Law No. 7524 on the Amendment of Tax Laws, Certain Laws and Decree Law No. 375 published in the Official Gazette dated 02.08.2024 (“Amending Law“) introduced significant regulations regarding the taxation of shares acquired through employee share option plans.

Pursuant to the Income Tax Law, shares acquired through employee share option plans are among the pecuniary benefits which are granted to the employee in return for services. Therefore, if shares are acquired through employee share option plans, income tax is accrued on the fair value of the shares.

Pursuant to the Amending Law, it is regulated that if technology startups grant shares to their employees free of charge or at a discount, income tax will not be accrued for the portion of the fair value of the shares that does not exceed the amount of one year’s gross salary in the relevant year.

However, the Amending Law also regulated that the employer may have to pay the uncollected income tax in some cases.

The exempted income tax will be collected together with the default interest from the employer (i) at the rate of 100% if the employee disposes of the shares within three years, (ii) at the rate of 75% if the employee disposes of the shares within four to six years, (iii) at the rate of 25% if the employee disposes of the shares withing seven to twelve years.

This regulation introduced by the Amending Law does not provide a practical benefit in terms of exempting the shares acquired through employee share option plans from income tax. In fact, the portion of the fair value of the shares acquired through the employee share option plan that exceeds the employee’s gross salary for one year will continue to be subject to income tax.

Considering that one of the main reasons for the employee share option plan is to reduce the cost of employment, it is clear that the portion exempted from income tax, which corresponds to one year’s gross salary, may be insignificant compared to the total fair value of the shares granted through the share option plan. In addition, it is also problematic that if the employee does not retain his/her shares for a long period of time, the uncollected income tax will be collected from the employer together with the default interest. In short, the said regulation is criticised as it does not foresee any practical change that encourages the issuance of employee share option plans.

The said regulation entered into force on 02.08.2024.

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