Czech ESOPs: New Tax-Advantaged Regime from 1 January 2026

JUDr. Jakub Dohnal, Ph.D., LL.M.
JUDr. Jakub Dohnal, Ph.D., LL.M.
29.4.2026 | ARROWS law firm

Employee share ownership plans (ESOPs) are among the most effective tools in the technology and startup sectors for long-term motivation and talent retention. As of 1 January 2026, a new tax-advantaged regime applies in the Czech Republic for employees acquiring securities or ownership interests in a business corporation, finally making these programmes competitive with international standards. However, a properly structured ESOP is not merely a matter of legal paperwork—it is a comprehensive strategy that must work carefully on three levels: law, taxation, and the psychology of motivation. The illustrative image shows a specialist during a consultation regarding employee share option plans.

Key takeaways

  • The new regime from 2026 means an exemption from social security and health insurance contributions, the “no tax before cash” principle, and deferral of tax until the sale of the equity interest – fundamentally changing the economics of ESOPs in favour of both employees and employers in the Czech Republic.
  • Strict conditions for applying the new regime must be met, in particular regarding the relationship between the exercise price and the market value of the option at the time it is granted. The minimum holding period for the acquired securities or equity interests is also key.
  • Correct parameter settings (pool size, vesting length, strike price, cliff period, good/bad leaver clauses) are crucial for the programme to genuinely motivate and to protect the company from dilution of its ownership structure.
  • The most common mistakes (unclear promises, a pool that is too large or too small, complicated or non-standard solutions, weak communication) prevent an ESOP from fulfilling its potential and lead to issues and disputes.
  • Formal requirements (notification to the tax authority, written documentation, shareholders' agreements, records of grants and vesting) are not mere administration – breaching them leads to loss of tax benefits or legal invalidity.

Why employee shares in 2026 are no longer a luxury, but a strategic necessity

Historically, employee shares gained a reputation as an almost elite benefit that only multinational companies or roughly a dozen Czech startups could afford. However, reality is changing dramatically. Today’s labour markets are strongly dominated by the so-called “war for talent”, especially in IT, development, design and management.

Key employees, especially senior staff and specialists, are attracted to roles in foreign companies or decide to found their own startup, where they can participate in shares directly. A Czech employer that offers them only a fixed salary and perks like office vitamins simply loses in the competition.

A new legal regime for employees acquiring securities and equity interests in a business corporation, effective from 1 January 2026 (through an amendment to the Czech Income Taxes Act), now introduces conditions that had long been an unnecessary obstacle. Until the end of 2025, there were reports of preferential treatment, but they were fragmented and only on paper.

From January 2026, it is different: income from the sale of securities or equity interests acquired under a qualified ESOP programme is not taxed as employment income, and therefore is not subject to social security and health insurance contributions. In addition, income tax is paid only at the moment of the actual sale – which is why this is referred to as the “no tax before cash” principle. This dramatically changes the income structure and cash flow of both the employee and the employer.

As a result, ESOPs are finally becoming a real alternative to domestic wages and can serve as part of a modern compensation strategy. Companies that do not understand this and implement it by the end of 2026 will lose a competitive advantage precisely at a time when the labour market in the Tech & Growth sector is tightening even further.

New tax regime from 2026: what has specifically changed

To understand how to set up an ESOP correctly at all, it is necessary to know the new legal requirements. The regime for qualified options is conditional and requires meeting a number of criteria on the part of both the employer and the employee, which are described in detail in Section 6(13) and (14) of the Czech Income Taxes Act.

Conditions for employers

An employer that wants to use the new tax-advantaged regime must meet specific criteria. The most important are the size limits: the employer must not be a large enterprise under the directly applicable European Union regulation governing the General Block Exemption Regulation (Commission Regulation (EU) No 651/2014), and its annual turnover must not exceed CZK 2.5 billion and its balance sheet total must not exceed CZK 2 billion. These criteria are assessed at the level of the entire group, so if the business belongs to a holding structure or has a parent company, the indicators for all entities are aggregated.

The second significant limitation concerns the business sector. The regime cannot be used by banks, insurance companies, law firms in Prague, tax advisers, auditors, mining companies and certain other regulated professions. The reason is that the legislator wanted to protect the regime from abuse in sectors with a high risk of conflicts of interest or where there is no need to support an innovative form of incentive.

