- Monday 11 March 2024
One of the frustrations for many of our clients who receive share options as part of their remuneration package is ensuring that they remain tax compliant. Changes introduced in the 2023 Finance Act place the obligation back on the employer. We review these changes here
Share options are one of the most common forms of remuneration in Ireland for tech, med-tech and pharma employees. In many cases they can be a significant wealth creation source, particularly if not used for day to day expenditure.
Currently, gains arising from the exercise, assignment, or release of share options are taxed via the self-assessment system (known as the Relevant Tax on Share Options or “RTSO” for short), where the employee is responsible for settling the Income Tax, the Universal Social Charge (USC), and employee Pay Related Social Insurance (PRSI) due within 30 days of the exercise of the option.
In any tax year where you exercise or releases share options you are required to file an income tax return under self-assessment. This is due for filling by 31 October following the year in which the shares were exercised or released. Revenue treats the gain at exercise as earned during the vesting period.
In many cases, companies have in place a ‘sell to cover’ arrangement with the broker firm holding the share options and in this case a proportion of the total vesting amount (usually 52%) is retained for income tax purposes. However, there are many cases, particularly with multinationals who are recent to Ireland, or those who are not of substantial size, where the responsibility is left to the employee.
Last year, many staff (current and past) of a large multinational med-tech firm discovered that they had not paid the necessary RTSO from a vesting in 2019 and had to engage with Revenue in a manner that left them anxious and frustrated. In our view, from speaking with a number of these people, the company had not appropriately communicated the employee obligations at the time (2019) and effectively left their staff in the lurch.
While Revenue didn’t indicate the reason for changes to the rules around Vesting obligations, our suspicions are that they are connected.
CHANGES
The Finance Bill effectively aims to abolish the RTSO system and for gains arising in respect of the exercising of options, employers are now required to account for the Income Tax, USC and PRSI through PAYE/Payroll. There may still be an onus on you to file an income tax return however, as much of the practical considerations have yet to be worked out.
Most significantly, the routing of the remuneration through payroll will effectively force the ‘sell to cover’ mechanism to finance the PAYE/PRSI due. Where this is already in place, there will be little noticeable effect other than perhaps through your salary slip, but in cases where employees were obliged to do it themselves (and in many cases could use the allowable timeframe to their advantage), this is a significant change.
Two other groups who are exposed to these changes are ‘globally-mobile’ employees who are used to reporting according to their country of residence and, most significantly, previous employees who were allowed retain their RSUs on leaving (though this is not usually seen in a compensation package).
If you are unsure about your obligations or potential changes please don’t hesitate to get in touch.
