Cancellation of Share Options – Income Tax Implications
Warsaw, 18 October 2026
The tax treatment of cash payments made following the termination or modification of employee incentive schemes has long been a source of disputes between taxpayers and the Polish tax authorities.
In a judgment delivered in March 2026, a Provincial Administrative Court (WSA) adopted a clear position unfavourable to the taxpayer, dismissing an appeal against an individual tax ruling issued by the Director of the National Tax Information Service (KIS).
The Court confirmed that a cash payment received in exchange for share options granted free of charge and subsequently cancelled does not qualify for the preferential tax treatment applicable to income from financial capital.
Background to the Share Option Dispute
The case concerned a taxpayer participating in an overseas incentive scheme established by a foreign parent company, under which the taxpayer had received share options free of charge.
Following modifications to the incentive scheme, the options that had not yet been exercised were cancelled under a settlement agreement. In return, the taxpayer received a cash payment calculated as the difference between the selling price and the acquisition price of the shares.
The taxpayer argued that the payment should be classified as income from financial capital and taxed at the flat rate of 19%.
The taxpayer maintained that the scheme satisfied the statutory requirements for an incentive programme or, alternatively, that the payment represented income arising from the exercise of rights attached to derivative financial instruments.
Why the Court Rejected the Taxpayer’s Arguments
The Court disagreed with the taxpayer’s position.
It explained that the preferential tax deferral mechanism applicable to qualifying incentive schemes requires the participant actually to acquire or subscribe for shares.
Only at that point does the taxpayer become a shareholder and participate in the growth of the company’s value as an investor.
In the case under consideration, this had not occurred. The share options had been cancelled, and the taxpayer received a cash payment without exercising any rights attached to the shares or options.
The Court emphasised that achieving an economic outcome similar to acquiring and subsequently selling shares was not, in itself, sufficient to justify preferential tax treatment.
Tax Rules Governing Derivative Financial Instruments
A further important element of the judgment concerned a specific anti-avoidance provision within Polish income tax legislation.
Under this provision, income arising from the exercise of rights attached to derivative financial instruments acquired free of charge is allocated to the same income category under which the original non-cash benefit was received.
The Court recalled that the purpose of introducing this provision was to prevent remuneration arrangements involving cash-settled derivative instruments from being used artificially to reduce taxation from progressive income tax rates to a flat rate.
Consequently, the legal classification of the original benefit was decisive in determining the appropriate treatment of the subsequent cash payment.
Cancellation of Share Options as Income from Other Sources
The taxpayer had acquired the options free of charge under an agreement with a foreign parent company with which the taxpayer had no employment relationship.
The Court therefore concluded that the original benefit should be classified as income from other sources under Polish personal income tax legislation.
As a consequence, the cash payment received following cancellation of the options was taxable within the same income category, subject to progressive income tax rates rather than the preferential 19% rate applicable to financial capital income.
The Court stressed that neither the equity-based nature of the incentive scheme nor the method used to calculate the payment could override the clear purpose of the relevant anti-avoidance provisions.
The absence of an employment relationship between the taxpayer and the foreign parent company prevented the payment from being classified as employment income.
At the same time, the specific statutory rules governing the allocation of income to particular categories excluded its classification as income from financial capital.
Implications for International Employee Incentive Schemes
The judgment provides important guidance for taxpayers participating in international share-based incentive arrangements.
Cash payments received following the cancellation or termination of share options granted free of charge may be subject to progressive income taxation rather than the preferential rate applicable to financial capital.
This distinction should be considered when designing, modifying or restructuring employee incentive schemes, particularly those involving foreign parent companies.
The precise tax treatment will depend on the legal structure of the scheme, the nature of the rights granted and the circumstances in which any cash settlement takes place.
The judgment discussed above is not yet final and remains subject to appeal.
Bernard Łukomski
Legal Counsel
Tax Adviser