A phantom programme is tested not on the day it is signed, but on the day a participant comes to collect the money.

In the first part, we looked at why a phantom share in Russia is currently a contractual construct rather than a statutory institution. The practical consequence: anything not covered by the programme documents will be resolved after the fact — in negotiations or in court.

As long as the business has not grown in value, the employee has not left and no right to payment has arisen, the gaps in the documentation stay invisible. After that, every term starts to matter: when the right arises, whether it can be lost, what the company is worth and who calculates the amount. Let's go through them in the order in which they usually come up in practice.

Vesting: when a phantom share becomes "earned"

Foreign programmes use vesting — a mechanism by which a participant's right to the shares, options or notional units granted to them arises gradually. For example, an employee is granted 10,000 phantom shares with four-year vesting: 25% for each full year worked. The logic is clear: the programme retains a key employee and ties their income to the growth of the business over the long term.

The legal problem is that Russian law does not recognise the concepts of vested and unvested in relation to phantom shares. Between "granted" and "earned" there may be four years — and the entire future dispute.

The programme therefore has to distinguish between five legally distinct stages itself:

1. granting the right to participate in the programme;
2. allocating a specific number of phantom units to the participant;
3. satisfying the vesting conditions;
4. the occurrence of an event that allows the payout amount to be determined;
5. the participant's monetary claim against the company arising.

It is mixing up these stages that creates risk. If a programme says both that the employee "receives" phantom shares and that the company may cancel them at any time without payment, the question arises: has the right already been formed, or was the employee only given an opportunity? The more precisely the documents answer this, the less room there is for a dispute.

Dismissal: what can be taken away and what can't

The most sensitive question in any programme is what happens to phantom shares when the company parts ways with a participant. The programme runs for five years; the employee has worked for four, met their KPIs and is leaving. Can their entire allocation be cancelled?

The law gives no universal answer. But if the right to remuneration is part of the employment relationship and relates to work already performed, an attempt to strip the employee of everything they have earned may be challenged. The programme should therefore separate four categories of units in advance: unvested units; units for which the vesting conditions have been met; units for which a settlement event has occurred; and a monetary claim that has already arisen. The termination rules can differ for each.

Regulators have also provided a benchmark. The recommendations of the Bank of Russia and the Ministry of Finance of 17.03.2026 take a differentiated approach: on dismissal through no fault of the employee, the payout is preserved pro rata to time worked; on dismissal for cause, no payment is made. Formally this is addressed to public companies, but as a description of good practice it is useful for non-public businesses too.

Foreign programmes solve the same problem by dividing participants into good leavers and bad leavers. The former include redundancy, illness, death and an agreed separation; the latter include dismissal for misconduct, leaving for a competitor and voluntary departure before an agreed date. The category determines whether vested units are retained.

The mechanism works and can be carried over into a Russian programme — not by copying, but by adapting it. If the participant is an employee, mandatory employment law rules apply: the economic consequences of dismissal must not turn into employee liability not provided for by law, or allow the employer to arbitrarily strip the employee of what they have already earned.

What a phantom share is worth and when to value it

The second major problem is the size of the payout. For a public JSC the benchmark is obvious: the market price of the shares. That is precisely why phantom programmes at public companies are simpler — there is an objective external indicator. LLCs and non-public JSCs have no such indicator, so the company sets the valuation mechanism itself. Options include an independent valuation, EBITDA with a multiple, the price of an investment round, the company's value on a sale, the price of a controlling stake, or a combination of several indicators.

This is where the ability to describe every element of the payout formula clearly and precisely comes into play: the more precisely it is described at the outset, the lower the risk of differing interpretations and disputes over its application in the future.

Structures in which the value is determined by the company itself or by the board of directors "at fair value" without objective criteria are especially risky. The larger the potential payout, the less discretion there should be in the calculation.

A sale of the business deserves separate attention as the most logical settlement event: that is when the value created is monetised. Here, too, the rules are written in advance:

• whether a sale means only a disposal of 100% of the business or any change of control;
• whether a sale of assets instead of shares or interests counts;
• what happens in a staged sale;
• how to calculate the payout if part of the price is deferred, and whether an earn-out is taken into account;
• whether the company pays at the same time as the owners or later;
• what happens to units that have not vested.

A programme may provide for accelerated vesting on a change of control: unvested units become fully or partially earned at the moment of sale. Economically this is often justified, but it only works if it is expressly set out in the documents.

