IT73
Tax treatment of shares acquired by
directors and employees
RPC004965_EN_WB_L_1
1.Introduction
This Explanatory Leaflet is aimed at an individual who is in receipt of shares from his/
her employer and he/ she is prohibited from disposing of the shares for a specified period
exceeding one year.
The purpose of this leaflet is to outline:
a
the income tax treatment on the acquisition of restricted shares by a director or
employee;
a
the income tax treatment on the alteration or lifting of restrictions on restricted shares
acquired by a director or employee, and
a
the capital gains tax treatment on the disposal of restricted shares.
2. What are restricted shares?
An employee or director may be awarded shares by his or her employer or may be granted
an option or right to acquire shares at a discounted price.
In some instances, the employer, in an effort to retain staff or to improve performance, may
impose a restriction on the disposal of the shares until a specified period has elapsed.
Shares are restricted shares if all of the following conditions are satisfied:
a
there is a bona fide written contract or agreement in place under the terms of which
there is a restriction on the freedom of the director or employee by whom the shares are
held to assign, charge, transfer or otherwise dispose of the shares for a specified period
of not less than one year, and
a
the shares cannot be assigned, charged, transferred or otherwise disposed of during
that specified period, except in limited circumstances:
•
on the death of the director or employee or,
•
where there is a change in control or a reorganisation of the share capital of the
company in which the shares are held.
3. Income Tax charge on the acquisition of shares
An income tax charge arises where a director or employee acquires shares by reason of his
or her office or employment for less than market value.
Generally, the amount chargeable to income tax is the difference between the market value
of the shares and the price paid by the director or employee.
In the case of restricted shares acquired by a director or employee that satisfy the conditions
set out in the next section, the amount chargeable to income tax is reduced by between 10%
and 60% depending on the length of the period that the restriction on the disposal of the
shares by the director or employee remains in place.
The rates of reduction in the amount chargeable to income tax are as follows:
Number of years restriction
1
2
3
4
5
More than 5 years
Rate of Reduction
10%
20%
30%
40%
50%
60%
4. What are the conditions that must be satisfied to qualify for a reduction in
the amount chargeable to income tax?
To qualify for the reduction the shares acquired by the director or employee must:
•
be shares in the company in which the employee or director is employed or in a
company that controls that company, and
•
be restricted shares (see paragraph 2 above), and
•
during the period of restriction, the shares must be held in a trust established by the
employer or held under such other arrangements as the Revenue Commissioners may
allow.
5. What happens if the restriction on the disposal of the shares is lifted or
varied?
Where the original restriction on the disposal of the shares is subsequently removed or
varied during the specified period, the income tax charge on the acquisition of the shares
must be adjusted to take account of the actual period the restriction was in place (see
Example 2 in the Appendix).
6. What happens if the shares are disposed of before the end of the
specified period of restriction?
The shares cannot be disposed of during the period of restriction except in the following
circumstances:
•
on the death of the director or employee, or
•
where there is a change in control or a reorganisation of the share capital of the
company in which the shares are held.
Where the shares are disposed of in any of the above circumstances before the end of the
specified period of restriction, the income tax charge on the acquisition of the shares must be
adjusted to take account of the actual period the restriction was in place.
7. Is it necessary for a director or employee to notify the Revenue
Commissioners of details of restricted shares acquired?
As PAYE is deducted in respect of restricted shares acquired by a director or employee,
there is no obligation on the director or employee to notify the tax office of details of restricted
shares acquired.
8. Capital Gains Tax
An individual who acquires restricted shares is chargeable to capital gains tax on any
chargeable gain realised on the subsequent disposal of those shares.
The tax is due on the difference between –
(a) the sale price of the shares; and
(b) the acquisition cost of the shares.
Acquisition cost
The acquisition cost of the shares for CGT purposes is calculated as follows:
Shares acquired on exercise of a share option
Where the shares are issued on the exercise of the share option, the cost of acquisition is the
sum of the following:
•
the cost (if any) of the option,
•
the price paid for the shares on exercise of the option, and
•
the amount charged to income tax on the exercise of the option taking account of
any reduction in the amount of the charge and any additional amount charged on the
variation or lifting of the restriction.
Where the shares are already in existence at the time of exercise of the share option the cost
of acquisition is the market value of the shares at the time of exercise.
Shares acquired otherwise than on exercise of a share option
In the case of newly issued shares, the cost of acquisition is the sum of the following:
•
the price paid for the shares, and
•
the amount charged to income tax on the acquisition of the shares taking account of
any reduction in the amount of the charge and any additional amount charged on the
variation or lifting of the restriction.
