This article is specifically addressed to HR or tax professionals interested in the tax treatment applicable as per the Romanian tax law to a stock option plan, or to other similar remuneration plans based on company shares offered to employees. Thus, we describe below the tax rules applicable in Romania to such share plans, as per the 2023 tax legislation.
An important characteristic of such share based plans (or any remuneration programs through capital elements) is that both the employees and the employers can benefit from a preferential tax treatment, if certain conditions as provided by the Romanian tax legislation in force are fulfilled (Law 227/2015 on the Romanian Tax Code), as we describe below.
Therefore, at least from this perspective, a stock option plan is a very attractive way to remunerate key employees and, at the same time to commit them to remain in the company in the long run. At the same time, it is an effective mean for connecting the dimension of the employee’s professional performance and that of the company’s economic performance.
First, we’ll describe the definition of a Stock Option Plan as per the Romanian tax legislation in force, as well as the criteria it must meet according to the same definition, to benefit from the favorable tax treatment.
According to the provisions of the Romanian tax legislation in force (Law 227/2015 on the Romanian Tax Code, art. 7, point 39) a stock option plan is defined as:
“a program initiated by a legal person granting its employees, its administrators and/or directors, or to those of an affiliated legal person, as defined under points 26 (c) and (d), the right to purchase at a preferential price, or to receive free of charge, a specified number of securities, as defined in accordance with point 40, issued by that entity. To qualify a program as a stock option plan, that program must comprise a minimum period of one year between the granting of the right and the time of its exercise (acquisition of the securities) “.
Some of you will probably be confused by the far too technical wording of this definition. Therefore, we will further explain what exactly each criterion established by the definition in force means. We will also describe our practical interpretation of each criteria in the definition.
Thus, according to the definition currently in force, a Stock Option Plan should meet the following conditions (click on each condition to read the explanations):
By exclusion, we can identify quite clearly that any such remuneration plans cannot be qualified as Stock Option Plans in accordance with Romanian law if they are not initiated by a legal entity – for example if initiated by employing individuals, associations without legal identity, etc. In any such situation, the respective plan cannot be included in the definition of the Romanian Tax Code.
Thus, under this type of program a right is granted to acquire or even to receive securities (i.e. shares of the company) free of charge. Let’s see further who can be granted such rights.
We understand from here that the right to purchase the securities can be granted to the employees, but also to the directors/members of the Board of that company. Furthermore, it may even be granted to employees or directors of other companies affiliated with the company in which the share plan is initiated.
Most often we encounter in practice the situation in which a share plan is initiated by a group company (usually the parent company), but employees of other companies in the same group can also enroll in the program.
In such situations, as set out in the definition above, there should be affiliation (according to the provisions of the Romanian Tax Code) between the two companies – i.e. the one who initiates the award program and the one whose employees or directors receive the right to participate in the program.
In such a share plan the employee usually does not take possession of the securities immediately upon enrollment, but only after a certain period, as established in the plan policy. This period is usually called the vesting period. This is the period between the time when the employee is granted the right to purchase or receive the shares free of charge, and the date on which he can actually acquire them (and thus take possession of them).
Thus, as established in the Romanian Tax Code (as per the above definition), this period must be at least 1 year (12 months) long.
We were explaining at the beginning of the article how such a share plan can benefit from a preferential tax treatment at the level of the employee and of the employer. Therefore, we will further detail what this tax advantage is, and how transactions carried out as part of a share plan that meets the conditions applied through the above explained definition are taxed.
According to the provisions of the Romanian Tax Code (art. 76, paragraph (4) letter r)), the benefit received as part of a stock option plan are not taxable as salary for the purpose of income tax, neither when granting the right to participate, nor at the moment of exercising that right (to acquire the shares).
More specifically, the tax authorities consider that the benefit enjoyed by the employee as part of such a program – i.e., the purchase or receipt of shares at a preferential price or even free of charge – should not be taxed as salary income.
In addition, according to the provisions of the same Tax Code (art. 142 let. p), such benefit must neither be subject to mandatory social contributions at the level of the employee or employer.
Based on the above, we can conclude that neither the employer nor the employee has any obligation to declare and pay salary taxes for the granting of such benefits.
However, this does not mean that the share sale transaction is not taxed at the level of the individual (i.e., of the employee who received the shares and later decides to sell them). We detail below the tax treatment applicable for the sale of the securities received as part of such share plan.
As per the provisions of the Romanian tax legislation in force, the gain from the sale of any securities is taxed as investment income. Taxable gain is determined as the difference between the sale price and the fiscal value – i.e., the purchase price of the securities.
In the case of company share plans, the purchase price is determined as the preferential price at which the securities were purchased. If the securities are granted free of charge, the fiscal value is considered to be zero. From the gain thus determined, the costs related to the sale transaction can also be deducted, where applicable (e.g., commissions paid to the intermediary/broker).
For example, if an employee receives free shares from the employer (or from the parent company), he will not owe income tax or social security contributions for the salary benefit received. But he will be required to declare the income he will make if he sells those shares. At the time of sale, the full amount received from the sale of those shares constitutes a taxable income, from which the costs of the sale transaction (e.g., commissions paid to the intermediary) can be deducted.
The capital gain derived is taxed as follows:
The income realized by individuals from the sale of the shares is classified by the Romanian Tax Code in the category of investment income. This type of income must be declared through the annual tax return, which must be submitted annually for each tax year (calendar year).
The deadline for submitting the annual tax return is currently set for 25 May of the following year. Specifically, for 2023, the deadline for submitting the tax form is on 25 May 2024. This deadline may be extended by decision of the authorities.
If you need help with your Romanian annual tax return reporting obligations, check how we can assist here:
Founded in 2008 as TAX IQ, our company has gained extensive expertise over the years, allowing us to effectively utilize our experience to benefit our clients’ best interests. Over time, we have succeeded to build a solid reputation as trusted tax advisor for the entire community of Romanian expats.
Founded in 2008 as TAX IQ, our company has gained extensive expertise over the years, allowing us to effectively utilize our experience to benefit our clients’ best interests. Over time, we have succeeded to build a solid reputation as trusted tax advisor for the entire community of Romanian expats.