A significant (and unexpected) amendment provided for in Ireland’s Finance Bill (No.2) of 2023 is an overhaul of the method by which taxes on employee share option gains are collected and remitted to Irish Revenue. Olive O’Donoghue and Thalia O’Toole explain
From 1 January 2024, the tax collection method for share option gains will become a real-time payroll withholding (PAYE) obligation for the employer under Finance Bill (No.2) of 2023.
While the extension of PAYE to share options is broadly a welcome measure from an employee perspective (as it removes the onus from employees to settle their own taxes within 30 days), it is a significant change for employers, who may never have had an obligation to operate PAYE on share-based compensation previously.
The move to the collection of employee liabilities on share option exercises through the PAYE system in such a short timeframe is likely to present several challenges for employers, at least until appropriate processes and procedures have been developed to aid compliance with the new rules.
The timeframe to prepare for this new process is very tight for employers, especially for organisations with frequent grants and exercises of share options.
Relevant tax on share options
Share options are one of Ireland’s most common forms of share-based remuneration. Currently, gains arising from the exercise, assignment or release of share options are taxed via the self-assessment system known as the relevant tax on share options (RTSO).
Under the RTSO system, the employee is responsible for settling the income tax, the universal social charge (USC) and employee pay-related social insurance (PRSI) due within 30 days of the exercise of the option.
In any tax year where an employee exercises, assigns or releases their share options, they must file an income tax return under self-assessment. This is due for filing by 31 October following the year the shares were exercised, assigned or released.
Ireland follows OECD principles and treats the attributable gain at exercise as earned during the vesting period. However, the current RTSO rules also apply to non-residents who have performed taxable workdays in Ireland in the vesting period.
The employer is obliged to file a RSS1 return annually by 31 March following the calendar tax year to report the grant, exercise, assignment or release of an option.
Proposed employer requirements
The Bill provides for a significant overhaul of the current treatment by abolishing the RTSO system.
For gains arising in respect of the exercise, assignment or release of a share option on or after 1 January 2024, employers must now account for the income tax, USC and PRSI due on share option gains through the PAYE system.
Employees may still be required to file an income tax return for a relevant tax year.
No changes are currently proposed that alter the obligation to file an annual RSS1 informational return by the employer.
Practical considerations
Under current real-time reporting, an employer is generally expected to file details of pay, non-cash benefits that have associated payroll liabilities due on or before the payment date. These rules will now apply to share options.
Clarity is, however, needed from Irish Revenue on what is meant by “real-time” for options.
Under PAYE rules, employers remain obliged to settle the liabilities due on share remuneration, even where the employee does not have sufficient net salary to fund all relevant payroll deductions.
As a result, employers will need to make sure they have adequate provisions in place to calculate the correct option gain and effect a ‘sell to cover’ mechanism on exercise where required. This broadly involves the immediate sale of a sufficient number of shares purchased by the employee to finance the PAYE/PRSI due following exercise.
In addition, funding complexities can arise where options are exercised outside of a liquidity event.
For globally mobile employees, the calculation of the taxable gain depends upon several factors, such as the country of residence at exercise, location of workdays during the vesting period, and the application of tax treaty provisions – access to all relevant facts will be important in managing payroll compliance.
Employers will also have potential trailing payroll obligations for former employees and directors who exercise the option after leaving the business.
Given the above, employers will need to keep track of employee share option events for current and former employees and globally mobile employees.
Employers should ensure that the necessary processes and controls are in place to capture the correct taxable gains via the PAYE system (and in real time).
Next steps for employers
The changes announced will lead to some payroll compliance challenges for employers for both domestic and globally mobile employees.
While formal Revenue guidance is pending, employers may wish to consider the following:
- Review current Share Option and Employee Share Purchase Plan (ESPP) arrangements so the taxation and reporting positions are fully understood. This may also be an opportunity to consider whether the current arrangements remain fit for purpose.
- Consider the impact of the new provisions in the context of globally mobile employees and former employees/directors, or those due to leave their roles, to understand how payroll will be updated to account for same.
- Identify the stakeholders responsible for providing the information needed for the payroll withholdings and map out relevant processes needed.
- Prepare an employee communication regarding the updates setting out how their share options will now be taxed through payroll and that the responsibility for collecting the relevant liabilities has now shifted to the employer. It should also set out details concerning the various ongoing employee responsibilities for filing their tax return under self-assessment.
Olive O’Donoghue is Partner in KPMG
Thalia O’Toole is Tax Principal and Head of Global Mobility at KPMG
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