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Share Option Gains to be Taxed Through Payroll from 1 January 2024

AUTHORs: Aidan Fahy, Vahan Tchrakian co-author(s): Audrey Kean, Siun Clinch Services: Tax, Employment and Incentives Taxes DATE: 26/10/2023

Finance (No. 2) Bill 2023, which was published last week, provides that, from 1 January 2024, employers will be required to withhold Irish payroll taxes and charges from gains arising on the exercise of share options. Share option gains are currently the only form of share-based remuneration that are taxed through the Irish self-assessment system, with employer's obligations to date being limited to an annual reporting obligation and a payroll withholding obligation that is limited to payments made in exchange for a release or cancellation of a share option right.  Bringing all share option events within the payroll system brings with it a number of practical issues for employers to be cognisant of:

  • From a timing and logistical perspective, having such a material change being introduced without prior warning, and with a short lead time, is unfortunate.  The change will, incidentally, coincide with the introduction of Enhanced Reporting Requirements (ERR) for employers, which is also due to commence from 1 January 2024 (addressed by us in a recent update – linked here) – we are aware from dealing with clients and representative bodies on ERR that putting in place the required systems and processes to comply with ERR in time for the start of 2024 is a significant ask, meaning resources are likely to already be stretched in this area.
  • Whilst share option plans can take different forms, the most common type of share option plans provide employees with significant discretion as to when they can exercise share options.  This can be contrasted with, for example, employee share purchase plans (ESPPs) (which can sometimes be categorised as a form of share option plan) and RSU plans – both typically have share acquisitions (and tax trigger points) arising at set intervals, perhaps only twice annually in the case of ESPPs.  Administering payroll taxes and charges on (potentially) multiple and sporadic exercise events may be a lot more administratively burdensome than current share plans that are already taxed through payroll.
  • As a practical matter, employers will need to consider how such tax liabilities will be funded, particularly where there is a delay between the exercise of options and the issuance of shares, and indeed the realisation of shares.  Revenue guidance on the taxation of RSUs provides some leeway for share-settled RSUs, allowing for a delayed collection of taxes and charges until shares are actually settled, provided the settlement date is within 60 days of the vesting date.  It awaits to be seen whether Revenue share option guidance may provide similar leeway, but no indication of such leeway has yet been forthcoming.
  • Some consideration will need to be given to possible complications that may arise where former employees are allowed a period to exercise vested share options.  Clear practical issues may arise where there is no longer a source of emoluments from which to withhold share option taxes and charges and / or where a former employee is not engaging or cooperating.
  • In respect of both employees who carried out the duties of their employment in Ireland and overseas during the vesting period and non-resident directors, the calculation of the portion of a share option gain that is taxable in Ireland (under domestic law and pursuant to a tax treaty) can be complex, and this will now fall on the Irish employer.  An additional issue with certain mobile employees is that they may be outside the Irish employment tax net at the time a share option is exercised but still trigger Irish taxes and charges (for which the Irish employer is accountable) where Irish duties were carried out during the vesting period.

What should employers be doing to prepare themselves for the change?

In the first instance, ensuring accurate and up to date records for all share option grants are being maintained on an ongoing basis will be important.  The relevant information should include all information captured on the annual share option information filing (the Form RSS1).  In addition, closely monitoring working days spent in Ireland and elsewhere for mobile employees during the vesting period will be important, with a consistent methodology being adopted to calculate and record Irish days and Irish taxes due for all employees and / or directors.

Multinational groups that already have experience of dealing with share option gains through payroll in other jurisdictions may be in a position to leverage from practical experiences in other jurisdictions.

Separately, thought should be given to appropriately updating the share option plan and associated documentation in light of this change – particularly in the context of funding the tax liabilities and appropriating shares, as required.

Finally, whilst in many instances this will already be the case, where employers can ensure that employees communicate their intention to exercise share options with employers in a timely manner in advance of doing so, that, as a practical matter, should assist employers in being in a position to fulfil their withholding obligations.

Please contact our Tax team or your usual Matheson contact if you wish to discuss this topic further.