Tax implications of Share-based remuneration and exercising Share Options

Did you know that earlier this year (2016) the Dept. of Finance held a public consultation on share-based remuneration? In Budget 2017 the minister for Finance committed to introducing a SME-focussed, share-based incentive scheme in Budget 2018.

Shares of the company you work can at times be offered to employees at a discount i.e. the employee pay less than the market value of the share. Similarly employees can be offered share options which allows them to purchase shares in the company at some time in the future.

In effect the employee has received or will receive (share options) additional pay in the form of the discount.

How this discount is treated by the Revenue depends on the type of share scheme. There are two types of scheme in Ireland, Revenue Approved and Unapproved.

Revenue approved schemes allow the value of the discount to be taxed as a capital gain when the shares are disposed of rather than as income at the time the shares are acquired or the option granted.

Capital Gains Tax applies to the gain on disposal of the shares based on the sale proceeds less the market value of the shares on acquisition.

There are 3 types of approved scheme

  1. Approved Profit Sharing Schemes
  2. Employee Share Ownership Trusts
  3. Savings Related Share Option Schemes

For unapproved schemes income tax is charged on the discount granted on purchase of the share or at time on exercising the option.

The requirement to pay income tax upfront can be a disincentive to participating in such unapproved schemes for many employees. This is especially the case for share in private companies as often there isn’t a ready market to allow them sell some of the shares in order to cover the tax charge.  

Note that both PRSI and USC is charged on the market value of the shares appropriated, irrespective of whether the scheme is Revenue approved or not.

Employers PRSI does not apply to share based remuneration.

The Tax Man can assist you in meeting your compliance obligations.

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