Options Arrangements
Unapproved Share Option Schemes
The employer must file a return by 31st March in a format covering all unapproved option schemes. Within 30 days of the exercise of an unapproved share option, the employee must submit a return online, along with payment of the relevant tax. This tax is applied at 40% on the share option gain unless the taxpayer satisfies Revenue that a lower rate should apply.
Universal Social Charge (USC) is also payable. The rate of €100,000 does not apply. The employee pays PRSI (Pay Related Social Insurance) at the same time as income tax and USC through the RTS (Real-Time System). By exercising the option, the individual becomes liable to make a tax return.
Generally, the costs of establishing the scheme are deductible in accordance with general principles. The deduction is not permitted for payments connected with the procurement of shares in a related company unless paid at arm’s length, incurred for bona fide commercial reasons, and absent of tax avoidance. Share option gains are not subject to employer PRSI.
Share Awards
Share awards involve the allotment of share rights at a discount, which is subject to tax. This tax is collected via the PAYE (Pay As You Earn) system, where the employer withholds and realises sufficient shares to fund the tax liability arising from the share award.
The tax may be collected from the employee in future periods, provided it is paid by 31st March of the following year. If the full amount is unpaid, the outstanding balance owed to the employer is treated as a benefit-in-kind, which may incur additional tax.
Employers may withhold and realise sufficient shares to fund the tax liability if they cannot deduct tax and the employee has not paid the liability. The employee must permit the withholding.
Unapproved Profit-Sharing Schemes
Under unapproved profit-sharing schemes, shares can be allocated to employees and directors annually up to a certain tax-free amount. This arrangement operates under a trust, with the employer granting free shares. Employees may pay a percentage of their gross salary towards the purchase or accumulate funds from profit-sharing bonuses; some may use salary sacrifice.
The maximum amount of salary sacrificed is 7.5% of the basic salary. The employee or director must not hold shares exceeding 15%. The funds are paid to the scheme’s trustees, who use the funds to acquire shares.
Trustees legally own the shares but must allocate them within 18 months to participating employees. The shares are beneficially owned by the employees. Income tax arises on share allocation to the employee, with charges to USC and employer PRSI upon initial allocation.
The shares must remain in the trust for a minimum of two years, after which they may be disposed of without income tax after three years. There is a market value limit for each employee.
Tax
USC and employee PRSI must be paid by the employer. If disposed of between years two and three, income tax applies. USC is charged on the initial appropriation but not on disposal.
Income tax does not apply if the disposal occurs after the third anniversary of allocation; capital gains tax applies on a later sale based on the difference between the proceeds and the value at appropriation. Dividends may be distributed by trustees to employees proportionate to shareholdings.
Employees must submit an annual return detailing acquisitions, disposals, and dividends. Companies must supply scheme details to Revenue for approval and amend schemes if necessary. Trustees of unapproved profit-sharing schemes must file a return by 31st March annually and an annual income and capital gains return by 31st October of the following year.
PAYE Applied 2024
Finance Act 2023 amends sections 128, 128B, 531AO, 959AB and 985A of the TCA 1997 so that the taxation of a gain realised on the exercise, assignment or release of a right to acquire shares or other assets is moved from self-assessment to the Pay As You Earn (PAYE) system. This treatment will apply to gains realised on or after 1 January 2024.
As a result, the employer will be responsible for accounting for the income tax, Universal Social Charge and employee’s PRSI to the Revenue Commissioners as part of their payroll process. Gains realised on or before 31 December 2023 will remain taxable under self-assessment.
Discounted Shares
Discounted shares are taxed as perquisites upon grant, where the perquisite is the discount value. There is a provision for reducing the taxable value by up to 6% where restrictions exist, known as “clogs.” Directors or employees must be restricted from disposing of shares held in Ireland or an EEA trust for at least one year or approved by Revenue.
The abatement percentages are as follows: one year (10%), two years (20%), three years (30%), four years (40%), five years (50%), and more than five years (60%).
The discounted amount is liable to income tax, PRSI, and USC, but not to employer PRSI. The employer accounts for tax through PAYE.
The amount subject to income tax may be added to the base cost in capital gains tax calculation. These rules do not apply to shares acquired under an approved profit-sharing or Save-As-You-Earn scheme.
Employers granting shares must deliver a return by 31st March if shares are awarded, restrictions are removed, or the shares are disposed of. PAYE applies on taxable share awards.
Forfeited Shares
Where a director or employee acquires shares that may be forfeited, the following apply. There must be a written contract specifying the forfeiture conditions for bona fide commercial reasons, unrelated to tax avoidance.
Income tax is calculated based on the market value at acquisition, ignoring the risk of forfeiture. If forfeited, the shares are considered not acquired, and income tax, USC, and PRSI are repaid, provided a claim is made within four years.
For capital gains tax purposes, the allowable loss upon forfeiture is limited to the consideration given by the director or employee.
Convertible Shares
Convertible shares may be designed to have minimal initial value but increase upon a specific event. An employee incurs income tax when shares convert to a more valuable asset. If shares are convertible into other securities or money, income tax applies on the grant as if they were non-convertible.
Income tax is charged upon conversion, release, or disposal of the benefit. The tax is based on the market value of the converted securities, less the market value at the conversion date, any amount given for conversion, or consideration paid for the conversion right.
Upon disposal, income tax is charged based on consideration received minus any conversion expenditure.
Amounts charged to income tax are added to the acquisition cost when computing gain for capital gains tax. Those taxable on conversion must file an income tax return, accounting for income tax, USC, and employee PRSI through employer PRSI. Employers awarding securities must notify Revenue of a chargeable event by 31st March annually.
Restricted Stock Units (RSUs)
Restricted Stock Units entitle recipients to shares or cash equivalent. RSUs are subject to tax at the earlier of the vesting date or when shares/cash are provided. If there is a further lock-in period, Revenue may grant up to 60 days for tax payment to allow share sale for funding.
Dividends on RSUs are subject to income tax in the year they arise.
RSUs are taxable in Ireland if vesting occurs while the holder is an Irish resident. If vesting occurs while the individual is not a resident, they are not taxable in Ireland, except for directors of Irish companies.
PAYE and USC deductions are made upon vesting in the absence of an exclusion order.