholding tax will be withheld in Turkey varies.
In the event that the company in Turkey first purchases the shares of the foreign group company itself and then gives them to the employee, the benefit provided by the company that provides the shares in Turkey should be subject to income tax withholding (B.07.1.GİB.4.34.16.01-GVK 61-72 dated 23/02/2012). Similar situation is also valid for the case of reflecting the cost of the shares given directly to the employee in Turkey by the foreign company to the domestic company.
However, if the foreign group company gives shares directly to the employee in Turkey without being associated with the company resident in Turkey, no withholding tax will be applied on the benefit obtained. In this case, the wage income obtained must be declared by the employee.
2. Dividend Income from Shares Issued to Employees
Dividend income can be earned through shares granted to employees under the stock option plan as long as the shares are held. Dividend income is defined as securities capital income in accordance with Article 75 of the Income Tax Law.
Dividend income is subject to withholding tax. Pursuant to Article 94 of the Income Tax Law, a 10% withholding tax is applied on the amount distributed by the company distributing dividends in Turkey.
In addition, pursuant to Article 22/3 of the Income Tax Law, half of the dividend income from full taxpayer corporations is exempt from income tax.
Whether or not to declare the withheld securities capital income will be determined according to Article 86/1-c of the Income Tax Law. In cases where a declaration is required, half of the income will be subject to tax due to the exception and the entire amount of the withholding withheld can be deducted from the calculated tax.
On the other hand, if shares are acquired abroad within the framework of the stock option plan, no withholding tax will be withheld in Turkey on the dividend income to be distributed. In this case, in accordance with the 86/1-d provision of the Income Tax Law, if the amount of dividends obtained exceeds 3.800,00.-TL for the year 2022, it must be declared with an annual declaration. However, double taxation avoidance agreements regarding dividend income from abroad should also be taken into consideration.
3. Disposal of Acquired Shares
Shares or partnership rights acquired by employees under the stock option plan may be disposed of. In the first paragraph of the first subparagraph of the first paragraph of the repeated Article 80 of the Income Tax Law, those acquired without consideration and those belonging to full-fledged taxpayer corporations and held for more than two years hoist mustardexcept for the gains derived from the disposal of securities or other capital market instruments are defined as value increase gains. In the fourth subparagraph of the aforementioned paragraph, gains arising from the disposal of partnership rights or shares are also listed as value increase gain.
It should be considered that the acquisition of shares under the stock option plan is not gratuitous as it is in return for work. For this reason, the shares of a fully taxpayer joint stock company in less than two years Gains arising from the disposal will be considered as value increase gain. Likewise, gains derived from the disposal of other partnership shares will also be taxed as value increase gain.
In accordance with the above-mentioned provision, the gains obtained as a result of the disposal of foreign shares will also be considered as value increase gain. However, the provisions of the double taxation avoidance agreement signed with the relevant country regarding capital appreciation gains should be taken into consideration as to whether the income obtained as a result of the disposal of foreign shares will be taxed in Turkey.
4. Evaluation
The acquisition of shares under stock option plans has become quite common. The tax consequences of this transaction are summarized above. However, the determination of the fair value of the shares given to employees and how to determine the wage base is one of the biggest difficulties in practice. This difficulty also applies to the determination of the cost price to be taken into account in the calculation of the value increase gain when the shares are disposed of.
In this respect, it is considered that there is a need to make special arrangements to facilitate the taxation of shares acquired under stock option plans.
