31 March is an important deadline for companies who have provided share option schemes to their employees. A Form RSS1 is required to be completed and filed with Revenue where share options are either granted, exercised or sold. The Form RSS1 must be sent to Revenue on or before 31 March in the following year of assessment i.e., for 2021 this would be due on the 31st of March 2022. This form is required to be returned to Revenue electronically by using their online system.
Where the share option scheme is operated under the Key Employee Engagement Programme (“KEEP”) a KEEP 1 return is also required to be filed by the employer by 31 March for any KEEP options granted, exercised, assigned or released.
As companies begin to see the light at the end of the Covid-19 tunnel we have seen an increased interest in looking at rewarding key management with an interest in the company. We have outlined below the reporting requirements for employees who obtain unapproved share options. As you will note, unapproved share options can often lead to a significant income tax bill for the employee and if not exercised at a point of sale can have cash flow implications.
Two common alternatives to unapproved share options which can have a more positive tax impact are both the KEEP mentioned above and growth shares which are popular to incentivise key staff to grow the business. We will look at the advantages of these share award options in our next article. In the meantime, below are the key considerations for employees obtaining unapproved share options from their employer.
Grant of Share Option Scheme
The granting of share options would not be subject to tax in Ireland provided the share option is not capable of being exercised more than seven years after the date on which it is granted.
If it is capable of being exercised more than seven years after the date of it being granted, you will only pay tax if the option price is less than the market value of the shares at the grant date.
The tax is due on the difference between the:
- market value of the shares on the grant date
- amount you pay when you exercise the option.
Exercise of Share Option Scheme
Once share options are exercised, an individual will be subject to Income Tax, USC and PRSI at a rate of 52% on the gain arising on the exercise of the shares.
The gain arising on the shares will be calculated as the difference between:
(a) the market value of the shares at the date of exercise; and
(b) the amount you paid for the shares at the time of exercise.
Once a share option scheme is exercised, an individual is required to file an RTSO1 and remit the tax to Revenue within 30 days of exercising. You will also be required to register for income tax and a Form 11 will be required to be filed. If you exercise shares in 2021, you will be required to file a Form 11 by 31 October 2022.
Sale of Shares
If you exercise your share options and then subsequently dispose of the share you acquired you may be liable to Capital Gains Tax (CGT). You must report this disposal to Revenue, even if no tax is due.
The CGT would be calculated as the difference between the sales proceeds and the base cost of the shares. The base cost would compromise the cost paid for the share options (if any), the price paid for the shares on the exercise of the share options and the gain arising on the exercise of the share option. The gain arising would then be subject to CGT at a rate of 33%.
If the shares are disposed of between 1st of January and 30th of November, the CGT would be due on the 15th of December. If the shares are disposed of between 1st of December and 31st of December, the CGT would be due on the 31st of January. The disposal will be required to be reported in your income tax return for the year the shares were disposed.
We have set out above a high-level overview of the compliance obligations for employers and employees on unapproved share schemes. As discussed, we will look in our next article at the benefits or alternative share option scheme such as KEEP and growth shares.
If you are offering a share option scheme to your employees or have a share award you wish to exercise or sell you should talk to our tax team at Roberts Nathan.