ESOP and Employee Share Plans in Turkey: Legal and Tax Framework
Employee equity, taxation timing, and contractual protection
1. Why ESOPs matter in Turkey
Employee stock option plans (ESOPs) and wider employee share plans are increasingly used by Turkish and foreign-backed companies – especially tech start-ups – to attract and retain key talent when cash salaries alone are not enough. These plans allow employees to become shareholders or at least benefit from the economic upside of shares if certain conditions (vesting, performance, continued employment) are met.
Turkish law does not have a single, comprehensive “ESOP law”. Instead, ESOPs sit at the intersection of:
- Corporate law (Turkish Commercial Code – company shares, capital increases, transfer restrictions),
- Labour law (ESOP benefits as part of “wages” and disputes going to labour courts),
- Tax law (Income Tax Law No. 193 and recent ESOP-related exemptions), and
- Capital markets / FX rules (especially where a foreign parent grants shares of a non-Turkish company).
Because there is no codified template, ESOPs are largely contractual mechanisms, and careful drafting is critical.
2. What kind of employee equity can you grant?
In practice, Turkish market practice has converged around a few basic structures:
- Direct share grants / share purchase plans
- Employees receive or purchase actual shares in the Turkish company (or a foreign parent).
- May be free of charge or at a discounted price.
- Usually subject to a vesting schedule and transfer restrictions.
- Stock options (classic ESOP)
- Employees receive an option to buy shares in the future at a fixed exercise price if vesting conditions are met.
- Contractual terms define vesting, exercise periods, good/bad leaver rules, and treatment at exit.
- Restricted stock / RSUs
- Restricted stock: actual shares are allocated, but may be forfeited if conditions are not satisfied.
- RSUs: rights to receive shares in the future, usually on vesting.
- International practice is applied, with tax consequences at acquisition or vesting.
- Phantom / virtual stock (cash-settled)
- No real shares are transferred; employees receive a cash bonus linked to company value or share price (VSOP / phantom stock).
- Legally treated as a cash remuneration scheme, not as share ownership.
All these structures are generally permissible as long as they respect mandatory corporate, labour and tax rules and – if applicable – capital markets restrictions.
3. When is the employee taxed? The timing question
The central tax issue for ESOPs in Turkey is when the employee is taxed and as what type of income.
3.1. Basic rule: treated as wage income
There is still no ESOP-specific tax code section. However, Income Tax Law No. 193 treats most ESOP benefits as “wage” (ücret), because they are granted in connection with the employment relationship.
- This means the benefit is employment income and subject to income tax and (often) withholding tax.
- For Turkish-resident employees, worldwide employment income is taxable.
3.2. Direct share grants and discounts
Where employees receive real shares:
- If shares are granted free of charge, the market value of the shares at the time of grant is generally treated as wage income.
- If shares are granted at a discount, the difference between market value and the price paid by the employee is treated as wage income.
Recent amendments introduced a limited income tax exemption for benefits provided through free (or discounted) shares under qualifying ESOPs, subject to specific conditions and caps; outside that exemption, standard wage rules still apply.
After acquisition, a later sale of the shares may trigger capital gains tax on any further appreciation, depending on holding period, type of company and other conditions.
3.3. Stock options: grant, vest or exercise?
For classic stock options, Turkish practice (and commentary) lean towards taxation at exercise, when the option is actually used and the economic benefit crystallises:
- The taxable benefit is the spread between the fair market value of the share at exercise and the exercise price paid by the employee.
- That spread is treated as wage income; where the grantor is a Turkish company, this amount is normally included in payroll and subject to withholding tax under Articles 94, 103 and 104 of the Income Tax Law.
Taxation at grant or vesting is less common in practice for standard options, because there is often no readily quantifiable benefit until exercise.
After exercise, any later sale of the shares may generate capital gains, separate from the wage component.
3.4. RS / RSUs
For restricted stock, if the employee acquires full shareholder rights (voting and dividends), income tax generally arises on acquisition, based on the value of the shares acquired.
For RSUs, the taxable event is typically on vesting/settlement, when the shares are actually delivered (or their cash equivalent is paid).
3.5. Plans granted by foreign parents
Where a non-resident parent company grants options or RSUs directly to Turkish employees:
- From a regulatory perspective, such awards are generally exempt from Turkish capital markets approval, provided sales do not occur in Turkey and the communication does not amount to a public offering.
- From a tax perspective, the benefit is still wage income, but if the foreign company pays the benefit directly (and there is no recharge), Turkish withholding by the local employer may not be technically possible. In that case, the employee must usually declare the income via annual tax return.
Social security contributions (SGK) may or may not apply depending on whether the local employer bears the cost or reimburses the foreign parent.
4. Contractual protection: what should be documented?
Because the legislation is fragmentary, good documentation is the main protection for both company and employee.
4.1. For the company / investors
Key documents and clauses include:
- ESOP / plan rules
- Type of instrument (option, RSU, phantom, direct share).
- Vesting schedule (time-based, performance-based, or hybrid).
- Exercise mechanics, settlement in cash or shares.
- Leaver provisions
- Clear definitions of good leaver and bad leaver (death, disability, dismissal for cause, voluntary resignation, etc.).
- Consequences: accelerated vesting for good leavers, forfeiture for bad leavers, repurchase rights and price formulas.
- Change of control and exit clauses
- What happens on an M&A transaction: acceleration of vesting, cash-out, assumption of options by the buyer.
- Shareholder alignment
- Amendments to the articles of association and shareholders’ agreement to reflect ESOP pool, transfer restrictions, drag/tag rights, anti-dilution and voting arrangements.
- Compliance and tax language
- Clarifications that the employee is responsible for any personal filing obligations where withholding is not possible, especially in foreign-parent structures.
4.2. For the employee
From the employee side, good documentation should:
- Describe in clear terms what exactly is being granted (option vs share vs phantom).
- Explain the tax timing and nature of the benefit to the extent possible.
- Clarify what happens on termination, and avoid vague forfeiture language that could be challenged as abusive.
- Clarify rights at an exit: whether the employee can sell along with founders or investors, or is cashed out based on a formula.
Given the growing number of ESOP disputes in Turkish labour courts – often about whether the employee has “earned” options or exit proceeds – clear drafting and consistent communication are essential.
5. Practical takeaways
- There is no one-size ESOP law in Turkey, but ESOPs are perfectly feasible under freedom of contract, as long as corporate, labour, tax and capital markets rules are respected.
- In most cases, ESOP benefits are treated as wage income, with taxation typically at grant/acquisition (for free or discounted shares, restricted stock) or exercise/vesting (for options and RSUs).
- Recent amendments have introduced targeted income tax exemptions for certain ESOP structures, but these are narrow and heavily condition-based – they should not be assumed without careful checking.
- For foreign-parent plans, make sure to address withholding limitations, employee self-filing obligations and securities law exemptions in Turkish advice, rather than copying a US or UK template.
- Above all, treat the ESOP as a core part of the compensation and corporate structure, and draft the plan, grant agreements and shareholders’ documents as if they will be scrutinised in a future M&A due diligence or before a labour court – because in Turkey, they increasingly are.
If you’d like, I can next turn this into a more “client-facing” website article with headings tailored to founders or foreign investors (plus a short FAQ section on taxation and leaver scenarios).
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