Unapproved share option plans are commonly used by companies operating in Ireland as a means of rewarding employees for loyalty and ongoing contributions to their employer company.
In most instances, employees are personally responsible for paying the tax due when share options are exercised. The tax due is payable by the employee within 30 days of the date of exercise. In addition, the employee must file an income tax return for the relevant tax year. Separately, employees are also responsible for paying (i) income tax on dividends received; and (ii) capital gains tax where a gain is made on a disposal of the shares acquired on foot of an exercise of share options.
Employers are required to report to Irish Revenue on an annual basis outlining, amongst other things, details of all share options which were granted to or exercised by employees in the previous calendar year. Unlike salaries and most other forms of employee remuneration, employers are generally not liable to operate the Irish payroll withholding tax system to collect the tax due on the exercise of share options.
As a result of the increase in the use of share based remuneration to reward employees, Irish Revenue has stepped up its oversight of the tax treatment of share option plans in Ireland. Revenue frequently carry out audits and other compliance interventions to ensure that both employers and employees are in compliance with their tax obligations.
Technological advances means that it is easier and quicker for Revenue to cross-check the information reported by employers annually with the information reported by employees in their personal tax returns to ensure that employees are tax compliant.
What should employers do?
Employers are being increasingly notified by Irish Revenue of tax audits or compliance interventions into their employees' tax compliance with regard to their share option plans. Upon receipt of such notifications, employers should generally:
- Review the employer's operation of the relevant plan and ensure that its reporting obligations are up to date (eg, forms RSS1 filed, etc).
- Communicate with employees who have been granted / exercised share options in order to remind them of their tax payment and filing obligations. Consider re-circulating plan tax summaries to employees or holding a town-hall.
- Advise employees to review their tax compliance position and speak with their personal tax adviser. In the event that defaults are identified, employees should take action to remedy such defaults and ensure that they are tax compliant and avoid possible penalties.
- Direct employees to Irish Revenue's Code of Practice for Revenue audits and other compliance interventions (available here).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.