Is there any legal framework regulating ESOP in your country?
Do ESOP shares have a favourable tax regime?
Is there any specific regime applicable for phantom share plans?
Does implementing ESOPs of a foreign HQ trigger any legal and tax consequences?
Finally, we can gain some insight into these questions, in one place. Deloitte recently published an updated comparative overview of ESOP regimes in 16 Central European countries. Their analysis shows that, in most CE countries, the viability of employee stock ownership plans depends on the legal and tax treatment of this benefit.
That finding won’t be surprising to anyone familiar with the situation in Central Europe. It was never (just) about share distribution particularities but because founders weren’t even motivated to try. How could they be, seeing how complicated ESOP implementation is – and in many jurisdictions, not sustainable at all.
The awareness about ESOP benefits, however – never dwindled because of that. The fact that it’s hard for a startup, with limited funds, to employ and retain top talent was not going away. Incentivizing employees and collaborators with stock option plans is still a key to being able to build great things…
…and it is possible to have a tax regime that can better support it, as we can see from around the globe. Slowly, jurisdictions in the region were pressured to do some changes as well.
Where we are now?
As per Deloitte, some countries such as Austria are already streets ahead in this department. Unfortunately, most others are still working to create a favourable tax regime or, in many cases, a bespoke corporate law regime. However, it is promising that their analysis showed this incentive – which gives employees a direct stake in their employer’s success and which has been more widely adopted in other global regions – is considered a key legislative priority in several regional countries.
Key findings from the report are giving some hope as well:
- 10 countries have a favorable tax regime for ESOP shares.
- 13 countries have legal frameworks regulating ESOPs.
- In 15 countries there are legal and tax consequences when implementing ESOPs from a foreign HQ.
- 15 countries do not have any specific regime for phantom share plans.
- 8 countries have a specific corporate law regime for ESOP shares.
Countries with established or emerging frameworks
Austria, Latvia, Lithuania, Hungary, and Romania stand out with their explicit or emerging legal frameworks for ESOPs.
Austria introduced “Flexible Companies” (FlexCo) with clear rules for ESOPs, though voting rights are excluded. Latvia offers well-defined regulations for Joint Stock Companies, and a flexible but general framework for Limited Liability Companies.
Lithuania updated ESOP regulations in 2022, with new tax incentives introduced in 2023, and Romania applies a preferential tax treatment for equity plans that meet certain conditions.
Hungarian regulations provide different ways in which
employers or other members of the employer’s group can
provide share incentives to employees.
Bulgaria is somewhere in between
In Bulgaria there is no special tax regime regarding ESOP share plans, points out Valentina Lukova, Director of Tax Services and Global Employer Services at Deloitte Bulgaria we reached out for comment.
“In practice, the tax authorities treat the ESOP income as employment income in line with the envisaged OECD principles. Taxation occurs upon vest (for free shares received on plans such as Restricted Sock Units Plans) and upon exercise (for ESOP).”
As of August 2023, new type of commercial entity known as the Variable Capital Company (VCC) was introduced in Bulgaria.
“The amendments enable VCCs to offer share options to employees. In addition, there is an option to transfer VCC shares to third parties by simple written agreement (notarial certification of signatures is not required). However, the Bulgarian legal framework does not provide a clear mechanism for implementing ESOPs and these are only partly regulated given the new VCC. There is no prohibition on implementing ESOPs in other forms of legal entities.”
The new VCC has not been implemented in practice yet. Currently, Lukova concludes, “the most preferable type of legal form for implementing ESOPs in Bulgaria is the Joint Stock Company”.
Countries with partial frameworks
Croatia, Czech Republic, Poland and Serbia even though they have tailored some benefitial frameworks they still lack comprehensive ESOP regulations.
Czech Republic and Croatia have begun modernizing, focusing on favorable tax regimes for startups and LLCs. In Croatia, legal system lacks explicit ESOP regulations, but amendments in 2024 have extended benefits to Limited Liability Companies, showing progress. Similarly, in Czech Republic, recent amendments introduced tax deferrals for ESOPs, while the general framework is still incomplete.
Poland still classifies income derived under ESOPs as income
from employment or other sources. However, if the plan meets the specific conditions, taxation of that income can be done under a more favourable tax regime.
In Serbia, specific provisions exist only for share options issued by local LLCs, but there are no comprehensive regulations governing foreign issuers. This lack of clarity results in much of the practice being shaped by ad hoc interpretations and opinions issued by the Securities Commission, which oversees capital markets.
Countries with a minimal or outdated framework
For Slovakia and Slovenia high tax burdens and limited legal provisions still deter ESOP adoption.
Ukraine also lacks specific ESOP legislation, resulting in reliance on foreign-administered schemes. In Albania, BiH, and Kosovo situation is similar. While some mechanisms exist, these countries lack explicit ESOP regulations, making adoption dependent on ad-hoc practices or historical precedents.
In Albania and BiH ESOPs are indirectly tied to employment benefits and face significant taxation hurdles. Kosovo on the other hand permits ESOPs in Joint Stock Companies but sees little practical implementation.
If you have any specific inquiries and are interested in implementing ESOP in some of these 16 jurisdictions, make sure to contact the corresponding experts and representatives listed in the report for each country.