The third criterion is formal notification to the tax authority. The fact that the employer granted the employee the right to acquire a security or an equity interest (an option) must be reported to the tax administrator via the employer’s unified monthly report (JMHZ) or another relevant method. Without this step, the benefits of the regime cannot be relied upon, and the tax authority may subsequently assess additional tax and insurance contributions.

Conditions for employees

On the employee’s side, the conditions are also clearly defined.

  1. The employee must acquire the security or the interest in a business corporation only after at least 12 calendar months have elapsed from the moment the right to acquire it was granted (e.g., from the option grant).
  2. The employee must be in an employment relationship with the employer for at least 12 calendar months, specifically between the granting of the option and the acquisition of the security or the interest in a business corporation.
  3. The employee must then hold the acquired security or interest for at least 3 years from the moment of acquisition. This is the so-called minimum statutory holding period for tax purposes.
  4. The option exercise price (the price agreed for acquiring the security or interest) at the time the right (option) is granted must correspond to or be higher than the market value of a comparable security or interest in a business corporation at the time the right (option) is granted. This is a key condition.
  5. The employee’s gross monthly salary for the period of employment between the granting of the option and the acquisition of the security or interest must reach at least 1.2 times the minimum wage applicable at the time the option is granted. The minimum wage for 2026 will be set by a government regulation; for illustration: if the minimum wage for 2024 were the same as in 2024 (CZK 18,900), the minimum monthly income would have to be at least CZK 22,680. This limitation prevents abuse of the programme as a substitute for regular salary.
  6. The maximum stake of a single employee must not exceed 5% of the company’s registered capital. Therefore, when granting stakes, you must have accurate data on the company’s capital and calculate what percentage you have already distributed.

Tax principle: “No tax before cash”

The core of the new regulation is that the employee does not pay tax and social security and health insurance contributions at the moment of acquiring the shares (i.e., when they exercise the option and buy the shares for the strike price), but only at the moment they actually sell the shares and receive cash. For example, if an employee receives an option with a strike price of CZK 100 in 2026, the shares increase to CZK 500 by then, in 2027 they buy them for CZK 100 (if they meet the 12-month period between the grant and acquisition) and then in 2030 (after the 3-year holding period) sell them for CZK 500 – at that moment they will pay income tax on the difference (CZK 400).

If the employee does not sell the shares, the income is taxed no later than in the tax period in which 15 years have elapsed from their acquisition, even if no sale takes place.

Exemption from social security and health insurance contributions

One of the biggest advantages of the new regime is that income arising from the sale of securities or interests acquired under a qualified ESOP programme is not considered employment income (under Section 6 of the Czech Income Taxes Act). This means that it is not subject to social security and health insurance contributions.

Under the historical regime up to the end of 2025, the employee had to pay approximately 11% of the option income in health and social insurance contributions on their side, while the employer paid approximately 33.8% (social security 24.8% + health insurance 9%). The new regime eliminates this entirely.

So if you have a team of 10 key people and each year income worth CZK 10 million is allocated into the pool, you will save more than CZK 4 million in insurance contributions (employees and employer combined). This is a radical change in the economics of remuneration.

Most common questions about the new ESOP tax regime

1. Do we have to re-register all ESOP programmes we have under the new regime?
    No, but you should think it through and assess it. The new tax regime applies to income arising from the acquisition and subsequent sale of securities or interests, provided that all statutory conditions are met at the time the option is granted, the security/interest is acquired, and it is sold. If you have an older programme from previous years (when the qualified options regime did not yet exist), it is likely that it does not meet all the new conditions (e.g., the relationship between the strike price and FMV at the time of grant). Therefore, for new grants from 2026 we recommend setting them up so that they meet the new regime. You would breach only the prescribed conditions, such as the employee not meeting the minimum wage requirement or the company exceeding the turnover threshold; in such a case, the new regime would not apply to the programme. The lawyers and tax advisers at ARROWS advokátní kancelář can help you with a legal and tax audit of your existing programmes and with any optimisation.

