![\"Personnel](\"https:\/\/breicis.com\/wp-content\/uploads\/2022\/06\/Personala-opcijas-400x355.png\")
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Prior to the entry into force of the regulation introducing this change, these concepts – options and personnel shares – were only available to public limited companies (PLCs).<\/p>\n
For more information on the nuances of personnel stock options and personnel shares and the favourable tax treatment of these tools, please click here (link: Stock options in Latvia | Tax and accounting services | BREICIS.com<\/a><\/span>).<\/p>\n In our experience in helping clients to implement long-term employee incentive schemes and to deal with these tools, we have noticed that in the year and a half since the new framework came into force, there are still a number of issues that are not fully understood and even differ between advisers. Among other things, we would like to clarify that there are things and nuances in the new regulation regarding personnel shares and options that are not clearly explained when reading the law. As a striking example of this ambiguity, we can mention the 10% limit.<\/p>\n Specifically, the CL provides that for PLCs:<\/p>\n However, no such or similar limitations are defined in the law in respect of personnel shares and personnel options for LLCs. Thus, a reading of the Law gives the impression that the CL regulation on personnel options and personnel shares is significantly more favourable to LLCs. We have also heard from several of our colleagues – tax advisors, lawyers and accountants – that in their opinion there are no restrictions on LLCs comparable to the above-mentioned restrictions on PLCs, as the law does not specifically define them. While it is true that the CL does not specifically impose such restrictions, in our view, following the legal analogy, these 10% restrictions on both personnel shares and personnel options should also be taken into account in an LLC.<\/p>\n In view of the above described vagueness in the CL regulation, in order not to limit ourselves or our clients in the end and above all to mitigate risks, we decided to analyse the views of the public authorities responsible for the implementation of the SIA law on personnel shares and personnel options as to how the 10% limit on personnel shares and personnel options in LLCs actually works. As part of our analysis, we contacted a number of the responsible public authorities and asked them questions.<\/p>\n Summarising the views of the public authorities, we have come to the conclusion that the annotation of the amendments presupposes that the legislator wanted to ensure equal conditions for motivating employees of both PLCs and LLCs. In particular, although the CL does not expressly regulate the conditions for the grant of options and shares to employees of an LLC, the application of a legal analogy, where a general principle of law is deduced from several (related) legal provisions, where similar legal consequences are intended for the different components of the provision, which also covers the life case to be decided, leads to the conclusion that the conditions laid down in Articles 248.1 and 255 CL apply by analogy to options granted to employees of a limited liability company.<\/p>\n At this stage, this collection of opinions cannot be regarded as a binding explanation of the application of the legal rules. However, given that the opinion, firstly, comes from public authorities that have been involved in the drafting and implementation of the law and, secondly, is sufficiently well argued and grounded in legal theory, we believe that there is a reasonable possibility that such an opinion, without going into the merits, could become the opinion of the State Revenue Service (SRS) as well.<\/p>\n Knowing the practice of the SRS regarding audits, we can comment that the SRS likes to do the following: when they detect a problem in a particular sector or in a particular legal provision, they launch massive checks, often resulting in audits, on companies either operating in that particular sector or applying the relevant legal concept or tool, such as personnel shares or options.<\/p>\n With this in mind, as a possible scenario, we see that the SRS might at some point come to the conclusion that the 10% limitation is indeed applicable not only to PLCs but also to LLCs and launch mass inspections (including audits) of LLCs that have issued and granted personnel options or shares to employees.\u00a0 For companies that have not reckoned with the 10% limitation, the consequences can be very unpleasant, i.e:<\/p>\n If this scenario does come true, the Company’s representatives will end up with a dilemma of two possible courses of action when they receive the audit decision::<\/p>\n Thank the legislator who has introduced a binding ruling. It is a written document issued by the authority which issues an administrative act, from which a person can find out the authority’s opinion on the legal framework of a given situation. When a reference is issued, the opinion of the authority is binding on it.<\/p>\n If the addressee of the advice, or the person to whom the advice is given, has acted in accordance with the advice issued, the administrative act subsequently issued by the institution relating to the matter on which the advice was given cannot be more unfavourable to the addressee – this follows from the provisions of the Administrative Procedure Law concerning the legal consequences of the advice for the institution. For example, a binding ruling issued by the SRS is binding on the SRS itself regardless of the functions performed by the SRS inspector, including the tax auditor. The SRS shall be bound by the notice only and exclusively to the addressee thereof.<\/p>\n Thus, we see the binding ruling as an effective option to mitigate the risks if, however, it is in the interest of the Company – SIA to issue personnel shares with a nominal value exceeding 10% of its paid-up share capital and\/or to issue personnel options with a total nominal value that can be obtained by exercising the personnel options exceeding the same 10%. In other words, before introducing personnel options\/shares, the SIA may make enquiries to the SRS and\/or other the national authorities responsible for the relevant issues. Thus, even if the binding ruling provides an answer that is contrary to the applicable legal provisions, the decision of the authority cannot be more unfavourable than the one provided in the reference.<\/p>\n Another option is simply not to exceed the 10% threshold even if the shares\/options are issued by an LLC.<\/p>\n The changes to the CL that came into force at the beginning of 2021, which, among other things, introduced the possibility to grant personnel shares and options to employees of LLCs, as well as introduced one of the friendliest regimes in Europe for personnel options directly from a tax perspective, undoubtedly made a fundamental and important contribution to the Latvian business ecosystem. Firstly, long-term employee motivation tools became available to a much larger number of companies and, secondly, employees receiving such share-linked motivation tools are more interested not only in the performance of tasks assigned by their employer, but also in the development and appreciation of the company. Although we have not come across any studies analysing the impact of these changes in the CL regulation on the inflow of foreign capital into Latvia, but I have a reason to believe that the situation has become better because of these changes.<\/p>\n <\/strong><\/a>Latest news<\/a><\/strong><\/p>\n\n
How to read the Commercial Law correctly?<\/strong><\/h2>\n
Possible consequences of not respecting this 10% limit<\/strong><\/h2>\n
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How to protect yourself? BINDING RULING!<\/strong><\/h2>\n
Conclusions<\/strong><\/h2>\n