The Finance Bill 2023 transforms the taxation of share option gains, starting January 1, 2024. Discover the implications for both, employers and employees in our comprehensive update.
Finance Bill 2023 announced that, with effect from 1 January 2024, the taxation of a gain realised on the exercise, assignment or release of a right to acquire shares or other assets will no longer be subject to self-assessment but taxed through the PAYE system.
Therefore, from 1 January 2024, the collection of the taxes will be through the payroll process.
Considerations for Employees
Under the existing self-assessment system, known as the Relevant Tax on Share Options system (RTSO), the employee was responsible for settling the Income Tax, the Universal Social Charge (USC) and employee Pay Related Social Insurance (PRSI) within 30 days of the exercise of the option.
The abolishment of this RTSO system, with effect from 1 January 2024, and the extension of PAYE to share option gains from that date will shift the responsibility for collecting taxes on share option gains to the employer. This will now be required to account for the relevant income taxes and employee PRSI through the PAYE system. Gains arising on or before 31 December 2023 will remain subject to the RTSO self-assessment process.
Considerations for Employers
The obligation to calculate and report taxable gains arising on the exercise of share options as part of the real-time monthly payroll reporting submissions will rest solely with employers from 1 January 2024. This is in addition to the current reporting obligations for share options by employers, which are due on or before 31 March of the following tax year.
Employers will now require a process to track all share option activity to ensure they have accurate and up-to-date records for all share options granted and to maintain these records on an ongoing basis.
Consideration will also need to be given to how the tax liabilities will be funded. For example, introducing a ‘sell to cover’ mechanism (i.e., automatically selling sufficient option shares) as part of the share option exercise process, to ensure that the employee has sufficient funds available to cover the payroll taxes due on the gain.
A further potential funding issue that has yet to be addressed by Revenue may arise where there is a delay between the exercise of the option and the issuance of shares. As it stands, the payroll obligation arises in the period the options are exercised, not when the shares are received. Revenue has addressed this issue relating to share-settled RSUs, whereby the collection of taxes can be deferred by up to 60 days if the settlement date and vesting date are not aligned. To date, there has been no indication from Revenue as to whether a similar approach will be adopted for share option exercises.
For international assignees and multi-state workers, the calculation of the taxable portion of the gain on exercise can be quite complex.
The domestic tax legislation of the relevant jurisdictions and the provisions of any double tax treaty need to be considered to determine where and how much of any gain is to be taxed.
The requirement to accurately calculate the taxable gain in Ireland now rests with the employer. As a result, employers will need to closely track the Irish workdays for these mobile employees over the entire vesting period of the options.
A further complication may arise if the share options are exercised when the mobile employee is not subject to the Irish PAYE system at the time of exercise, but the gain on exercise (or a portion of it) triggers an Irish tax liability for which the Irish employer is required to account.
A question then arises as to how the employer can account for the tax if the employee is no longer on their payroll.
This same issue may also arise if the share option plan allows an employee a period of time to exercise their options after leaving their employment.
Summary
While this announcement may be broadly welcomed by employees due to it simplifying the process by which tax on share options is accounted for option holders, the burden of reporting the relevant gain and remitting the tax due has, with effect from 1 January 2024, been fully transferred to the employer. Share option gains will, however, remain exempt from employer’s PRSI contributions.
Employers will need to prioritise introducing adequate funding and tracking provisions as well as getting a better understanding of the personal tax complexities of mobile employees.
The rules of existing share option schemes should be reviewed and revised as necessary to provide for these changes.
Our Employment Tax Team are experienced in all aspects of the taxation of share-based remuneration. They can assist you in understanding and addressing the implications of the proposed changes, including changes to share scheme rules and payroll processes.
For further information, please contact a member of our Employment Tax team, or click the button below:
Mark Hynes
Pat O'Brien