Why the previous rules did not work
Under the previous regime, income from the exercise of an employee share option was taxed as income from employment under Section 6 of the Income Tax Act, at the time of acquiring the shares or stake. The employee was therefore obliged to pay income tax and social and health insurance contributions at a time when they had not yet received any cash from any potential sale.
The result was the so-called cash-flow paradox: the tax liability arose before the employee realised any actual economic benefit. Add to this the complicated valuation of non-monetary income and the administrative burden of payments on the employer’s side – the result was that many companies abandoned ESOPs entirely or opted for so-called virtual programmes (phantom shares), which, however, do not provide employees with a genuine share in the company’s value.
How ESOP works: basic concepts
An ESOP generally means that an employee acquires the right to purchase a stake or shares under pre-determined conditions. The programme typically comprises four key elements:
- cliff period – the minimum period during which an employee must remain with the company before the options begin to vest;
- vesting – the gradual vesting of options following the expiry of the cliff period;
- strike price – a pre-agreed price at which the share can be acquired, usually derived from the company’s value at the time of joining the scheme;
- good/bad leaver provisions – rules governing the termination of employment.
The final reward for the employee corresponds to the difference between the strike price and the market value of the share at the time the option is exercised. The new tax regime applies exclusively to schemes leading to the actual acquisition of shares – it does not apply to virtual ESOPs (phantom shares).
Principle of the new rules: no tax before cash
The amendment introduces a simple principle: tax liability on a qualified employee share option arises only at the time of actual realisation of the gain, i.e. upon the sale of the acquired share. At the latest, the employee must tax the income in the tax period in which 15 years have elapsed since the exercise of the option.
Income from the exercise of a qualified option is no longer considered income from employment but other income under Section 10 of the Income Tax Act. A key consequence is that this income is not subject to social security and health insurance contributions.
The income is determined as the difference between the market price of the share at the time the option is exercised and the higher of the following values: the market price of the share at the time the option was granted, or the agreed strike price. Price changes caused by a contribution, conversion or other transactions of a similar nature are not included in the calculation. The law does not expressly regulate the method of determining the market value of the share – practice is likely to settle on the use of expert opinions or standardised valuation methodologies.
Conditions for applying the new regime
The new regime is not a blanket exemption. The benefits of Section 6a of the Income Tax Act may only be claimed if the conditions relating to the option itself, the employer and the employee are cumulatively met.
- A qualifying option must be non-transferable, granted free of charge on the basis of a written contract and exercisable no earlier than three years after it is granted. Exceptions to the three-year condition are so-called liquidity events: the sale of a controlling stake of at least 67% or the company’s listing on a stock exchange.
- A qualifying employer must not exceed an asset limit of CZK 2.5 billion and a turnover limit of CZK 2 billion, with these limits also being assessed at group level. The Act further excludes entities operating in regulated sectors – banking, insurance, the legal profession, tax consultancy or auditing. Conversely, payment institutions, crowdfunding platforms or providers of services related to crypto-assets, for example, will meet the conditions. Given the relatively high turnover limits, the new regime can also be expected to apply to medium-sized companies outside the start-up environment.
- A qualified employee must have worked for the employer continuously for at least 12 months in the period between the grant and exercise of the option, must have a monthly income from employment of at least 1.2 times the minimum wage, and their total stake in the employer, after exercising all rights, must not exceed 5% at the time the option is granted. The scheme applies exclusively to employees in an employment relationship – it does not apply to persons working under a trade licence.
Notification obligations
The employer is obliged to notify the tax authority both of the grant of the option (including its value and the identification of the employee) and of its subsequent exercise or financial settlement. Compliance with these obligations is a condition for retaining the tax benefit – failure to comply may result in additional tax and contributions being assessed, including the relevant penalties.
What to watch out for
The practical application of the new regime presents several areas of increased risk, which should be taken into account when setting up or reviewing ESOP documentation.
In the case of convertible instruments and option repricing, it is necessary to verify whether any adjustment to the terms causes a loss of eligibility for the new regime. Buybacks and secondary sales of employee shares to investors prior to an IPO may result in a shift in the tax timing. In cross-border structures – typically where a parent company grants options for shares in a Czech entity – it is necessary to address the allocation of income between jurisdictions, cost-sharing arrangements and the tax deductibility of costs at group level.
It is also essential that all ESOP documentation (master plan, grant letters, vesting conditions, good/bad leaver provisions) is aligned with the conditions of the tax regime. Missing or inconsistent documentation is one of the most common causes of losing entitlement to tax benefits.
Conclusion
The new regulations on employee share options, effective from 2026, represent a significant alignment with international standards and a fundamental shift for the entire Czech start-up and tech ecosystem. It offers employees a realistic opportunity to participate in the company’s value without an unsustainable liquidity burden when exercising options; for employers, it opens up scope for a more competitive structuring of total remuneration.
However, success in practice depends on careful programme design, proper documentation and compliance with disclosure obligations. Thanks to the amendment, a properly designed ESOP is now becoming a fully-fledged element of remuneration within the Czech legal framework as well.
