Hmm, but generally the value of a share is the sum of all future dividends (at least as a textbook definition, and assuming rational markets). A person given a share is entitled to dividends from the company, and those dividends are taxed.

So, they will be taxed anyway when the shareholder receives dividends, or when they sell the share.

@ Bill

I think we need to differentiate between shares that are given free and shares that you have to pay for, discount or not, via share options.

From what I gather, the shares you receive free as a part of salary allow you to bypass paying income tax (under certain thresholds) but you are still subject to capital gains tax from when you receive them to when you sell them, if you made a profit. So, if you have made a profit, the government gets its cut; if you have made a loss you bear the risk without being further penalised.

Share option programs are different: technically your salary is paid as normal and that is what is counted as income and what is subject to tax. The shares are not TECHNICALLY seen as income, they are a PURCHASE made from your income that reduces your income. The only tax benefit at this stage is that the shares are bought from your pre-tax income and your total taxable income is reduced before income tax is applied. Contrast this to a situation where you receive your salary as usual, net of tax, and then go and buy the shares: you are buying the shares from your taxed income, therefore you are paying a larger chunk of your gross income to buy the same number of shares. In either case, however, in the eyes of the taxman the shares are not counted as income.

However, on a broader level, I agree that this could be seen as income, in that you are receiving shares instead of the cash you would have received: if you purchase the shares, you are avoiding the income tax you would have paid if you had opted for the cash paid into your salary instead. But from what I understand, there was a broad rationale behind these programmes: to improve companies' productivity. The reasoning was, if employees felt they had a personal stake in the firms they were working in, this sense of "ownership" would translate into better motivation to improve personal performance and output.

Furthermore, any time you change jobs, there is a transition period where your productivity is reduced, as you come to grips with the new environment and methodology and the same applies to the person taking over the job you left - reducing this job merry-go-round by encouraging employees to stay where they are means less productivity drops.

In essence, some of you are seeing this only as "income tax avoidance", not looking at the reasons why such programmes were introduced in the first place. If hundreds of thousands of employees staying in their company adds even 1% productivity and these employees feeling they personally gain by improving their performance adds another 1%, then on a country-wide scale, it's still a good thing.

As with the closing of the loophole allowing housing loan interest payments to be netted off against income for tax purposes (at a time when people are already struggling to get by) I get the feeling this is just another move to keep the budget balanced to meet future Maastricht criteria, and to hell with productivity and the struggle that Estonian families are going through today - only the ultimate goal of the Euro is important.

AR, how does the intentions of the giver change the nature of the transaction? It is income either way.

From what I can read in the article the main thing here is that you now have to pay tax up front for any discount on the shares you recieve (plus regular capital income tax on any profit you make on the options) thereby reducing your current net salary if you accept such options which in turn makes them unattractive to everybody as there is no benefit over just buying the options yourself from your salary and if you did that you didn't have to stay with the company to reap the benefit.