The price of flexibility: amending the programme and the size of the obligation

Owners almost always want to keep the ability to change or cancel the programme at any time. With rights not yet granted, this is straightforward. With rights the participant has already acquired, it is fundamentally harder: the more definite the company's obligations and the more conditions the participant has met, the greater the risk that a unilateral change of the rules will be treated as a refusal to perform an obligation that has already arisen. A clause stating that "the company may amend the programme at any time at its discretion" offers no protection on its own.

Amendments to the programme are therefore regulated separately: for future periods, for unvested units, for vested units and for a monetary claim that has already arisen.

And one more thing that people tend to remember later than they should. The company does not transfer shares or dilute the owners' stakes — but it does take on a monetary obligation. The stakes have not been diluted, but a new line has appeared on the balance sheet.

If the business grows significantly, that line becomes large. If several managers together hold participation equivalent to 10% of the growth in the company's value, selling a fast-growing business means a large one-off payout. The programme is therefore modelled not only for its incentive effect but also for its financial impact on the company itself: a cap on the payout, instalments, linking the payment date to actual receipt of the sale price, setting aside funds, and separate rules for earn-outs.

Taxes: treated as dividends, but the question remains

In its Letter No. 03-15-05/58680 of 17.06.2025, the Ministry of Finance considered the taxation of payments to employees under a phantom (virtual) option programme.

Insurance contributions are predictable: the payments are subject to them as remuneration paid to individuals covered by compulsory social insurance (Article 420(1)(1) of the Tax Code), since they are not listed among the exempt amounts (Article 422 of the Tax Code). The company acts as the tax agent.

Personal income tax is more complicated. The ministry takes the view that such payments are treated as dividends paid by a Russian organisation.

This position is debatable. Article 43(1) of the Tax Code defines a dividend as income received by a shareholder or member on a distribution of profit in proportion to their share of the capital. As we discussed in the first part, the holder of a phantom share owns neither shares nor a participation interest. As a result, one and the same payment is described both as a dividend and as remuneration in connection with employment.

The consequence of this ambiguity is a financial one. For dividends, the Tax Code provides a separate tax base and two rates: 13% on annual income up to RUB 2.4 million and 15% on the excess. For ordinary employment income, a five-tier progressive scale reaching 22% has applied since 2025. On a large phantom programme payout, the difference between the two regimes can be significant.

Which one applies is not entirely clear. Neither the law nor case law gives a direct answer yet, and the Ministry of Finance letter is the ministry's position on a specific enquiry, not a legal rule. We are waiting for practice to accumulate and, as is usual in such cases, for the first court disputes.

Checklist: programme documents and content

The law does not prescribe a mandatory set of documents. A programme involving employees usually requires a decision of the company's competent body, programme rules, amendments to internal regulations on pay and bonuses, a supplementary agreement to the employment contract and an individual agreement on the grant of phantom units. For members of management bodies and consultants, the documentation will be predominantly civil-law in nature.

The corporate documents must answer a separate question: which body is authorised to approve the programme and commit the company to the corresponding monetary obligations — especially if the CEO, members of the board of directors, shareholders or their related parties participate in the programme.

In our view, the programme rules themselves should cover at least:

• the participants, the number of units and the procedure for granting them;
• the vesting conditions and period, and the moment an unconditional right arises;
• KPIs and other conditions;
• good leaver / bad leaver rules and the consequences of dismissal;
• the company valuation formula and the procedure for determining the payout;
• rules on a sale of the business and a change of control, and the consequences of reorganisation and liquidation;
• the procedure for amending and terminating the programme, payment deadlines and the maximum amount of obligations;
• tax consequences and the dispute resolution procedure.

Conclusion

The main risk of phantom shares in Russia is not that they cannot be used, but that the law is still silent while the programme is already up and running.

Questions that seem technical at the start become financial at the finish: what vesting means, which right has already been earned, whether it can be cancelled, what the company is worth and who is entitled to determine the amount. A Russian programme is therefore designed first and foremost around future conflict scenarios, not just around the desired economics of motivation. A good programme is one you are not afraid to open on the day a key manager leaves.

Would your programme survive that day?

Sources

1. Civil Code of the Russian Federation.
2. Labour Code of the Russian Federation.
3. Tax Code of the Russian Federation.
4. Ministry of Finance Letter No. 03-15-05/58680 of 17.06.2025.
5. Information Letter of the Bank of Russia and the Ministry of Finance of 17.03.2026 No. IN-01-28/9 / 05-08-05/21339.