2. What happens if our company stops meeting the turnover criterion during the programme (e.g., due to rapid growth)?
    If your company stops meeting the size limits (turnover exceeds CZK 2.5 billion or the balance sheet total exceeds CZK 2 billion), you will no longer be able to allocate new options that would fall under the new tax-advantaged regime. Existing options that were granted at a time when the company met the conditions, and that also meet the other conditions (e.g., 3-year holding period, strike price = FMV, etc.), remain in the regime under which they were granted. However, this means that if you are growing quickly and exceed the limit, you now need to consider how you will continue to motivate key people—whether through classic shares (without the tax advantages of the new regime), virtual shares, or other benefits. This is a tricky situation that companies often do not realise during their expansionary growth. In such a case, ARROWS attorneys in Prague can help you prepare an action plan and adjust the benefits structure.

3. What are the consequences if we do not notify the tax authority about the granting of a specific option?
    Without notification, you cannot reliably rely on the new tax-advantaged regime. The granting of the right to acquire a security or an interest must be notified to the tax administrator before filing the statement of cash income arising from employment and emoluments. The tax authority may later conclude that you are obliged to tax the income under the general rules (i.e., as employment income including insurance contributions). This means that employees could be additionally taxed on the difference between the strike price and the market value at the time of acquisition—precisely what the new regime is intended to prevent. The notification is therefore not optional—it is a mandatory part of the regime.

How to set up an ESOP programme in practice: from pool size to mechanisms

Once the legal and tax conditions are clear, let’s look at what it means to “set up” an ESOP correctly from a practical perspective. This is not just a technical matter—it is a strategy that affects motivation, fairness, and corporate governance.

Deciding on the pool size

One of the first and most critical decisions is how many shares or interests to reserve for the ESOP programme. Too small a pool (say only 3–5%) is not enough to motivate key people—they will think it is not worth the effort. Too large a pool (say 25–30%) unnecessarily dilutes the stakes of existing shareholders and may be exhausted before you manage to attract all the talent you want.

In practice, in the early stages of startups (pre-seed, seed, Series A), the benchmark is 10–15% of the company’s total capital reserved for employees. This is sufficient to be a motivating stake while not causing excessive dilution.

If your company is already further along (Series C or later), the pool may be smaller—say 8–10%—because you already have an established workforce and the goal is more about new key hires. However, this is not a hard-and-fast rule. It depends on your sector, how aggressively competitors “pitch” their plans, and your financial plan. The attorneys at ARROWS can help you analyse what pool is optimal for your situation and then assist with setting it up in a legally compliant manner.

Vesting period and cliff period: the time dimension

A vesting period is the time during which an employee gradually “earns” their entitlement to options. The most common standard is four-year vesting, meaning the employee gradually becomes entitled to their stake over four years. What for?

Motivation. If you gave an employee all options at once and they could purchase them immediately, there would be no long-term incentive in it. As soon as they had the money, they could leave. Vesting prevents this—the employee gradually “earns” their options by staying with the company and contributing to its growth.

Vesting often also includes a so-called cliff period, i.e., a “deferral period”. This is typically a one-year period at the beginning during which no options vest at all. If the employee leaves the company in the first year, they forfeit all options. Once the cliff expires (usually after one year), the options start vesting. Most commonly, this is combined as: 1-year cliff + 3-year vesting, meaning that after the first year the employee receives 25% of their options at once, and the remaining 75% then vest monthly or quarterly over the following three years.

Why is the cliff important? Because it protects the company. If a new junior developer joins in January, realises in March that the work environment does not suit them, and leaves in May—the cliff period ensures they take nothing with them. This is fairer to the rest of the team and to the company’s investment.

The new ESOP legal regime sets a minimum statutory holding period for acquired securities or ownership interests at 3 years, but this is different from commercial vesting. The vesting period, as well as the cliff period, depends on your internal standards and should align with the intended duration of the employee’s motivation.

Strike price and fair market value: setting the price

The strike price (exercise price) is the price at which the employee purchases a share or ownership interest. Crucial for the new tax regime is that the strike price must be set at fair market value (FMV), i.e., the market price at the moment the option is granted, or higher. Why?

Because it has fundamental legal and tax significance. As stated above, the new tax regime applies only if the option’s exercise price at the time it is granted corresponds to, or is higher than, the market value of a comparable security or ownership interest.

If the strike price were set artificially low below FMV (e.g., CZK 50 when FMV is CZK 100), the new regime would not apply to such an option and the income from it would be taxed as employment income (including social security and health insurance contributions) already at the moment the employee acquires the security/ownership interest.

