The Employee Share Ownership Programme (MRP) has taken root at employers. Its new, partly simpler and partly stricter version, the Special Employee Share Ownership Programme (KMRP), aims to give a boost to this trend. How is it different? What are its advantages and disadvantages? Is it worth? How is it taxed?
Motivation is one of the most crucial points in the relationship between employees and employers. One element of motivation can be if the employee is interested in achieving results for the employer, as this is likely to lead to better performance. This recognition guided the legislator in setting up the framework for the MRP, but the costs and other difficulties associated with setting up and running the scheme have caused that the MRP has not been taken up by small and medium enterprises. However, EU legislation has made it increasingly common, particularly in the financial sector that management salary packages included employee shares.
The new rules are essentially based on the old rules, but provide for a different possibility for the acquisition of shares in a public limited company or limited liability company by employees or members of the supervisory or management board. Here are the most important new features!
- The employer may provide support for the operation of the KMRP organisation, which is necessary because the organisation would otherwise be financed by the members’ contributions.
- Employer permission is not required to set up a KMRP organisation.
- The KMRP organisation must be established with at least 10 members and for a fixed term of at least 10 years.
- Membership of the KMRP cannot be extended during its operation. A member may transfer its participation rights and, in the event of death, the participation may be inherited or, failing this, a new member may be recruited to replace the old one.
- The foundation requires the establishment of an organising committee and the adoption of the bylaws, the appointment of the operative board and the executive officers at the inaugural assembly.
- Members shall be entitled to vote in proportion to their contributions and, in the absence of contributions, members vote equally.
- The asset management method chosen at the time of incorporation cannot be changed later.
- A fiduciary trust may also be set up to manage the KMRP, with a minimum contribution of HUF 10 million and such trust may manage multiple KMRP’s.
- Members acquire ownership in the employer at the end of the KMRP, but if the employer is able to sell the assets, they can ask for payment of the consideration.
There are a number of other differences, but it should be noted that the KMRP organisation is taxed in the same way as the MRP organisation. The tax treatment of assets received through the scheme remains more favourable than that of shares received through other means, such as fringe benefits. Members’ ownership acquired in an MRP organisation and securities distributed through an MRP organisation are not considered as income of the employee for tax purposes at the time of acquisition. Through the MRP, employees receive income taxable as capital gains (i.e. at a tax rate of 15%), rather than having to pay the full employee and employer tax on the benefit.
The disadvantages are the obligation to prepare accounts and balance sheets, and the fact that assets must be recorded at fair market value, which inevitably entails a recurring audit requirement. It is necessary to provide the organisation with a permanent room suitable for the separate storage of documents. These costs, together with the salary of the organisation’s executive director, are necessarily incurred in all cases, regardless of the size of the organisation, so only programmes with larger assets should be started. However, the possibility to outsource asset management to a trust under the KMRP slightly reduces these costs.