Reserved Own Share: The New Feature as an Incentive

Employee ownership has become a widely embraced notion with recent trends of companies offering stimulus to its employees in the form of ‘reserved own share’. In line with the practices initially adopted by the European Union Member States, the Serbian legislature made significant changes to the Serbian Companies Act in 2019 to modernize the rules that regulate companies and their functioning, especially the IT Sector. The newly enacted laws provide for a liberal surrounding whereby the acquisition of shares within the company would be possible for every employee subject to the agreement with the employer.

What do newly added provisions bring about? 

Reserved own shares can be defined as shares that companies acquire without compensation from their shareholders to grant a financial instrument called the right to acquire a share. The percentage of all reserved own shares cannot surpass 40% of the company’s basic share capital. It is interesting to note that one-member companies may also acquire reserved own shares.

Acquisition of reserved own share is made by the decision of the general meeting of the company by a majority of usually 2/3 of the total number of votes of all company members. The company may acquire the reserved own share only from the shares that have been fully paid up – may only be acquired from the shares of members who have voted in favor of the decision to acquire a reserved own share.

The right to acquire a share, as a financial instrument, is issued by the decision of the company that submits its decision to the Central securities, depository and clearing house (CSDCH) for registration purposes. This right cannot be pledged nor inherited. In addition, under the auspices of the Law on Capital Markets, the issuance of the right to acquire a share is not considered a public offer.

Concerning the tax regime, every transfer of share from the company to its employee is treated as an income, hence, it is subject to taxation. However, there are few exceptions to this rule in the situations where:

  • the employee does not transfer the share within two years from the moment of acquisition of said share;
  • the employer or person affiliated does not buy-back said share from the employee; and
  • the employee does not terminate the employment within two years from the moment of acquisition of said share, with exception of the termination of employment independently from the will of the employee and that of the employer.

When the employee decides to sell a reserved own share at a higher price than acquired, the gain is subject to the capital tax gain. Under the Serbian Personal Income Tax Act, the capital gain is taxed at the rate of 15%.

Benefits for the employees 

From the psychological aspect, the possibility for the company to offer participation in the company’s share to their employees and other cooperatives (e.g. consultants, investors) is ultimately fruitful as it boosts the work productivity of the latter. In that way, the employees look at the company as their own. Notably, this is the most common in startup companies whose subscribed capital is limited. One of the main advantages for the companies stems from the more rapid growth of the company’s value.

On the other hand, for employees, the benefits of realizing their share occur at the time of the sale of the company or its listing on the stock exchange. Moreover, the employees whose company is listed on the stock exchange can receive an opportunity to buy shares at a lower price and earn on the difference by instantly selling them on the stock exchange, or keep them with the assumption that their price will rise in the future.

Europe v United States

The US set the yardstick in the global tech industry by implementing the employee stock option plan (ESOP – similar to reserved own shares). EU has struggled to keep up with the rapid growth of the American companies in this field, as non-uniform rules across the EU countries posed a major barrier. For that reason, several countries have passed legislation that is more flexible and wider in scope intending to enable tech companies to compete with those in Silicon Valley.

For example, certain changes have been made to French stock option rules that include lowering the price at which they can be offered to employees and extending a program with friendlier taxation to foreign companies with employees in France. On the other end, countries such as Germany and Ireland are contemplating new amendments to stock option rules. It is considered that Latvia, Estonia, and Lithuania have the most favorable regime in this respect, even better than the US, due to recent legislative changes that lowered the tax rate and reduced the period of exercising the stock options. The discrepancy between US and European countries is still wide, but it will be interesting to see whether the adoption of this model can consequently reduce the gap in the following period.