Law No 7524 on Amendments to Tax Laws, Certain Laws, and Decree Law No 375 was published in the Official Gazette number 32620 dated 2 August 2024 and has come into effect. Below is detailed information on the new regulations, which are of significant interest to employers providing benefits to employees through stock purchase option arrangements. Before delving into the regulations, we briefly look at the legal nature of the benefits provided to employees in the form of share certificates.
LEGAL NATURE OF BENEFITS PROVIDED TO EMPLOYEES IN THE FORM OF SHARE CERTIFICATES
To reward employees for their loyalty to the company or their performance, some employers provide employees with shares, or the right to acquire shares, either "free of charge" or "at a price below the actual share value", in addition to salary and other salary-related benefits. These benefits can be included in employment agreements or, as is commonly practiced, set out as a "Stock Option Plan ("SOP")" within the scope of unilateral terms determined by employers.
Although there is no comprehensive regulation in the Labour Law No 4857 ("Labour Law") or any other labour law legislation regarding stock acquisition practices, the Court of Cassation has ruled on the matter in disputes where the payment of stock option rights are demanded. In this regard, the 9th Civil Chamber of the Court of Cassation, in its decision numbered E. 2022/7885, K. 2022/15517, dated 29 November 2022, examined the issue and defined the nature of the benefits obtained through stock options.
In its decision, the 9th Civil Chamber emphasised that the "stock option" right granted to employees is a right offered as an incentive in the employment relationship, different from general options traded in financial markets. The court considered this right to be a "bonus", as expressed in Article 32 of the Labour Law, thus defining it as an element of the "salary".
As a result, this element of the salary received by the employee was determined by calculating the monetary equivalent of the stock the employee was entitled to. With this interpretation, the Court of Cassation indicated that the stock option rights provided to employees by employers are treated as an element of salary under the Labour Law, and that the unpaid equivalents of shares, after meeting certain entitlement conditions, will be considered "labour receivables" before the labour courts.
NEW REGULATIONS
The repealed Article 17 of Income Tax Law No 193 regarding exemptions and exceptions has been re-enacted along with its title. According to this new regulation, the market value of share certificates given to employees free of charge or at a discount, considered as part of the salary, by employers classified as tech startups, will be exempt from income tax, provided that it does not exceed the employee's gross annual salary.
If the shares acquired by the employee are sold within 12 years, the employer will be required to remit the tax that was exempted at the time of the initial acquisition, along with interest for late payment. Upon selling the acquired shares, tax will be calculated at the rate of 100% for the first three years, 75% in the fourth to sixth years, and 25% for years seven to twelve.
Although some uncertainties have arisen with this new regulation, the most important issue from a labour law perspective is what is meant by the expression "share certificates considered as an element of salary." In the jurisprudence of the Court of Cassation, it is observed that benefits provided to employees in the form of stock options are considered an element of salary. Given this, the potential existence and nature of share certificates provided to employees by employers that are not considered as an element of salary will likely be a matter of dispute in potential lawsuits and appears to require definition by the Court of Cassation.
On the other hand, although it is stated that the tax exemption on share certificates provided to employees will be enjoyed by "tech startup companies", the fact that such benefits provided to employees are considered as an element of salary will have the same consequence for any type of employer from a labour law perspective.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.