FMV is determined either by an internal valuation (e.g., a valuation report), or in practice for small companies often based on the last investment round (if it took place). If, for example, a venture capitalist bought shares for CZK 500 per share, that will be your FMV for granting options.

The key is that this price must be objectively justifiable and documented. It is not merely an internal agreement—it should be a process that would also stand up to a tax authority audit in the Czech Republic. The attorneys at ARROWS can help set up and document the FMV process so that its legitimacy is beyond doubt.

Good leaver vs. bad leaver: when an employee leaves

What happens to options when an employee leaves? This is addressed in so-called good leaver and bad leaver clauses, which form part of the option agreement or the shareholders’ agreement.

A good leaver is a situation where the employee leaves the company for “normal” reasons—either they resign themselves, or they are dismissed without a serious breach of duties. In such a case, the employee may keep their vested options (those they have already “earned”) or the company buys them back for a fair price. Unvested options (those they have not yet “earned”) lapse back to the company.

A bad leaver, on the other hand, is a situation where the employee leaves due to serious misconduct—misappropriation of intellectual property, breach of a non-compete clause, theft, or other criminal conduct. In such a case, the employee loses all options, including vested ones, or the company may buy them back for nominal value.

The problem arises when the bad leaver criteria are too vague or subjective. When an agreement says that a bad leaver is “any situation the management deems inappropriate”, it is a major red flag. Attorneys know case after case where a company asserted a claim for the return of options and the employee sued and won because the clause was unclear. The result: a legal dispute, reputational damage, and demoralisation of the rest of the team.

We recommend setting good/bad leaver conditions clearly and objectively. This includes a specific list of situations that constitute a bad leaver (e.g., breach of a non-compete clause, misuse of intellectual property, serious disciplinary misconduct leading to immediate termination of employment). For all other cases, it is a good leaver. This provides legal certainty and the employee does not have to feel that someone is “pulling strings”.

Exit scenarios: how and when an employee cashes out

One of the most frequently overlooked points in ESOP programmes is communication about when and how an employee will cash out. If it looks like the options are merely a virtual promise with no real path to liquidity, employees will quickly figure it out and the programme will lose its effect.

The primary scenario is usually a company exit—i.e., a sale of the company, an IPO, or an acquisition. At that moment, the options are exercised, the shares are sold, and employees receive cash. That is the ideal situation. Moreover, the new tax regime expressly contemplates an exit scenario as an exception to the three-year holding period, which confirms its relevance.

But what if a sale does not happen for a long time? Then alternative liquidity needs to be devised. Some companies introduce “secondary sales”, where employees can sell part of their shares to new investors or existing shareholders.

Others introduce “share instalment programmes”, where the amount is amortised gradually over the years. Some smaller companies simply communicate that an exit is planned within 5–7 years, so employees know how long they may need to wait.

Without a clear communication plan, ESOPs become a demotivating factor: people think they will never cash out, and the programme then feels like a promise with no end.

Most common questions on the practical setup of ESOP parameters

1. We have a tech-sector startup with 5 employees. What percentage of equity should we allocate to an ESOP?
    At this stage (we assume you are early stage), 10–15% is a reasonable standard. If you have, for example, 1 million shares, set aside 100–150 thousand for the ESOP. As your team grows, you can then set a plan for how many shares each person receives. Remember that you must meet the condition that a single employee must not receive more than 5% – this is a legal limit set by Section 6(13)(g) of the Czech Income Taxes Act. If there are five of you and each receives 20 thousand shares, you meet it (that is 2% for each). Our Prague-based attorneys at ARROWS can help you audit your numbers and set up all formalities so that the program is legally compliant from the outset.

2. What is realistic vesting for a startup vs. an established company?
    For an early-stage startup, the standard is typically a 1-year cliff + 3 years of vesting (i.e., 4 years in total). This gives the company protection and employees motivation. For an established company that already has employees with a longer track record, it can be shortened to a 6-month cliff + 2–3 years of vesting. Vesting is also sometimes shortened when an employee has been on the team for a long time and receives an option as “refresh” motivation. The most important thing is that the rules are clear and the same for everyone (or at least that the same people at the same level are treated the same). Remember that for Czech tax purposes, the statutory minimum 3-year holding period for acquired securities/ownership interests must be met.

