Companies wishing to reward their key personnel (management, employees or associates) for their achievements and build long-term relationships with them are increasingly introducing different incentive programmes. One interesting solution is a program based on phantom shares, which also offer tax benefits.
What are phantom stock option plans?
Phantom shares are derivative financial instruments that grant the right to receive a cash payment depending on the achievement of specific goals, financial results or the value of the company. Unlike traditional shares, phantom shares do not change the ownership structure of the company and do not confer voting rights, rights to information or dividends. The beneficiaries of incentive program are key personnel of the company: members of the management board, employees or associates (subcontractors).
Terms and conditions of the incentive program
Polish law does not regulate the rules for introducing incentive program based on phantom shares (stocks), which gives considerable freedom in their design. The terms and conditions of the program should therefore be clearly defined in the relevant documents, e.g. the program rules or individual agreements. The regulations should specify, among others, the conditions for acquiring rights, the number of instruments granted, the dates and method of payment of benefits. It is also important whether phantom shares are acquired for consideration or free of charge (this has significant tax implications, as discussed below).
The exercise of rights under the program may be subject to various conditions, for example:
- the obligation to remain/work in the company for a specified period of time,
- the company achieving a specified level of profit,
- specified increase in the value of the company,
- the performance of a specified action by an employee, e.g. finalising a specified contract.
Well-structured regulations not only ensure transparency of rules, but can also play an important role as evidence in the context of tax settlements.
Tax implications for program participants
The acquisition/receipt of phantom shares does not generate income for the participant at the time of their grant. Taxation only arises at the time of exercise of the right, i.e. payment of the cash equivalent to the participant. The rules of taxation depend on whether the phantom shares were granted free of charge or for consideration.
If phantom shares were granted free of charge, the income from their exercise should be classified as income from the source from which the participant obtained them. E.g., if phantom shares were granted free of charge to an employee, the cash benefit related to the exercise of rights arising from phantom shares constitutes employment income. It is taxed at the so-called tax scale (12%, 32%), i.e. at a high PIT rate.
In the case of the purchase of phantom shares for a fee, the payment of the cash equivalent will constitute income from capital sources, to which 19% PIT applies. This is confirmed by individual tax interpretations, e.g. the interpretation of 29 May 2025, No. 0113-KDIPT2-3.4011.280.2025.2.SJ.
Tax implications for the company
For a company, granting phantom shares to employees, associates or other persons associated with the company constitutes an obligation to pay a cash benefit in the future. The costs associated with the implementation of the program (payments to participants) constitute a tax-deductible cost at the time they are incurred, i.e. when the benefits are paid.
In order to be able to classify expenses related to the program as tax-deductible, appropriate documentation must be available. It is crucial to have regulations and agreements with participants that clearly define the conditions of participation and the rules of the program.
Risk of the program being challenged
A phantom stock option plans, apart from increasing motivation and binding key personnel to the company, also offer tax benefits. However, it must be properly structured. Tax authorities may question the assumed tax consequences. An example of this is the judgments of the Supreme Administrative Court of 13 June 2025, ref. II FSK 1235/22, 1286/22, 1287/22, in which it was ruled that agreements concluded under incentive program did not create derivative financial instruments. The court pointed out that if the participants in the program do not bear the risk or costs of acquiring phantom shares, the benefits cannot be classified as related to derivative financial instruments. Consequently, cash benefits paid to participants in these program should be classified as income from employment rather than from capital.
There is also a risk of applying the general anti-avoidance rule (GAAR) if the authority finds that the program was artificial and its main or one of its main objectives was to obtain a tax advantage.
ABC Tax commentary
The implementation of incentive program offers many benefits for both the organisation and its employees. From the company’s perspective, these program help to build loyalty among key personnel and retain them in the organisation for longer. In addition, through the appropriate design of objectives and conditions of participation, they can be a tool for increasing team effectiveness and staff stability, and consequently have a positive impact on financial results. Tax aspects are also important, as in the case of employees who have purchased phantom shares, the tax rate may in practice be reduced from 32% to 19%. Furthermore, receivables that do not constitute income from employment will not be subject to social security and health insurance contributions. However, in order to achieve these goals, the program must be well prepared.