Employee Stock Option Planning (“ESOP”) in Turkey
On August 2, 2024, with the enactment of Law No. 7524 published in the Official Gazette No. 3260, an income tax exemption was introduced to the Income Tax Law for benefits provided to employees through the granting of free shares (stock option plans). In our subsequent articles, we will discuss this topic in detail.
Before delving into the specifics of this matter, it would be beneficial to take a closer look at the concept of granting free shares to employees. This is because finding exact equivalents for the methods applied by Western companies, particularly those in the United States, or accessing sufficient regulatory infrastructure, is not always feasible in Turkey.
Stock option plans are incentive programs that grant employees the right to acquire company shares in the future, either at a predetermined—often discounted—price or completely free of charge. These plans are especially preferred by startup companies to retain qualified talent within the organization for a certain period, as well as to enhance employee performance and motivation.
It would not be wrong to say that these plans consist of certain stages.
Definition of the Plan and Determination of Terms
In the first stage, the scope, terms, and eligibility criteria of the stock option plan are determined. At this point, details such as the number of shares to be granted as options, the share price (exercise price), the vesting period, and the option period are decided.
Vesting Period
Employees may need to work for a specified duration before they can actually exercise their stock options. This period is known as the vesting period and typically spans several years. If the employee remains with the company during this time, they become entitled to their stock options. Option rights may accrue incrementally over the years.
Exercise of Stock Options
Once the vesting period is complete, employees gain the right to exercise their stock options. At this stage, they can purchase the shares either at the predetermined exercise price or, if applicable, acquire them free of charge. At this point, the employee gains full legal and economic ownership of the shares, enabling them to freely use or dispose of the acquired shares in any manner they wish. This stage is also critical in terms of taxation.
In our subsequent articles, we will examine the tax implications of employees acquiring shares free of charge or at a discount, both from the employee’s and employer’s perspectives.