3. How is the strike price set for a limited liability company (s.r.o.)?
    The same as for shares – at FMV at the time of the grant. The problem, however, is that in an s.r.o. the ownership interests are less liquid and harder to value. In practice, companies often use the last funding round if it included external investors (their price is indisputable evidence of FMV). If there is no such evidence, you need to obtain a valuation. This can be costly, but it is necessary to ensure that the tax authority does not raise the question of whether your FMV is too low and whether the newly introduced tax regime is applicable at all. Our Prague-based attorneys at ARROWS can help set up the valuation process and document it so that it is defensible before the authorities.

Most common mistakes to avoid when implementing an ESOP

Practical experience shows that companies often fall into the same mistakes. Knowing about them in advance, you can avoid them.

Unclear and overly optimistic promises

One of the worst situations is when founders or managers informally promise options to the first employees even before the program is actually defined. The employee then thinks they will have 1% of the company, while the founders think it was only a motivational statement with no legal commitment.

Then, when it comes time to define the program after a year, a mismatch arises and other employees say, “if Pete got 1%, why do I only get 0.3%?”, and suddenly it becomes a political problem. Always define the program formally first, then communicate specific grants. Informal promises lead to future conflicts and legal uncertainty.

Too small or too large a pool

Conversely, we see companies that set aside only 3% for an ESOP and then are left without any way to incentivize new senior hires. Or companies that set aside 30% and then find they diluted their ownership unnecessarily and it complicates the next fundraising.

Benchmarks of 10–15% for early stage and 5–10% for later stages are a good starting point.

Unnecessarily complex or non-standard solutions

Some companies come up with their own vesting structures, their own definitions of good/bad leaver, etc. This leads to lawyers needing more time to verify correctness and to the program being difficult to administer.

It is better to stick to standards (four-year vesting with a one-year cliff, clear good/bad leaver categories, strike price = FMV) that lawyers and HR teams know how to handle.

Poor communication with the team

Many entrepreneurs think that once the program is technically set up, it is done. In reality, communication is half the work.

Employees must know how the program works, what their specific grants are, how the program develops, and what the tax and financial implications are. Without that, the program does not fulfil its motivational function.

Breach of tax formal requirements, especially regarding the strike price

Whether it is a failure to notify the tax authority, incorrect FMV settings, or faulty record-keeping, breaching formal tax requirements may result in employees losing tax benefits and being taxed retroactively.

The biggest mistake is setting the strike price lower than FMV at the time the option is granted. In that case, the new tax regime does not apply to the program at all and the income from the option is taxed as employment income (including social security and health insurance contributions) at the time the security/ownership interest is acquired. This is not just an administrative failure – it can have serious financial consequences.

Our Prague-based attorneys and tax advisors at ARROWS will help you avoid all of these mistakes. Through legal and tax due diligence of your existing program or by setting it up from scratch, we will ensure it is legally compliant under Czech law, tax-optimised, and practical to operate.

Table of typical risks and how to address them

Potential issues

How ARROWS can help (office@arws.cz)

Failure to meet tax formal requirements – If the programme is not notified to the tax authority or proper records of FMV and grants are not kept, the tax authority may subsequently tax the employee, including social security and health insurance contributions. Failure to notify, or setting the strike price below FMV at the time of the grant, leads to a complete loss of the benefits of the new regime.

We will help you set up the correct registration and reporting process with the tax authority, prepare clear documentation for recording grants and vesting, and ensure that all ESOP parameters are properly reported. We will oversee the correct setting of the strike price.

Employee disputes over good/bad leaver terms – If the clauses are vague or incorrectly drafted, they may lead to legal disputes when the company attempts to claw back options due to an employee’s departure.

We design and prepare clearly defined and legally sound good/bad leaver clauses that are fair and compliant with Czech law. In the event of a dispute, we provide legal representation.

Ongoing uncertainty about liquidity and exit scenarios – Employees worry that they will never be able to monetise their options because there is no clear exit plan.

We will help you develop a communication strategy around exit scenarios and, in line with that, set up the shareholders' agreement and drag-along/tag-along clauses to ensure liquidity.

Conflict due to inconsistent terms for different employees or old vs. new grants – If you do not have a clear plan for how to adjust the ESOP as the company grows, issues of discrimination or unfairness may arise.

