Option Regulation in the Baltics
Options are a powerful tool for recruitment and retention of talent in startups. In fact, so important that we have never invested in a startup without an option plan.
Baltic founders are fortunate as Estonia, Latvia and Lithuania are considered to be the top startup-friendly jurisdictions in the world when it comes to option regulations. Index Ventures recently predicted that the Baltic startup ecosystem will bloom thanks, among other factors, to the favourable stock option regulation by the governments.
Together with our Baltic legal partner Cobalt we have reviewed a lot of different configurations and versions of option plans, but the topic can still be quite complex for non-lawyers. We are sharing this overview of options related laws to provide a simplified guide for Baltic founders to consider when setting up your options plan.
Corporate law considerations
Special regulatory framework for issuance of employee share options?
Latvia
No - for limited liability companies (SIA).
Yes - for joint stock companies (AS).
What type of shares can be issued as a result of exercising the options (regular v. employee shares)?
Limitations in relation to the number of share options?
Latvia
No- for SIA.
Yes - for AS - total amount of share options may not exceed 10% of the share capital.
Can the share options be sold by employees?
Latvia
No, unless expressly provided in AoA or option issuance documents.
Lithuania
Yes. However, a time limit (max 3 y) must be set in an option within which the employee shares may only be transferred to another employee of a company.
Estonia
Yes - established by the option agreement between the company and the option holder.
Do the option holders have voting rights?
Rules regarding cliffs, vesting periods, good/bad leaver situations?
Labour law considerations
Must the option plan be in the local language?
Estonia
Maybe. To be safe, the offer/grant documents should be in Estonian, or at least the employees should confirm that they have understood all information and do not require translation.
Considered average earnings? If yes, at what value?
Lithuania
Yes. Market Value.
Tax considerations
Exercise of share options meeting the following conditions are tax exempt.
Latvia
- share options granted to employees in accordance with the share option plan;
- the minimum holding period of share options is 12 months;
- during the minimum holding period the person stays with the employer;
- share options are exercised within six months after employment is terminated;
- at the moment of the exercise of the options there is no outstanding loan due from the employee to the company (its affiliate) which has granted the options; and
- Latvian tax authority is duly notified on the granted share options within 2 months from the grant date.
Lithuania
- There is at least a 3-year period between granting and exercising of the share option; and
- the underlying asset of the share options is a shareholding in the employer or in a company belonging to the employer's group of companies.
Exemption from personal income tax (PIT) only applies if the share option agreement is concluded not earlier than 1 of February 2020.
Estonia
- There is at least a 3-year period between granting and exercising of the share option; and
- the underlying asset of the share options is a shareholding in the employer or in a company belonging to the employer's group of companies.
Additionally, if 100% of the option issuer company’s shares are sold, an employee is established to have no work ability or there is a death of the employee, the tax exemption applies proportionally to the part which corresponds to the time the option was granted to the employee.
What is the taxation if the share options do not meet the above-mentioned conditions?
Latvia
If the above-mentioned conditions are not met, then upon the exercise of share options, payroll taxes must be paid.
Lithuania
If the above-mentioned conditions are not met, then upon the exercise of share options, payroll taxes must be paid.
Estonia
If the above-mentioned conditions are not met, then upon the exercise the share option are taxed as fringe benefits at the level of the employer, i.e., the taxes are fully payable by the employer.
Fringe benefits are taxable in Estonia with income tax at the rate of 20/80 and social tax at the rate of 33% (whereas the income tax amount is also subject to the social tax).
Latvia
Difference between the fair market value and the price paid by employee for the shares.
Lithuania
Difference between the fair market value and the price paid by employee for the shares.
Estonia
Difference between the fair market value and the price paid by employee for the shares.
Who is liable for payment of taxes?
Personal income tax (PIT)
Latvia
Progressive PIT depending on the amount of income at the rate of 20%, 23% and 31%.
Lithuania
Progressive PIT depending on the amount of income at the rate of 20%, 32%
Estonia
No PIT.
However, the employer is subject to income tax at the rate of 20/80 as part of the fringe benefit tax (see above).
State mandatory social insurance contributions
Lithuania
The employer should withhold 1,77% (fringe benefit tax), 6,98% (health insurance contributions) and 12,52% (social security contributions). If the employee is party to pension scheme an additional 2,1% or 3% shall be withheld.
Estonia
33% as part of the fringe benefit tax (see above).
Will the employee be subject to taxation upon the sale of shares acquired as a result of exercise of share options?
Latvia
Yes.
The received gain is taxed with PIT at the rate of 20%.
Lithuania
Yes.
The received gain is subject to progressive PIT depending on the amount of gain at the rate of 15% or 20%.
Estonia
Yes.
The received gain is taxed with PIT at the rate of 20%.
It is possible to defer the payment of PIT if the employee uses a special investment account regime (available to Estonian residents holding specific financial assets).
Who is liable for payment and declaration of taxes?
Determination of the gain
Latvia
Gain is the difference between the sales price and the acquisition costs of the shares.
In case the employer has paid payroll taxes for the shares upon exercise of the share options then taxable base is the difference between the price at which the shares are further sold and the value of the shares from which the employer paid the payroll taxes.
Lithuania
Gain is the difference between the sales price and the acquisition costs of the shares.
In case the employer has paid payroll taxes for the shares upon exercise of the share options then taxable base is the difference between the price at which the shares are further sold and the value of the shares from which the employer paid the payroll taxes.
Estonia
Gain is the difference between the sales price and the acquisition costs of the shares.
