12 January 2021, amendments to the Latvian Commercial Law (CL) and the law
“On Personal Income Tax” (PIT Law) entered into force. The new regulations will
make the tool of issuing stock options and share options to employees as a more
available and popular tool for motivating employees in Latvia. Until now,
certain tax relief were available only for joint stock companies (akciju
sabiedrība or AS), which had issued employee stock options or, in other words, granted
the right to purchase stocks. The new amendments have enabled also limited
liability companies (sabiedrība ar ierobežotu atbildību or SIA
) to grant
their employees right to purchase capital shares and to qualify for tax relief.
What is share and stock option?
By granting share
or stock option an employer grants its employees the right to purchase after a
certain period of time, at a fixed price (or free of charge), under specific
conditions the capital shares or stocks (hereinafter both - stocks and capital
shares referred together as - stocks) of the employer’s company or stocks of a
company related to the employer. Granting of the stock options does not oblige
employee in any way to exercise this granted right, meaning, that it is not
mandatory for the employee to buy the company’s stocks offered by the employer.
Thus, employees always have the freedom of choice whether to exercise the stock
options or to refuse. In the result of exercising the stock options, an
employee becomes an owner of the company’s stocks.
There are three
key events in the process of granting stock options:
1. Granting of stock option - the
company offers its employees the right to purchase stocks, for example, when
starting the employment relations. At this moment the stock price is set (if
they are not provided free of charge) at which the stocks will be made
available for the employee to purchase after the expiry of the period of
holding the stock options (also called the “vesting period”).
2. End of the period for holding the
stock options – the end of a period specified by the employer (for example,
3 years from the day of granting of the stock options), after which the
employee is entitled to exercise the stock options or, simply put, to buy the
stocks. After this period, the employee may choose when to use the stock
3. Exercising stock options - the
employee purchases stocks at the price defined at the moment of granting the
stock option, or free of charge, whenever the employee decides to exercise the
stock options. After the end of the period of holding stock options, the
employee may choose the most convenient and advantageous moment for exercising
the stock options (for example, when the stock value is high).
issuing stock options for employees may serve as a long-term employees’
motivational tool, which can help to raise employees’ interest in the development
of the company. Employees with stock options will have a direct interest in
raising the company’s value, since the growth of the company will inevitably lead
to the rise in the value of stocks, which employees will be able to purchase in
the future. After purchasing the stocks, the employee can choose to keep or
sell the stocks.
options for employees is a tool widely used by start-ups. Stock options can be
used for attracting and retaining in long-term highly qualified employees. At
the development stage a start-up might not be able to offer competitive
salaries to such qualified employees. Therefore stock options that provide
opportunity to obtain equity stake in the company serves as long-term
motivation. When the start-up will be developed and increased its value, the
employees will be able to exercise their stock options and choose to sell them
if the company’s stocks or shares are purchased by investors.
What should be considered when issuing stock
several important aspects related to issuing employee stock options that must
Why to issue?
options may be issued for several purposes:
- as an additional remuneration
and motivation for employees;
- to keep highly-qualified
specialists in the long run;
- to engage employees in taking
Depending on the
reason, the company should define - which groups of employees will be eligible
to receive stock options; the period of holding stock options (vesting period),
and the amount of rights arising from stocks to be purchased by employees.
Whom to grant?
Stock option can
be granted to members of board and council, employees (or employees of specific
categories), employees and members of board and council of a company related to
How much to grant?
shall define how many stocks the employee shall be eligible to purchase as a
result of exercising stock options.
In relation to
joint-stock company, the total amount of nominal value of stocks that may be
acquired by exercising the stock options shall not exceed 10% of the company’s
paid-up capital at the moment when decision on issuing the stock options was
What rights to grant to employees?
A company may
define various rights arising from stocks be purchased by employees in the
articles of association. Both joint-stock companies and limited liability
companies may have several categories of stock or share with different amount
of rights. The rights arising from stocks or shares can be, inter alia, as
- rights to receive dividends;
- voting rights in meetings of
How long period the stock options shall be held?
- rights to receive liquidation
shall establish the period of holding stock options (vesting period),
i. e. a certain period starting from the moment when stock options are granted
to an employee during which the employee must hold the stock options, and after
the expiry of the period the employee shall have the right to exercise the
stock option (to buy the stocks).
define one specific period of holding stock options after the expiry of which
the employee will be eligible to exercise all granted stock options (“cliff
vesting”). For example, an employee shall be entitled to exercise stock options
to all 100% stocks granted to employee after 3 years as of the date of
granting stock options. Or the employer may choose to establish that employee
shall be eligible to exercise the stock option gradually (“graded vesting”). For
example, 20% of the stock options can be exercise after 1 year, another
40% of the granted stock options may be exercised after 2 years, and so on.
period of holding stock options, to qualify for tax relief, shall be
What shall be the price of stocks?