We will create an internal ESOP policy and governance processes that clearly define allocation rules, approval processes, and how the programme evolves over time.

Legal disputes during an exit or sale of the company – Employees may block the sale of the company if they do not agree with the terms for settling their options.

We will ensure your documentation includes drag-along rights (the company’s right to require employees to sell upon an exit at an agreed price) and tag-along rights (employees’ right to sell alongside the majority).

Shareholders' agreements and legal documentation: what must not be missing

A proper ESOP is not just an internal programme – it must be anchored in the company’s legal documentation. The key document is the shareholders' agreement (a shareholders’ contract or shareholders’ agreement), which governs the mutual relationships among all shareholders, including employees who purchase shares.

The shareholders' agreement must include rights and obligations that protect both the company and the employees. The most important elements are:

Drag-along right (“drag-along”): Allows the majority shareholder (typically the founders) to require minority shareholders (employees with options) to sell their shares upon the sale of the company on the same terms. Without it, it can happen that when the company sells 95% of its equity, an employee holding 5% says, “I’m not selling; I want to keep my shares,” and the buyer is then effectively paralysed.

Tag-along right (“tag-along”): Allows minority shareholders (employees) to sell their shares on the same terms on which the majority shareholder sells. Employees thus have legal certainty that if a founder takes CZK 500 million, they will also receive “their” proportional share.

Buy-back right : Gives the company the right to repurchase shares from employees in certain situations – e.g., when an employee leaves. This protects the company from shares ending up outside the company’s control while also enabling the employee to obtain liquidity.

Information rights : Employees have the right to receive regular reports on the company’s performance, annual results, etc. This supports transparency and trust.

Without these documents, an ESOP can turn into chaos during a future company exit. The ARROWS legal team in Prague can help you prepare, review, and optimise the shareholders' agreement and all related documentation.

Practical steps to implement an ESOP: from idea to execution

If you are considering implementing an ESOP programme, here is a practical checklist of steps:

1. Legal audit of your current legal setup : If you already have any share structures or legacy ESOP programmes, have them reviewed by an ARROWS attorney in Prague to confirm they meet the conditions of the new regime from 2026.

2. Defining the parameters : Decide on the pool size, vesting period, cliff period, and strike price. These must match your business plan and incentive objectives while also meeting statutory requirements under Czech law.

3. Tax advice : Consult a tax advisor to optimise the tax implications and to ensure that all reporting to the tax authority is carried out correctly.

4. Preparing the documentation : Prepare option agreements, grant letters, the shareholders' agreement, good/bad leaver clauses, and all other documentation. Make sure it is compliant with Czech law.

5. Implementation and record-keeping : Set up internal processes for keeping records of grants, vesting, and share value. HR and accounting must know what to do.

6. Communication : Explain the programme to employees, their specific grants, how the programme works, and the tax implications.

7. Reporting to the tax authority : Report the granting of options via JMHZ or otherwise in the relevant manner to the tax authority.

8. Monitoring and adjustments : Continuously monitor the programme, update it if the company’s conditions change (turnover, number of employees, etc.), and be prepared for legislative changes.

The ARROWS legal team in Prague can assist you with each of these steps. Most often, companies come to us when they already have a programme partially set up and need it reviewed, optimised, and formalised. Sometimes they come from the very beginning. In any case, it is better to invest time and money into getting the setup right at the start than to deal with legal and financial problems later.

How to ensure an ESOP truly motivates: psychological and communication dimensions

Of course, legal and tax compliance is a prerequisite. But an ESOP programme that is legally sound and tax-optimised may still fail to motivate if management and HR communicate it poorly.

Key communication points:

Transparency about value : Employees must know the numbers behind their options. What is the company’s market value? What is their strike price? What is their stake? How is it expected to develop? Without this information, the programme remains abstract.

Realistic exit scenarios : You must communicate when an exit is expected (sale, IPO, etc.). If it looks like it will happen in 5–7 years, employees know how long they are waiting for. If you never say when it is supposed to happen, the programme feels like an open-ended promise.

Equality and fairness : If someone simply receives more options without an obvious reason, the rest of the team will notice quickly and the programme will lose credibility. You need clear and fair criteria: a junior gets X%, a senior Y%, the CTO even more. This must be clear and justifiable.

