If your employer has recently given you shares of stock, you may be wondering how to pay tax on these stock options. In Ireland, the default income tax rate is 40 per cent. Still, you can apply for a reduced rate by contacting your local revenue office. Then, your employer will let the Revenue know you have exercised your share options. Here are the steps to take:
Effective tax rates on employee stock options
In calculating the effective tax rate on employee stock options in Ireland, a company will deduct a specific amount from the value of a stock at the time the option is exercised, which is usually the exercise price, from the value of taxable income. Typically, these rates are based on the legal situation on January 1 2002. Employee stock options are generally discounted from fair market value. They are given to employees as an incentive to stay with their current employer.
When considering the taxation of employee stock options in Ireland, one must consider the overall tax burden of the employee. The effective tax rate depends on the employee’s overall income and family situation. For example, the highest rates would be incurred in a hypothetical situation where an employee receives a EUR 100,000 option grant and a EUR 100,000 cash income. In contrast, a low effective tax rate would apply to a single person with no dependent children and married individuals with a low income.
The changes in the Finance Act 2019 have significantly reduced the tax burden for the employee. This means that employers must report all employee stock option grants in Ireland. While the tax implications of the change are still unclear, it is essential to note that it will help employees with stock options. The tax treatment of employee stock options in Ireland is designed to encourage employees to stay at their current jobs, as the change will result in higher employee pay.
In Ireland, employees must provide written confirmation of their employee stock option exercise as part of their year-end benefits. This confirmation statement must indicate the taxable benefit derived from the shares acquired during the year. The statement must also be included in the relevant monthly electronic withholding tax return. The new provisions will apply to stock options exercised after 1.1.2020. There is an extensive range of tax implications for this change.
The effective tax rate on employee stock options in Ireland varies depending on the scheme used by the company. In some cases, the tax rate can be as low as 10%. Regardless of the effective tax rate, the employee must hold the shares for at least five years before the benefits are realised. However, suppose there is no restriction on the exercise of the shares. In that case, the employee can choose to exercise them before the tax period expires.
Employee stock options can be subject to income tax, PRSI and USC. Non-listed shares may be subject to solidarity tax, an additional employee tax. If the employee has an option to sell the shares, he or she must declare the capital gains. The employee must report the gains at the time of transfer. The tax rate is 15% of the shares’ value at the transfer time.
The KEEP scheme, introduced in 2018, is a tax relief designed to help small and medium-sized enterprises combat skills shortages and staff retention. It applies to share options granted to employees from January 1, 2018, to December 31, 2023. However, the scheme only applies to companies with fewer than 250 employees or less than EUR50 million in turnover. Tax relief is also available to companies that run restricted shares. Restricted shares are free shares companies issue to employees who have agreed to stay with the company for a year.
The APSS shares must be held in a trust for a minimum of two years before they can be sold. After two years, employees can dispose of their shares without any restriction. They must notify the Revenue Department if they decide to sell their shares. Employee stock options must be reported on the employee’s annual tax return by October 31. However, APSS shares are subject to taxation. Employees must sell their shares if they leave employment or become a director.
If an employee does sell their shares at a profit, they are subject to Irish taxes. Employee stock options are fully taxable if the employee is a resident of Ireland. However, RSUs do not attract Irish tax if acquired at a lower price than the current market value. Therefore, it is crucial to report the RSUs electronically if you are an Irish resident. For your information, the Revenue has electronically updated their guidance on reporting requirements.
Effective tax rates on employee stock options in Ireland
In most EU countries, the tax burden associated with employee stock options is based on the value of the shares acquired, not the price paid for them. Therefore, this type of employee stock option is considered employment income and is subject to income tax and social security contributions. While most countries tax the subsequent gain from the sale of the shares as capital income, others only tax the employee when the options vest or are exercised. Thus, Ireland offers a favourable tax regime for employee stock options.
When comparing various tax regimes, we used a standard investment scenario. In this case, an employee is granted a certain number of stock options, holds them for three years, and then exercises them. The employee then sells the shares for a profit. The employee must pay capital gains tax at the time of the final sale, but before doing so, he must keep the stock. Moreover, the tax rate will not change during this time, as long as the annual level of employment does not change.
Under a Revenue-approved savings-related share option scheme, the employee must agree to save a certain amount out of his or her net pay for a predetermined period of time. After reaching the amount of savings, the employee is granted options based on the agreed savings. Employee stock options granted under such a scheme can be tax-free if the employee continues to invest with the financial institution. In Ireland, a SAYE scheme allows small and medium-sized companies to make use of share-based remuneration for key employees. SMEs are encouraged to use this remuneration scheme as it helps them compete with larger companies.
There are a number of ways to reduce the tax burden on employee stock options. The APSS scheme allows the employer to assign shares to their employees for EUR12,700 a year. The employee can appropriate the shares after three years of employment. Once the shares are appropriated, the employee will only be liable for PRSI, USC, and any minor deductions. The employee will be liable for Capital Gains Tax if the shares are sold.
When it comes to determining the income gain on employee stock options, the Irish Stock Options Act makes it easier to calculate the tax owed on the option grant. If the employee exercises the option, the tax is based on the number of days the employee spent in Ireland during the vesting period. This tax rate on stock options is higher than for stock options granted to individuals in the US. However, the tax burden can be minimised when an employee is able to re-assess the value of the shares in Ireland.
In addition to the effective tax rates, there are other factors that determine the tax burden. The size of the option grants and the income levels of individuals will determine the effective tax rates. These factors can vary significantly from country to country, so the amount of tax paid will depend on several factors. If you are granting shares to employees in Ireland, the size of the options is also a factor. While some states have higher tax rates than Ireland, others are much more favourable.
The Revenue Commissioners have published a statement of practice on the taxation of share options granted to mobile employees. This statement is vital for both Irish and foreign employees. It may help to increase employee participation and loyalty. The tax benefits from employee share schemes may be delayed for several years. But if you do not offer an employee share option, you might want to consider this option for your company. The tax benefits may be substantial.
If you own stock options in an Irish company, you will have to pay dividend withholding tax. This tax applies to dividends and other distributions from an Irish resident company. The rate is 25%, but there are exemptions for certain categories of individuals. While this tax may sound steep, it is not as severe as many think. Moreover, it is a relatively small amount compared to other countries. It is also important to understand that the taxation system in Ireland is flexible, but that does not mean that there are no tax laws.
Should you require assistance, our team can provide you with a wide variety of accounting services or tax planning in Ireland. Please don’t hesitate to contact us.