he 2011 Budget, and following legislative enactments, saw significant amendments to the taxation of employee share awards and share options in Ireland. The changes impact all private and public companies providing any type share awards for employees. Firstly the employer is now required to operate PAYE on most forms of employee share award. Secondly, PRSI and the Universal Social Charge (USC) now apply to share awards.
The first change has implications for how companies operate employee share schemes and has shifted the responsibility for the collection of the tax from the employee to the employer. The second change has significantly increased the marginal tax rate on share awards, resulting in companies having to look for more tax efficient alternatives to reward executives and employees.
Extension of PAYE to Share awards
From 1st January 2011 an employer is required to deduct PAYE, USC and employee’s PRSI on most types of share awards, but not share options, made to employees and pay it through the PAYE system. Prior to 2011, the employee paid income tax on share awards directly under the income tax self-assessment system.
The taxation of share options is unchanged with the additional requirement that the employee now pays PRSI and USC on the gain. The employee pays tax directly to the Revenue within 30 days of the exercise of options. The tax is paid under the RTSO system (relevant tax on share options) together with USC and PRSI.
The table sets outlines the position for 2013.
|Award Type||PAYE||Income Tax||PRSI Employer||PRSI Employee||USC|
The general position, save for share options, is that it is the vesting or settlement of the share award that creates the employee tax liability (i.e. when the employees receive the shares and not a promise or entitlement to them). Different provisions apply for tax approved SAYE and APSS schemes.
Where the employee has insufficient net salary to pay the tax liability the employer is nevertheless required to pay over the tax and subsequently recoup it from the employee. The Finance Act 2012 introduced a provision which enables the employer to withhold and sell shares to meet the employee’s tax liability. As a matter of practice U.S. and U.K. plans generally contain a provision allowing for such a sale and it recommended that plans be amended to give employers this right.
In Tax Briefing 02/11 (April 2011) the Revenue allow an additional 60 days in which tax should be paid. The purpose of this extension is to provide an additional period in which the employees may dispose of sufficient shares to cover the income tax and related liabilities.
The situation regarding PRSI on share awards has changed quite significantly since its initial introduction in January 2011. The current position is:
• No employer’s PRSI arises on share awards or options.
• No employee’s PRSI will apply to awards exercised or allotted in 2011where the award or option was granted prior to 1 January 2011.
• Shares awards or options granted in 2011 and exercised in 2011 are liable to employee’s PRSI. All 2012 and later awards or exercises attract employee PRSI regardless of grant/allotment date.
• Employee PRSI arising on share options exercised after 30th June 2012 is paid through RTSO.
Specific issues arising from changes
For private companies share valuations, in the absence of a market in the shares, can present particular issues. Employers are now required to use a best estimate of a shares value to calculate the income tax and other deductions required on the grant or allotment of a share. There are different share valuation methods and the Revenue have accepted that there is no one correct method of share valuation. Tax Briefing 02/11 states “Where a bona fide ‘best estimate’ is used and documented to show that all reasonable efforts were made to determine the taxable benefit for a tax year, the employer will not be required to make any adjustments after the end of the tax year.”
For international assignees coming to Ireland care should be taken to ensure a senior executive is not transferred at a time when a large share entitlement attributable to employment activities exercised outside of Ireland, vests or settles. Where this is likely to occur it should be investigated to see if vesting can be structured in such a way so that no Irish tax liability is created. Tax equalisation programs that apply to share incentives could significantly increase the cost to the company of moving an employee to Ireland when a 52% marginal tax rate is taken into account. SARP may also have relevance here.
Tax efficient arrangements
The extension of PRSI, introduction of the USC and a marginal income tax rate of 41% now gives a marginal tax rate of 52% on share awards. There is a significant difference in the capital gains tax rate (currently 33%) and a 52% income tax rate. This has seen an increase in firms (private and public) looking at tax efficient share plans which would tax any profits on share disposal as a capital gain as opposed to income. The aim of such plans is that the employee holds the share while it increases in value and that this increase, on a sale, is liable to CGT and not income tax. The downside is that the allotment of the share to the employee/executive triggers an income tax liability.
In order to substantially reduce the income tax liability on the allotment of shares to employees a restricted share or “clog” scheme can be used. This involves an agreement between the employee and the company whereby the employee agrees not to dispose of the share for a period of between 1 and 5 years.
For example, where it is agreed that the share will be held, and not sold, for more than 1 year a reduction of 10% of the taxable value is allowed. This reduction in taxable value increases to 60% where the share is required to be held for a period of greater than 5 years. This scheme does not require Revenue approval and can be structured with existing restricted stock arrangements.
In conclusion, the extension of the PAYE system to share awards should not result in any additional cost for the employer provided the correct procedures and protocols are in place. Existing arrangements should be reviewed to see if a greater level of tax efficiency can be achieved.