If the employer has paid fringe benefit tax (i.e. income and social tax upon exercise of share options), the taxable amount will be the difference between the sale price and the acquisition cost which includes the value of the shares taxed as a fringe benefit upon exercise of the share options and/or the purchase price paid by the employee (less any expenses incurred in relation to the disposal of the shares, e.g., broker’s fees). The above overview is just a simplified summary provided for general informational purposes only and should not be considered to be specific legal advice. As always, you should contact a qualified attorney in your jurisdiction to obtain advice on the particular facts and circumstances of your situation.
The above overview is just a simplified summary provided for general informational purposes only and should not be considered to be specific legal advice. As always, you should contact a qualified attorney in your jurisdiction to obtain advice on the particular facts and circumstances of your situation.
Corporate law considerations
Special regulatory framework for issuance of employee share options?
No - for limited liability companies (SIA).
Yes - for joint stock companies (AS).
What type of shares can be issued as a result of exercising the options (regular v. employee shares)?
Limitations in relation to the number of share options?
No- for SIA.
Yes - for AS - total amount of share options may not exceed 10% of the share capital.
Can the share options be sold by employees?
No, unless expressly provided in AoA or option issuance documents.
Yes. However, a time limit (max 3 y) must be set in an option within which the employee shares may only be transferred to another employee of a company.
Yes - established by the option agreement between the company and the option holder.
Do the option holders have voting rights?
Rules regarding cliffs, vesting periods, good/bad leaver situations?
Labour law considerations
Must the option plan be in the local language?
Maybe. To be safe, the offer/grant documents should be in Estonian, or at least the employees should confirm that they have understood all information and do not require translation.
Considered average earnings? If yes, at what value?
Tax considerations
Exercise of share options meeting the following conditions are tax exempt.
- share options granted to employees in accordance with the share option plan;
- the minimum holding period of share options is 12 months;
- during the minimum holding period the person stays with the employer;
- share options are exercised within six months after employment is terminated;
- at the moment of the exercise of the options there is no outstanding loan due from the employee to the company (its affiliate) which has granted the options; and
- Latvian tax authority is duly notified on the granted share options within 2 months from the grant date.
- There is at least a 3-year period between granting and exercising of the share option; and
- the underlying asset of the share options is a shareholding in the employer or in a company belonging to the employer's group of companies.
Exemption from personal income tax (PIT) only applies if the share option agreement is concluded not earlier than 1 of February 2020.
- There is at least a 3-year period between granting and exercising of the share option; and
- the underlying asset of the share options is a shareholding in the employer or in a company belonging to the employer's group of companies.
Additionally, if 100% of the option issuer company’s shares are sold, an employee is established to have no work ability or there is a death of the employee, the tax exemption applies proportionally to the part which corresponds to the time the option was granted to the employee.
What is the taxation if the share options do not meet the above-mentioned conditions?
If the above-mentioned conditions are not met, then upon the exercise of share options, payroll taxes must be paid.
If the above-mentioned conditions are not met, then upon the exercise of share options, payroll taxes must be paid.
If the above-mentioned conditions are not met, then upon the exercise the share option are taxed as fringe benefits at the level of the employer, i.e., the taxes are fully payable by the employer.
Fringe benefits are taxable in Estonia with income tax at the rate of 20/80 and social tax at the rate of 33% (whereas the income tax amount is also subject to the social tax).
Difference between the fair market value and the price paid by employee for the shares.
Difference between the fair market value and the price paid by employee for the shares.
Difference between the fair market value and the price paid by employee for the shares.
Who is liable for payment of taxes?
Personal income tax (PIT)
Progressive PIT depending on the amount of income at the rate of 20%, 23% and 31%.
Progressive PIT depending on the amount of income at the rate of 20%, 32%
No PIT.
However, the employer is subject to income tax at the rate of 20/80 as part of the fringe benefit tax (see above).
State mandatory social insurance contributions
The employer should withhold 1,77% (fringe benefit tax), 6,98% (health insurance contributions) and 12,52% (social security contributions). If the employee is party to pension scheme an additional 2,1% or 3% shall be withheld.
33% as part of the fringe benefit tax (see above).
Will the employee be subject to taxation upon the sale of shares acquired as a result of exercise of share options?
Yes.
The received gain is taxed with PIT at the rate of 20%.
Yes.
The received gain is subject to progressive PIT depending on the amount of gain at the rate of 15% or 20%.
Yes.
The received gain is taxed with PIT at the rate of 20%.
It is possible to defer the payment of PIT if the employee uses a special investment account regime (available to Estonian residents holding specific financial assets).
Who is liable for payment and declaration of taxes?
Determination of the gain
Gain is the difference between the sales price and the acquisition costs of the shares.
In case the employer has paid payroll taxes for the shares upon exercise of the share options then taxable base is the difference between the price at which the shares are further sold and the value of the shares from which the employer paid the payroll taxes.
Gain is the difference between the sales price and the acquisition costs of the shares.
In case the employer has paid payroll taxes for the shares upon exercise of the share options then taxable base is the difference between the price at which the shares are further sold and the value of the shares from which the employer paid the payroll taxes.
Gain is the difference between the sales price and the acquisition costs of the shares.
If the employer has paid fringe benefit tax (i.e. income and social tax upon exercise of share options), the taxable amount will be the difference between the sale price and the acquisition cost which includes the value of the shares taxed as a fringe benefit upon exercise of the share options and/or the purchase price paid by the employee (less any expenses incurred in relation to the disposal of the shares, e.g., broker’s fees). The above overview is just a simplified summary provided for general informational purposes only and should not be considered to be specific legal advice. As always, you should contact a qualified attorney in your jurisdiction to obtain advice on the particular facts and circumstances of your situation.
The above overview is just a simplified summary provided for general informational purposes only and should not be considered to be specific legal advice. As always, you should contact a qualified attorney in your jurisdiction to obtain advice on the particular facts and circumstances of your situation.
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