Where the shares are already in existence, the cost of acquisition is the market value of the
shares at the time of acquisition.
See Examples 4 and 5 in the Appendix.
9.Examples
There are examples of the tax treatment of restricted shares in the Appendix.
10. Further Information
More detailed information on capital gains tax is contained in Leaflet CGT1
http://www.revenue.ie/en/tax/cgt/leaflets/cgt1.pdf
Further information on the general tax treatment of share options is contained in Leaflet IT72
http://www.revenue.ie/en/tax/it/leaflets/it72.pdf
Accessibility - If you are a person with a disability and require this leaflet in an alternative
format the Revenue Access Officer can be contacted at accessofficer@revenue.ie
This Leaflet is intended to describe the subject in general terms. As such, it does not attempt
to cover every issue which may arise in relation to the subject. It does not purport to be
a legal interpretation of the statutory provisions and consequently, responsibility cannot
be accepted for any liability incurred or loss suffered as a result of relying on any matter
published herein.
Revenue Commissioners
IT73 July 2014
APPENDIX
Example 1
On 30 January 2013, an employee is awarded 1,000 ordinary shares in his employing company
for nil consideration. The market value of the shares at that date is €10 per share. The employee
is prohibited from disposing of the shares for 4 years. All of the conditions outlined in Paragraph 4
of this leaflet are met.
Income Tax Charge on acquisition
Market Value of shares
Amount paid by employee
Gain to the employee
€10,000
nil
€10,000
Reduction in amount chargeable to income tax (40%)
€4,000
Amount chargeable to income tax for 2013
€6,000
Example 2
On 1 February 2012, an employee is awarded 1,000 ordinary shares in his employing company for
nil consideration. Under the terms of the award, the shares cannot be disposed of for a period of
5 years and 3 months. The market value of the shares at 1 February 2012 is €3 per share. All of
the conditions outlined in Paragraph 4 of this leaflet are met. On 30 June 2014, the restriction on
the disposal of the shares is lifted.
Income Tax Charge on acquisition
Market Value of shares
Amount paid by employee
€3,000
nil
Gain to the employee
€3,000
Reduction in amount chargeable to income tax (60%)
€1,800
Amount chargeable to income tax for 2012
€1,200
Removal of restriction - Revision of Income Tax Charge on acquisition
Market Value of shares
Amount paid by employee
Gain to the employee
Revised reduction in amount chargeable to income tax (20%)
€3,000
nil
€3,000
€600
Revised amount chargeable to income tax for 2012
€2,400
Amount previously charged
€1,200
Additional amount chargeable for 2012
€1,200
Example 3
On 1 February 2013, an employee is granted an option to acquire 1,000 shares in his employing
company at an option price of €2 per share. The option cannot be exercised before the expiry
of 12 months from the date of grant. Under the terms of the share option agreement, the shares
cannot be disposed of for a period of 3 years after the employee acquires the shares on the
exercise of his option. All of the conditions outlined in Paragraph 4 of this leaflet are met.
The employee exercises the option on 2 February 2014 and acquires the shares, which are newly
issued shares. The market value of the shares on that date is €4 per share.
Income Tax Charge on exercise of share option
Market Value of shares
€4,000
Amount paid by employee
€2,000
Gain to the employee
€2,000
Reduction in amount chargeable to income tax (30%)
€600
Amount chargeable to income tax for 2014
€1,400
Example 4
The facts are as in Example 1. The shares are sold after the 4-year period expires and the sales
proceeds are €15,000. The shares awarded to the employee are not newly issued shares.
Capital Gains Tax
Sale Proceeds
€15,000
Costs of acquisition
Market value of shares at date of acquisition
€10,000
Capital Gain
€5,000
Personal Exemption (if not already utilised)
€1,270
Chargeable Gain
€3,730
Tax due @ 33%
€1,230.90
Example 5
The facts are as in Example 3. The shares are sold after the 3-year period expires and the sales
proceeds are €6,000. The shares awarded to the employee are newly issued shares.
Capital Gains Tax
Sale Proceeds
€6,000
Costs of acquisition
Price paid by employee
€2,000
Amount charged to income tax
€1,400
Cost of option
Nil
Total
€3,400
Capital Gain
€2,600
Personal Exemption (if not already utilised)
€1,270
Chargeable Gain
€1,330
Tax due @ 33% €438.90
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