New Employer Withholding Requirement – Share Options

This significant change in the tax treatment upon the exercise of share options was set out in the recently published Finance (No. 2) Bill 2023.

These new rules are a welcome development for employees/directors as they will no longer be required to report and remit taxes arising upon exercise of share options from 01 January 2024. Instead, the compliance burden will be pushed onto employers which aligns with the general obligation for employers to withhold and report on other share awards, benefits and emoluments.

However, the announcement of the new rules in the Finance (No. 2) Bill 2023 has left employers with a short lead-in time to create and implement processes and procedures to ensure that they can manage this new compliance obligation. Over the coming weeks, employers will need to:

• Review legal documentation which govern share options schemes with a view to establishing and implementing a process to withhold the required income tax, universal social charge and PRSI.  In particular, employers should:
  • Ensure that an appropriate mechanism is in place for covering the tax liability arising (for example, having a right to sell shares on behalf of the employee/director or to make withholdings from other cash payment(s) due to the employee/director in order to fund the tax liability). This is of particular importance for private companies where there is no open market for the shares, and for those companies which permit former employees/directors to exercise their share options after their employment has terminated.
  • Ensure that any process that is put in place takes into account any FX conversions which may be necessary if the share options are exercised over shares in a non-EURO denominated currency.
  • Engage with internal and external payroll teams to ensure that a process is in place to correctly report the exercise of share options through payroll.

• Consider how to deal with the taxation upon exercise for globally mobile employees. It may be the case that only part of the gain arising upon exercise of the share option by a globally mobile employee may be subject to tax in Ireland. Employers will need to determine the correct amount of the gain subject to PAYE and whether the option gain is subject to PRSI or exempt.

• Establish and implement a process to ensure that the gains arising upon exercise of the share options are reported within the statutory timeframe. Share awards, benefits and emoluments are taxed under the PAYE system on a real-time basis. Gains arising upon exercise of share options will be regarded as notional payments and therefore must be reported on or before the exercise of the option, or if there is no actual payment of emoluments to the employee on that day, the earlier of the next pay day or 31 December in that year. This may be challenging for employers where employees are permitted to exercise share options at any time (in contrast to a scheme where exercise is permitted only upon a liquidity event).

We also recommend that employers should communicate this change in the tax treatment of the exercise of share options to their employees/directors and update any guidance that employers may have made available to employees in respect of the share option scheme.

The Finance (No. 2) Bill 2023 is making its way through the legislative process and is expected to be signed into law in late December 2023.

Finally, it is important to acknowledge the significant compliance burden that will be imposed on employers from the 2024 tax year onwards. In addition to these new withholding rules on the exercise of share options, employers will also have enhanced reporting requirements on certain tax-free payments made to employees on or after 01 January 2024.

Further details on the Enhanced Reporting Requirements may be found on the McCann FitzGerald LLP website here. Employers will need to deal with these challenging reporting requirements and absorb the administrative burden and costs involved as failure to comply will lead to penalties.