Share Option Reporting via Payroll

Employer Update

Background

As outlined in our recent Employment Tax and Law Quarterly Newsletter, from 1 January 2024 a gain arising from the exercise of a share option will be reportable through the PAYE system by the employer. Prior to 1 January 2024, the responsibility for the payment and reporting of the Irish taxes due on a gain arising from the exercise of a share option fell wholly on the employee. The responsibility to report the exercise gain and pay the tax due has therefore moved from the employee to the employer.

Revenue has now released an updated Tax and Duty manual outlining the practical considerations in operating payroll tax withholding in respect of a share option gain. In line with other share-based remuneration such as Restricted Stock Units (RSUs), the employer must report the relevant details of the exercise gain and account for the taxes due as a notional payment in the payroll. 

Details

Employee Perspective

Revenue has confirmed that an employee who exercises share options from 1 January 2024 will no longer be considered as a chargeable person with an obligation to file a self-assessment tax return purely in respect of the share option exercise. However, the sale of the underlying shares must be reported to Revenue even where the underlying shares are sold simultaneously upon exercise with no capital gain. Therefore, employees will generally continue to have a filing requirement in order to report the disposal of shares rather than the exercise of the options.

Employer Perspective

Revenue has confirmed that while the method of collecting the tax due has changed from self-assessment to payroll reporting, the underlying calculation of the gain has not changed. Needless to say, most payroll operators are unlikely to have experience in calculating the gain on the exercise of a share option. In many cases, this information will be provided by the company’s share broker but the obligation remains on the employer to ensure the gain has been correctly calculated and reported.

When the employer has calculated the exercise gain, it should be correctly reported under the share-based remuneration heading on the payroll return. The tax should be remitted to Revenue in line with the current Revenue Payroll Notification (RPN) in the same manner as for any notional payment and supporting documentation must be retained to support the share market value used. 

The guidance states that the rules governing the operation of PAYE on a notional payment will also apply to share options. As such, when a share option is exercised, the operation of PAYE must occur on the earlier of the next pay date or 31 December of that year. In many cases there will be difficulties in obtaining the information to report via payroll within the timeframe required. The Restricted Stock Unit guidance allows for the collection of PAYE to be delayed for up to 60 days from the date of vest to allow the shares to be settled up but no equivalent relaxation has been provided for share option exercises. 

The guidance outlines the position where the employee’s take-home pay is insufficient to cover the withholding tax due on the exercise gain and this in line with general PAYE rules. In such circumstances, the employer may:

• withhold sufficient shares to cover the tax liability due;
  
  
• request the tax due from the employee outside of payroll;
  
  
• pay the tax liability on the gain on behalf of the employee. The employee must refund the tax to the employer by the following 28 February or the outstanding tax due will be treated as a taxable benefit.

International aspects

The updated manual provides guidance on the operation of PAYE where an employee has been working overseas during the vesting period. The aim of this guidance is to avoid double taxation where the share option gain may be taxable in Ireland and the overseas country. Double taxation relief works in two different methods:

• when an employee is resident of a Double Taxation Agreement (DTA) country during the vesting period, Ireland will allow for this portion of the gain to be exempted from tax in Ireland,
  
  
• when an employee is resident in Ireland and overseas tax is also due then Ireland will allow a foreign tax credit to be claimed.

However, a foreign tax credit may only be claimed through payroll upon prior approval by Revenue. Our experience of this approval process in the context of employment income in general is that it can be time-consuming, and it is unlikely that approval will be in place in time for payroll reporting. This may give rise to both Irish and overseas withholding tax being applied on the share option exercise. A real-time foreign tax credit is permitted without Revenue approval on Restricted Stock Units and the different treatments between the two types of share plans will give rise to further complications for employers.

Employers should ensure they maintain all documentation on file to support any DTA relief being claimed via payroll.

Impact on employers

The transition to reporting share options gains through payroll will bring Ireland in line with other OECD countries and many employers will already have experience of reporting share-based remuneration through payroll. However, the taxation of share option gains, particularly from an international aspect, is a complex area and this will further complicate matters for payroll operators. 

Where an employee has worked overseas in the vesting period the employer will now have responsibility for tracking and collating the location of the duties and ensuring that double taxation relief is claimed. This information may not be readily available to an employer in the short timeframe allowed to report the share option gain.

The guidance does not specify a “bedding-in” period to allow employers to become familiar with the new requirements and penalties may be applied for any payroll errors.

There is also now a requirement for employers to track share option exercises for employees who leave Ireland to ensure that the appropriate payroll returns are submitted upon a share option exercise which may be many years in the future. 

How EY can help

EY can provide employers with share option reporting requirements in the following ways:

• Preparation of calculations of the share option gain for domestic and internationally mobile employees;
  
  
• Preparation of “sell-to-cover” calculations to determine the number of shares to be sold to cover withholding taxes in Ireland and overseas; 
  
  
• Review of draft payslips;
  
  
• Assistance with claims for real-time foreign tax credits through payroll;
  
  
• Working with your employees to determine locations where duties were performed in the vesting period.

It should be noted that the deadline for submission of the 2023 employer share reporting return for share options “Form RSS1” is 31 March 2024. EY can assist with the preparation and submission of this form. This form must be submitted if there are any share option grants or exercises in 2023 even though there were no payroll requirements in this year.

Contacts

If you require further information, please call your regular contact in EY or contact any of the following:

Michael Rooney
Partner
T: + 353 1 221 2857 | E: michael.rooney@ie.ey.com

Rachel Dillon
Partner
T: + 353 1 221 2554 | E: rachel.dillon@ie.ey.com

Marie Caulfield
Partner
T: + 353 1 221 1416 | E: marie.caulfield@ie.ey.com

Gillian Moore
Director
T: + 353 1 479 2216 | E: gillian.m.moore@ie.ey.com

Caoimhe Neary
Director
T: + 353 1 479 4007 | E: caoimhe.neary@ie.ey.com

Elaine O’Gara
Director
E: elaine.ogara@ie.ey.com

Peter O’Connor
Director
E: peter.oconnor@ie.ey.com

Jennifer Sweeney
Director
T: + 353 1 479 4007 | E: jennifer.sweeney1@ie.ey.com

Colin Spence
Director
T: + 353 1 221 1240 | E: colin.spence@ie.ey.com

Jake Higgit
Director
E: Jake.Higgitt@ie.ey.com