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Employee Participation in Profit Sharing

Based on an agreement on employee participation in profit sharing registered with the Ministry of Economic Development and Technology, a company may pay its employees a certain percentage of the profit of an individual business year, which is subject to tax relief and social contribution relief.

Agreement on Employee Participation in Profit Sharing

The employee's right to participation in profit sharing is regulated by the Agreement on Employee Participation in Profit Sharing. The agreement must apply to all employees; employees, however, have the right to withdraw from participation in profit sharing at any time by written statement. The initiative for concluding the agreement can be made by the company or the employees. The conclusion of the agreement on the part of the company must be duly defined in the company's articles of association. The conclusion of the agreement is decided by the general meeting by a simple majority.

The company and the employees can agree on a cash- or share-based profit sharing scheme. The cash-based scheme gives employees the right to the payment of the corresponding amount of profit in cash, and the share-based scheme in the form of shares. The determination of the scheme is one of the mandatory provisions of the agreement. The other mandatory provisions of the agreement are:

  • parties to the agreement;
  • share of profit;
  • the criteria for determining the amount to be allocated to each worker in a given year, taking into account at least the level of salary and the number of days present at work;
  • the interest rate determined in accordance with Paragraph two of Article 13 of the Act;
  • deadline for payment of the corresponding amount;
  • if a length of service condition is specified, additional rules for calculating length of service;
  • the manner and time limits for exercising rights and the consequences of disposing of shares in accordance with Article 16 of the Act;
  • method of notification of employees;
  • method of calculating the proportional share of the corresponding amount of profit upon termination of the employment contract of an employee;
  • validity of the agreement.

A person who is authorised to represent the company by law or company bylaws shall send the concluded agreement for approval and registration to the Ministry of Economic Development and Technology. Only an agreement entered in the register allows the application of tax relief and social contribution relief. Any change to the agreement, which is attached in the original or a certified copy, must also be entered in the register.

Tax relief and social contribution relief

The law provides for tax relief for both companies and employees if certain conditions are met; specifically, according to the law, employees can be paid a maximum of 20 percent of the profit of an individual business year, but not more than 10 percent of the annual gross amount of salaries paid in the company in the same financial year. The maximum amount that an employee may receive in accordance with the Act may not exceed EUR 5,000.

Income tax and social contributions under the cash-based scheme

Income in the form of the corresponding amount of profit received by the employee under the cash-based scheme is considered to be income from employment. If the income from the cash-based scheme is paid before the expiry of one year from the date of acquisition of the right to the corresponding amount of profit, it is fully included in the tax base, and social contributions are calculated and paid from the total income. If the payment is deferred for one year from the decision on the approval of the annual report, the tax base is reduced by 70 percent, and social contributions are calculated and paid from 30 percent of this income. If an individual waits at least three years from the decision on the approval of the annual report, the paid income is tax-free, and social contributions are exempt from payment.

Corporate Income Tax Relief

On the basis of a registered agreement on participation in profit sharing, the company can claim a reduction in the tax base in the calculation of corporate income tax; after one year from the date of the decision to approve the annual report, 70% tax relief can be applied, and after three years from the day of adoption of the decision on the approval of the annual report, 100% tax relief can be applied. If the participation in profit sharing was paid to employees before the expiry of one year from the date of the decision approving the annual report, the relief referred to in the preceding paragraphs cannot be claimed.

In addition to such relief, the company is granted one percent of the amount of the relief as a management expense that can be paid to employees.