Regular updates : The program must not be “set and forget”. You should regularly (e.g., once a year) communicate to employees how the company’s value is developing, how their options are progressing, and what the outlook is.

Most common questions on the practical implementation and administration of an ESOP

1. We are an s.r.o. (limited liability company). Can we have an ESOP?
    Yes, entirely legally under Czech law. Compared to a joint-stock company (a.s.), however, it is administratively more complex. Each transfer of an ownership interest in an s.r.o. requires a notarial deed and approval by the general meeting of the other shareholders. This means that when an employee decides to exercise an option and buy an ownership interest, it must go through the notary and approval formalities. This is slower and more expensive than with shares, but it is not unrealistic. The attorneys at ARROWS can help you prepare all documentation for an s.r.o. ESOP and handle the procedural steps for transferring ownership interests.

2. What happens to the options if an employee changes employers (employment-wise)?
    If this concerns an employee on a full-time employment contract who takes a side job or part-time role with another company, it should not be an issue provided it does not raise suspicions of competitive conduct (which could be addressed by a specific non-compete clause). The options remain with the employee and commercial vesting continues. However, if the employee actually changes employers (terminates the employment relationship with you), this switches the “good leaver/bad leaver” regime. The employee keeps their vested options or the company buys them back for a fair price; unvested options are forfeited.

3. What are the tax implications for an employee if they receive an option with a lower strike price?
    This is an important question and, as explained above, it has fundamental implications. To apply the new tax regime effective from 1 January 2026, it is essential that the exercise price of the option (strike price) at the time it is granted corresponds to or is higher than the market value of the security or ownership interest. If the strike price is lower than FMV at the time of grant, the new tax regime does not apply at all to such an option. Income from acquiring the security or ownership interest as a result of exercising such an option would be taxed as employment income (including social security and health insurance contributions) at the time of acquisition, not only upon sale. This is a critical condition, and we therefore recommend that the strike price always equals FMV—this will help you avoid these issues. The attorneys at ARROWS can assist you in setting the correct strike price and analysing the tax implications.

4. How is an ESOP handled in group (corporate group) structures or in cross-border programs?
    In international groups, ESOPs are often set up centrally (e.g., in a foreign parent company) and Czech employees participate in them. This raises specific tax and legal issues, such as taxable income in the Czech Republic, social security and health insurance contributions, the impact on transfer pricing, or compliance with Czech law. In 2026, this is still not entirely clear-cut, but there are established best practices. The lawyers and tax advisors at ARROWS, supported by the ARROWS International network, can help you address these complex issues and ensure compliance in the Czech Republic and abroad.

5. How much does the legal preparation and administration of an ESOP cost?
    It depends on the scope. A simple program for a small startup (5–10 people, basic documentation) can be prepared for tens of thousands of Czech crowns. A more complex program for a larger company, with more investors or a cross-border element, may cost more. However, it is an investment that pays off quickly when the program properly motivates and retains people. The costs are minimal compared to the costs of turnover and recruiting a new employee. If you would like a cost estimate, contact the attorneys at ARROWS at office@arws.cz.

Final summary

Employee shares (ESOPs) are finally becoming a real and attractive tool in the Czech Republic for motivating and retaining key employees. The new tax regime from 2026, with the “no tax before cash” principle and exemption from social security and health insurance contributions, makes them a more effective motivator than ever before.

If you are in the tech sector, the startup ecosystem, or any industry where talent is valuable, ESOPs should be part of your compensation strategy.

However, setting up an ESOP correctly is not trivial. It requires careful consideration of the parameters (pool size, vesting, cliff, strike price), preparation of legal documents (option agreements, shareholders' agreements, good/bad leaver clauses), ensuring tax correctness and—no less importantly—communication with the team.

Mistakes in any of these elements, especially failure to meet the conditions for applying the new tax regime (e.g., an incorrectly set strike price), can turn the program into a source of conflicts, legal disputes, or loss of tax benefits.

If you do not want to risk your ESOP programme failing, employees losing tax benefits, or later ending up in legal disputes with employees or the tax authorities, it is safest to have the matter prepared by experts. The attorneys and tax advisers at ARROWS, a Prague-based law firm, have long-term experience with ESOP programmes, are familiar with all legislative trends and practical obstacles. We can help you set up a programme from scratch, or review and optimise your existing programme.

