The Ministry of Economy and Innovation Improves Conditions for Start-ups: Option Taxation will Become More Attractive
The Government approved an amendment to the Law on Personal Income Tax prepared by the Ministry of the Economy and Innovation, which provides for a tax advantage for employees who have retained the shares of the company acquired through transactions (options) for more than three years. The change will make a significant contribution to the creation and improvement of business conditions in the country for start-ups who seek to retain and motivate employees by paying part of their salary with options.
“In the early stage of their activities, start-ups do not have sufficient funds to start a business and to pay competitive wages. For this reason, giving company shares to the employees becomes an alternative, and more favourable option taxation will allow young, as well as large, companies to motivate the existing employees and attract new ones. This solution will significantly ease conditions for early stage start-ups that at the beginning of their activities need the best specialists to improve the product, but have a very limited capital. It is apparent from international practice that options often become a way out of a situation“, – says Virginijus Sinkevičius, the Minister of Economy and Innovation.
An amendment to the Law on Personal Income Tax proposed by the Ministry of Economy and Innovation provides that the employee’s benefit from the options is not subject to either personal income tax or social security contributions after the acquisition of the shares not earlier than 3 years after the right to option has been granted.
Currently, an employee who exercises an option and receives shares needs to pay taxes immediately on the difference between the acquisition price of the shares and their fair market value, even without earnings. Unattractive procedure of option taxation makes it difficult for start-ups to attract and retain employees, forcing companies to choose other foreign countries.
This proposal is one of the parts of “Program 1000”, the project for start-ups that was prepared by the Ministry of Economy and Innovation, and it is aimed at creating a more favourable business environment for establishment and growth of start-ups, and at increasing the number of start-ups operating in Lithuania to 1000 by 2020. There are currently 530 active start-ups in Lithuanian start-up ecosystem, and last year alone investments amounting to 183 million EUR were attracted.