When issuing the
stock options, the company shall define whether the employee upon the expiry of
the period of holding stock options, shall purchase the stocks at a set price
or whether the stock will be free of charge.
If stocks are to
be acquired free of charge or at a price that is less than the stock nominal
value, the company shall issue the stocks at the expense of retained earnings
or they shall be paid for from the company’s special reserves.
How are relations between shareholder regulated after
the stocks are purchase?
The rights of
company’s shareholders or stockholders can be regulated in shareholders’
(stockholders’) agreement that can specify, inter alia, various restrictions
(regarding competition, for example), the company can also establish
restrictions regarding handling of stocks, specify conditions for cases when employment
relations are terminated with employee, and other provisions.
is important to consider what will be the tax implications from issuing stock
options to employees.
amendments to the PIT Law expand the non-taxable income from exercising the
stock options and establish a more favourable procedure for application of
personal income tax (PIT).
In general, the PIT
Law foresees that salary tax must be paid for the benefit granted to employee
by an employer, including income obtained from the exercising of the stock
options. The new wording of Section 8, Paragraph 25
specifies that income obtained from exercising of stock options, which has been
granted to an employee, member of the council or board by the employer or
company, which is a person related to the employer within the meaning of the
law On Taxes and Duties, on the basis of employment relations shall also be
considered as income for which the payroll tax must be paid.
It should be
noted that within the meaning of Section 1, Paragraph 2 of the Corporate
Income Tax Law, “stock” means also capital shares. Therefore, the new
amendments also apply to exercising capital share options issued by a limited
At the same
time, amendments to Section 9, Paragraph 1, Point 43 of the PIT
Law specify the preconditions, which must be met in order to exempt the income obtained
from exercising stock options from the payroll tax:
- the minimum period of holding
stock options (a period from the day of granting of the stock option until the
date when an employee is entitled to exercise stock options) is not less than
- during the minimum period of
holding stock options, the employee shall be in employment relations with a
capital company which has granted the stock options to the payer or with a
person related with which has granted the stock purchase option to the payer;
- within two months after expiry
of the time period during which employees could apply for the stock options, or
stock option was granted (if the plan for exercising stock options does not
provide for applying for the stock option), an employer has submitted to the
State Revenue Service the information regarding the stock option plan;
- stock options are exercised not
later than within six months from the day when employment relations between the
employee and employer are terminated;
- the capital company has not
issued the payer a loan that has not been repaid until the moment of exercising
the stock options.
provisions of PIT Law are more favourable for employees in relation to the
minimum period of holding stock options, which used to be 36 months, but
now not less than 12 months.
new norm forbidding debt obligations during the employment relations has been
the above indicated conditions are met the payroll tax shall not be applied to
an employee’s income obtained from exercising the stock options.
However, if the
preconditions for applying the tax relief are not met, then the taxable income
from exercising stock options shall be determined, in accordance with
, Paragraph 1 of the PIT Law. Namely, the
taxable income shall be the difference between the stock market value on the
day of exercising stock options and the stock purchase value. In addition, the
method for establishing the stock market value depends on whether the stocks
are traded publicly. According to Section 1111
Paragraph 2 of the PIT Law, the stock market value for publicly traded
stocks is the average weighted price fixed on the day of exercising stock
It should be
noted that a new norm has been introduced to the PIT law specifying that the stock
market value for stocks not traded publicly is established in an independent
written opinion that includes the methodology for the performance of assessment
and that is provided by a person who in compliance with the Commercial Law has
been included in the list of valuators of property contributions or who in
accordance with the laws of the respective state is entitled to provide an
independent opinion on the stock market value.
opinion on stock value shall be valid 12 months from the day of drawing up
thereof, unless significant circumstances have occurred after drawing up of the
opinion due to which the option no longer reflects the true value of stocks.
It should be
noted that the State Revenue Service must be informed (free format) about changes
in the plan for the exercising of the stock options within two months from
entry into force of such changes.
If stocks are alienated
If an employee
decides to alienate the stocks that have been acquired by exercising the stock
options, the income obtained will be regarded as income from the capital gains
and taxable with PIT pursuant to Section 119
of the PIT Law.
The stock purchase value is the stock market value on the day of exercising
stock options if these stocks have been acquired by exercising stock options,
and the income obtained on the day of exercising stock options is taxable
pursuant to Section 8,
and Section 11.11
According to Section 15,
Paragraph 5 of the PIT Law, PIT rate in the amount of 20% is applied to
income from the capital including from the capital gains.
If dividends are disbursed
If an employee,
in the result of acquiring stocks, is entitled to receive dividends, then the
capital company pays the corporate income tax on this income at the moment of
profit distribution and the PIT is exempted.