Contact us at office@arws.cz – we will be happy to assist you with the legal and tax strategy for your employee participation plan.

Most frequently asked questions about ESOP programmes

1. From when does the new ESOP tax regime apply, and can we apply it retroactively to old options?
    The new regime for income from the sale of securities and ownership interests acquired under ESOP programmes applies from 1 January 2026. Application to options granted in 2025 or earlier is not retroactive in the sense that the new regime would automatically apply to them. However, if the income from the sale of such securities or ownership interests arises after 1 January 2026 and all other conditions of the new regime are met (in particular, the 12-month period between grant and acquisition, the 3-year holding period for the acquired securities/ownership interests, and the condition that the strike price was equal to or higher than the FMV at the time of grant), then the new regime will apply. This is, however, a matter of legal and tax interpretation and always requires an individual assessment. ARROWS can assist you with auditing your older grants and their potential assessment.

2. What is the difference between an ESOP, virtual shares (phantom stock) and RSUs (restricted stock units)?ESOP (Employee Stock Option Plan) in the broader sense includes options to purchase real shares or ownership interests, which the employee holds after exercising the option. The new tax regime applies specifically to this type of programme. Virtual shares (phantom stock) are “only” a contractual entitlement of the employee to a cash payment derived from an increase in the value of the company or shares, but the employee does not purchase real shares or ownership interests. RSUs (Restricted Stock Units) are entitlements to acquire shares in the future, often subject to vesting and the achievement of performance targets. At the end of vesting, RSUs are usually converted into actual shares or cash. The tax and legal regimes differ for these instruments. In light of the new legislation, true ESOPs (options to acquire real securities/ownership interests) are more attractive, but the choice depends on your objective and the company’s structure.

3. Do we have to have the programme approved by the general meeting?
    Yes. Introducing an ESOP programme, especially where it involves reserving part of the capital for employees and the related potential dilution of existing shareholders’ interests, typically requires approval by the general meeting. In an s.r.o., this is handled by the general meeting of shareholders; in an a.s., by the general meeting of shareholders. This is a legal requirement, and without it the programme may not be valid and enforceable. Our attorneys in Prague can help you prepare the resolutions and manage the entire process.

4. What do we have to report to the tax authority, and how often?
    The granting of the right to acquire a security or an ownership interest (an option) and its parameters (including FMV, strike price, the employee’s name, etc.) must be notified to the tax administrator via the employer’s unified monthly report (JMHZ). From 1 April 2026, reporting will be carried out in a new JMHZ format, which will be more detailed. This is not a one-off matter – it is ongoing administration that must be carefully maintained. Always verify the details with a tax adviser.

5. How can we ensure that the strike price is defensible vis-à-vis the tax authority?
    The strike price (exercise price) should be objectively documented based on the fair market value (FMV) at the time the option is granted. In practice, companies often rely on the most recent investment round (if any), as the price external investors were willing to pay is strong evidence of FMV. If no such round exists, you should obtain an independent valuation from a qualified valuator. This valuation then serves as evidence supporting the legitimacy of your strike price. Without such evidence, the tax authority may believe you set the strike price artificially low, which would mean that the new tax regime does not apply to the option at all. Our attorneys in Prague can assist you with the valuation process and the preparation of documentation.

6. What happens if an employee leaves the company during the cliff period?
    During the cliff period (typically the first year), if an employee leaves the company, they forfeit all options granted to them and none remain vested. This is precisely the purpose of the cliff period – it protects the company and discourages employees from leaving early with any entitlement. Once the cliff has passed, the situation changes and the employee will usually keep at least part of their options (so-called vested options) that they have “earned” up to that point, in accordance with the good/bad leaver clauses.

Notice: The information contained in this article is of a general informational nature only and is intended as a basic guide to the topic under the legal framework as of 2026. Although we take the utmost care to ensure accuracy, legal regulations and their interpretation evolve over time. We are ARROWS, a Prague-based law firm, an entity registered with the Czech Bar Association (our supervisory authority), and for maximum client protection we maintain professional liability insurance with a limit of CZK 400,000,000. To verify the current wording of regulations and their application to your specific situation, it is necessary to contact ARROWS directly (office@arws.cz). We accept no liability for any damages arising from the independent use of the information in this article without prior individual legal consultation.

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