Eolas Money explains the Tax Implications for Employee Share Purchase Plans (ESPP’s)

In the world of modern employee remuneration, Employee Share Purchase Plans (ESPP’s) have gained significant prominence to attract and retain a talented workforce. However, the taxation of gains made by participating in an ESPP adds a layer of complexity to an already intricate financial and taxation landscape.

Jim Stapleton of Clonmel based financial planning practice Eolas Money, stated that last September the Revenue Commissioners announced that they had commenced a formal compliance intervention campaign as they have identified discrepancies such as employees under- declaring share option tax and underpaying Capital Gains Tax (CGT).

Jim stated that Eolas Money works with many multinational employers providing employee information seminars to ensure employees are tax compliant, “but there is significant lack of awareness of how various share schemes work and participants tax obligations”.

The Basics of Share Option Schemes:

Share option schemes are a mechanism through which employees, typically in multinational companies, are granted the option to buy shares of their employer at a predetermined future price at a future date. Employees may also avail of a discount up to 15% off the predetermined price making the cost of these shares cheaper for the employees.

Granting of Share Options:

So for example, on 15th December 2022(the grant date), an employer offers an employee John the option to buy 50 shares in 6 months’ time, on 15th June 2023, (the purchase date). The market value of the shares on December 15 2022 is €130.44 and John can purchase the shares at the lowest price in either December 2022 or June 2023. As well as buying the shares at the lowest price, John will receive a 15% discount.

Exercising the Share Options:

So, on June 15 2023, the share price has now increased to €211.92 and John decides to purchase 50 shares at a discounted price of €110.87 which is the grant date price of €130.44 discounted by 15%. So John buys 50 shares at a cost of €5,543.

However, if Michelle is a member of the public and not an employee of the company, wanted to purchase the same 50 shares on June 15, she would buy them at the open market value of €211.92 per share, or a total cost of €10,596.

RTSO Compliance Requirements:

John is required to pay his RTSO within 30 days of exercising the options to buy the shares. As well as paying the RTSO, John is also required to submit a specific form known as an RTSO1 to Revenue within the same 30 days outlining the details of the gain made.

From  January 1 2023, late payment of RTSO is subject to a daily interest rate of 0.0219% which is charged daily, or part thereof, from the date when the payment is due until the date the payment is made. Revenue now have the power to impose the same interest for the non-filing of the RTSO1 form. Prior to 1 January 2023 the interest rate was 0.0322%.

Filing your Income Tax Return:

John must also complete an Income Tax Return (Form 11) under self-assessment for every year that he exercises share options. John must also include details of any dividends received from his shareholdings and if he sold any of his shares, he may be liable to Capital Gains Tax (CGT).

However, within the Form 11, John may be able to reduce his overall annual income tax liability by claiming tax credits or reliefs such as the rent tax credit, medical insurance tax credit, unreimbursed medical expenses etc.

Capital Gains Tax (CGT) Implications:

Should John sell shares acquired through exercising options, he may be subject to Capital Gains Tax (CGT). The gain, calculated as the difference between the sale price and the market value of the shares at exercise, is subject to CGT. However, it would be important to consider whether John has any unused CGT losses from previous sales before finalising his CGT calculations while also considering his annual CGT exemption of €1,270.

Conclusion:

Share option schemes offer a unique way to engage and reward employees while aligning their interests with the companies success. In Ireland, the taxation of share options involves a multi- faceted approach, with possible implications at the time of grant, exercise, and eventual sale of shares. While the tax landscape can be complex, it's not insurmountable. With careful planning, a solid understanding of tax regulations, and professional guidance, employees can navigate this intricate terrain and make the most of the opportunities that share option schemes provide.

Jim Stapleton is a Certified Financial Planner, a member of the Irish Tax Institute and co-director of Eolas Money, a Financial Planning practice based in Clonmel, Co. Tipperary. To chat with Jim, contact him directly at [email protected] or visit eolasmoney.ie

This article is provided for general information purposes only and does not amount to financial advice. While every care has been taken in the preparation of the information, we advise you seek professional advice before making any personal financial planning decision.

Eolas Money Management Limited, T/A Eolas Money is regulated by the Central Bank of Ireland.