Employee Share Options – New Employer Withholding Obligation

by Rosaleen Boyle Incentives – Senior Advisor at A&L Goodbody LLP

The way in which taxes arising on the exercise of employee share options are collected is due to change from 1 January 2024. The Irish government’s Finance Bill was published on 19 October 2023 and contains a previously unannounced change which will bring share options within employer payroll withholding obligations under the Pay As You Earn (PAYE) system for the first time.

Section 12 of the Finance (No. 2) Bill 2023 provides for a new employer withholding obligation in relation to income tax and the universal social charge payable on gains realised when an employee exercises a share option award. This change will apply to all unapproved share option exercises that occur on or after 1 January 2024.

Currently, the onus is on employees to navigate the relevant tax on a share option (RTSO) procedure to report any gain realised on the exercise of their share options and pay the income tax, USC and employee PRSI arising, within 30 days of the date of exercise. Employees also must file a tax return for the year in which exercise occurs, under self-assessment rules. This has left employees exposed to both interest and penalty payments if they do not file and pay correctly and on time.

Therefore, employers will now have to ensure that their payroll function is fully integrated with their share option exercise procedures so that payroll providers receive details of all share option exercises in a timely manner. The timing of the tax charge, i.e. the exercise date, is largely at the choice of the employee rather than the employer, often over a period of years, so companies will need to be flexible and ready to track and act on that data in real time.  Employers do already have to report share option grant and exercise information annually to Revenue on Form RSS1 but the new payroll obligation means employers now have a more active role to play in tax compliance.

Comments

The move to bring share options into the PAYE regime is perhaps not surprising given that taxes on all other forms of share-based remuneration, such as restricted share units and free or discounted shares, are already dealt with via payroll. This will also align Ireland with practice in a number of other jurisdictions, including the USA and UK. However, there is a relatively short time frame between the date this bill is likely to become law and the effective date of the change, and it may catch some employers by surprise. Employers will need to ensure that processes and resources are in place to deal with their new compliance obligation.