Unapproved Share Option Schemes
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What is a Share Option?
A share option is a right but not an obligation, to purchase shares at some future date at a price which is determined on the date the option is granted. If the market value of the shares is greater than the option price when the options can be exercised the options are in the money. However, if the market value is less than the option price when the options can be exercised the options are underwater. Assuming growth in the share price, the option holder has an opportunity to buy shares at a price less than market value.
What documentation must be approved by Revenue?
As the scheme is unapproved, no scheme documentation needs to be approved by Revenue. Normally the Board of the Company would pass a resolution establishing the Scheme and approving the Rules of the Scheme. The employee will be provided with an Option Agreement outlining his /her options e.g. the number of shares under option, the option price and the vesting schedule.
How are options granted?
At a time of its own choosing, the company may notify an employee that he or she has been granted options which can be exercised during a specified period. The right to exercise the options may be conditional on the achievement of specific targets. The number of shares which the employee will be entitled to acquire and the option price will be at the discretion of the company and will be specified in a Share Option Agreement.
What type of company can establish an Option Scheme?
Practically all companies, whether private or public can establish an Option Scheme irrespective of where its parent is based. However, there are practical issues such as valuations and providing a ready market for employees to sell their shares for private companies to overcome.
What are the taxation implications for the employee?
On grant: there is no income tax, PRSI or USC on the grant of options provided that the options cannot be exercised more than seven years after they are granted. If the exercise period is greater than seven years and the options can be exercised at a discount on the market value as at the date of grant, then an income tax, PRSI and a USC charge will arise on the difference between the market value at the date of grant and the option price
On exercise: an employee will be liable to income tax, PRSI and the USC on the difference between the market value as at the date of exercise and the option price. Income tax, PRSI and the USC will also arise on any gain arising on the assignment or release of a share option.
On sale: the participant may, depending on their personal circumstances, be liable to capital gains tax on the subsequent disposal of the shares on the difference between the sale proceeds and the market value of the shares as at the date of exercise.
Must all employees be offered participation?
No. Options can be offered to employees on a selective basis. In practice, options are granted to key employees only. However, some companies do offer option to all employees.
How is the income tax, PRSI and the USC paid?
The income tax, PRSI and the USC due on the exercise of options must be paid with 30 days of the date of exercise. The tax due must be calculated at the top rate of tax (currently 40%) unless the participant has received confirmation from his / her Inspector of Taxes that he /she can pay the income tax at the lower rate.
The income tax, PRSI and the USC must be returned to the Collector General within 30 days of the exercise of the options along with Form RTSO1.
What are the taxation implications for the employer?
Any costs associated with establishing and administrating the Scheme are allowable for corporation tax purposes. However, the cost of funding the options is not allowed.
There is no employer PRSI on the gain arising on the exercise of the options.
What are the reporting requirements?
The Company: the company, Irish branches and agencies granting options must complete a return of information (Form RSS1) regarding the granting, exercise, release and lapse of options. Form RSS1 must be filed by 31 March following the relevant tax year.
The employee: an employee is required to return details of the exercise of options, the option gain and the subsequent disposal of shares on his / her tax return and to pay any capital gains tax due on the disposal of shares.
The employee must also submit Form RTSO1 within 30 days of the exercise of the share option accompanied with payment of any income tax, PRSI and USC due.
Are there any implications for pension benefits?
Revenue have confirmed that any gains arising on the exercise of an option can be included when calculating Revenue maximum benefits and the monetary limits for AVCs.
Example of Unapproved Share Option Schemes
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