Equity - Introduction to cross border issues in relation to Share Options and Share AwardsEmployment Tax Update, Winter 2012 |
Introduction
Employee share ownership has increased in popularity over the past number of years. A desire for employees to participate in the success of companies is matched by a demand from shareholders for remuneration to be aligned with shareholder interests. Many Irish based companies struggle with the reporting and withholding obligations imposed in relation to share remuneration. These obligations can be much more difficult to manage where the company has globally mobile employees. The taxation of share remuneration in cross border situations is complex and employers would be well advised to seek advice in relation to their obligations in relation to mobile employees.
Stock Options
The Irish tax treatment of stock options in cross border situations is relatively well defined and based on well-established OECD principles. Under OECD principles stock option gains should be sourced based on where the employment duties were exercised over the grant to vest period.
Irish Revenue published their position on cross border stock options in 2007. This confirmed that Irish Revenue intends to follow the OECD recommendations with effect from 5 April 2007. The following examples outline the tax position in a number of scenarios.
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Example 1: Irish resident at grant, non-resident at exercise |
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1 April 2008 |
Sandra, an Irish resident individual, was employed by an Irish resident company and was granted an option to acquire 5,000 shares in the company at a price of €1 per share.
The right to exercise the shares was conditional on remaining in employment with the company until 31 March 2011. |
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1 April 2010 |
Sandra went on a 3 year assignment to the US. She ceased to be Irish resident and has no Irish duties while on the US assignment. |
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1 July 2012 |
Sandra exercised the share options at which time the shares are worth €4 each. |
The gain on exercise of the share options is €15,000 (5,000 shares at €3 per share). The gain taxable in Ireland is €10,000 as Sandra was in Ireland for 2 years out of the 3 years from 1 April 2008 to 31 March 2011.
There is no employer withholding obligation in respect of stock options. However the Irish employer is obliged to report the grant, exercise, assignment or release of stock options on Form RSS1.
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Example 2: Non-Irish resident at grant, Irish resident at exercise |
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1 January 2009 |
Paul, a resident of the UK, was granted an option to acquire 10,000 shares in the company at a price of €1.50 per share.
The right to exercise the shares was conditional on remaining in employment with the company until 31 December 2011. |
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1 July 2010 |
Paul came to Ireland on a 2 year assignment from the UK and became Irish resident. |
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31 December 2011 |
Paul exercised the share options at which time the shares are worth €4 each. |
The gain on exercise of the share options is €25,000 (10,000 shares at €2.50 per share). The gain taxable in Ireland is €12,500 as Paul was in Ireland for 1.5 years out of the 3 years from 1 January 2009 to 31 December 2011.
The employer must determine the extent to which the exercise is reportable in Ireland to ensure that it meets its reporting obligations. Paul must determine the gain taxable in Ireland and pay, within 30 days of exercise, the tax, USC and PRSI due. If Paul is tax equalised while on assignment to Ireland the onus will be on his employer to calculate the taxable gain and pay the taxes due.
Share Awards
“Share awards” encompasses employee share remuneration excluding options. It includes awards such as Restricted Stock Units (RSUs), free shares, performance shares and Restricted Stock Awards. The categorisation of Employee Share Purchase Plans (ESPPs) and Stock Appreciation Rights (SARs) will depend on the plan rules and employers should ensure that they know if the ESPP or SAR is taxable in Ireland as a stock option or as a share award.
Generally share awards are taxable as employment income when the individual becomes beneficially entitled to the shares such as on vesting of an RSU. This is straightforward where an individual has been resident in Ireland throughout the grant to vest period. There is, however, a complete lack of clarity in relation to the Irish tax treatment of share awards in cross border situations.
From an international perspective share awards are generally taxed on an earnings basis similar to stock options. Taking this approach countries seek to tax the portion of the gain that is attributable to the duties in the relevant country. The OECD guidance in relation to stock options does not apply to share awards. However, most double taxation treaties provide that, where exemption is not available, employment income related to duties exercised in a State may be taxed in that State.
In general treaties provide that salaries, wages or other similar remuneration derived from the exercise of employment in a State may be taxed in that State. Thus, the actual “exercise of employment” is the determining factor.
The OECD guidance further clarifies that “this applies regardless of who that income may be paid to, credited to or otherwise definitively acquired by the employee”. This commentary may have contributed towards the development of the international practice of sourcing share awards over the period from grant to vest so as to allocate income to the countries in which duties were performed.
There is an alternative approach for the taxation of share awards which seeks to tax the share award at the vesting date based on the individual’s Irish tax status at that date. This is referred to by some as the “music stops” or “all in/all out” approach. Applying this approach an individual who is resident in Ireland at the vesting date will be taxable in full in Ireland on the gains on the shares on vesting. Alternatively, an individual who is non-resident in Ireland at vesting will not be taxable in Ireland on the receipt of the shares.
If this approach were adopted a credit should be available in Ireland for foreign tax paid on the vesting of the share, in a country with which Ireland has a tax treaty.
The difficulty for employers is that currently there is no Revenue guidance on the tax treatment of share awards in a cross border situation. This is a critical issue for employers since the introduction of withholding taxes from 1 January 2011. Whilst Revenue is actively considering this issue there is as yet no published guidance. As a result, employers need to decide on the approach they will adopt from a withholding perspective.
From a practical perspective employers need to ask a number of questions to determine if they are positioned to manage their obligations in relation to share awards. These include:
- Have we a monitoring/tracking system in place to allow us to collect the required data?
- Is there awareness at a payroll processing level of the obligations in relation to share awards?
- Who manages the equity remuneration and who will notify local payroll of the obligations?
- Have we considered how the required Irish taxes are to be collected on the shares?
- Have we considered the treatment of share awards in a cross border context?
- What do we do if there is a dual withholding obligation?
- Have we communicated to employees the tax treatment of stock options and shares awards?
- Who manages the completion of the Form RSS1 and have these been filed in Ireland?
- Has withholding taxes been applied correctly in Ireland since 1 January 2011?
With increasing focus on this area by Revenue and the risks for employers from non-compliance there is an onus on companies to ensure that they can adequately deal with the withholding and reporting obligations.
How Deloitte can help
If you would be interested in hearing more about how Deloitte can assist your organisation with minimising tax risk, to identify cost control or process improvements, to resolve potential compliance issues or employee communications please contact:
 Ian McCall GES Practice Leader + 353 1 417 2442 ixmccall@deloitte.ie |
 Sarah ConryTax Director + 353 1 417 1 2374 sconry@deloitte.ie |
