2024 changes for share options

Share options are one of the most common forms of share-based remuneration in Ireland.  Currently, gains arising from the exercise, assignment, or release of share options are taxed via the self-assessment system (a system that is known as the Relevant Tax on Share Options or “RTSO” for short).  

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 his or her share options, the employee is required to file an income tax return under self-assessment.  This is due for filling by 31 October following the year in which the shares were exercised, assigned, or released.

As Ireland follows OECD principles and treats the attributable gain at exercise as earned during the vesting period, the current RTSO rules also apply to non-residents who have performed taxable workdays in Ireland in the vesting period.

Annually, the employer is obliged to file an RSS1 return by 31 March following the calendar tax year to report the grant, exercise, assignment, or release of an option. 

Under current real-time reporting, an employer is generally expected to file details of pay, non-cash benefits, and 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, as well as 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 in respect of 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 as well as globally mobile employees. Employers should make sure that the necessary processes and controls are in place so that the correct taxable gains are captured via the PAYE system (and in real time). 

KPMG in Ireland had the opportunity to meet informally with Irish Revenue to discuss the new provisions and highlight the short period to roll-out and other practical matters. Several examples were discussed to demonstrate some of the practical considerations arising such as:

• Possible adjustments needed to existing share option plan documents to enable payroll withholding and/or sell to cover, notwithstanding some existing tax provisions which can allow employers to apply sell to cover to meet payroll obligations in some circumstances.  
• In an international group, there may be lack of visibility of option exercises at the local Irish subsidiary level making it difficult to comply with real-time reporting obligations e.g., global reporting of exercises by the parent to the subsidiary could occur a month in arrears.
• The way foreign tax credits will be provided for PAYE purposes. For example, there is currently facility for a real-time credit under the RTSO regime while there already exists a real-time credit facility for payroll purposes for Restricted Stock Units.  
• PAYE obligations for the employer where no liquidity event occurs at time of exercise for employees of private companies and timing of recoupment of payroll liabilities due from the employee. 

In general, Irish Revenue was very open to understanding the challenges arising which will inform the guidance materials that will issue. Some key take aways from the meeting include:

• No deferral to the roll-out date is expected.
• No current intention to apply the deferred PAYE reporting currently available for share settled RSUs. 
• The implications for globally mobile employees and the availability of real-time credits will be considered further. 

Guidance Material is in preparation and is planned to be available at some point in mid-late December 2023