Saturday 1 October 2016

State took €118m in 'crazy' tax on stock options

Published 19/07/2015 | 02:30

The tax treatment of share options is seen as important to entrepreneurs because start-ups use them as an alternative to cash payments to attract employees
The tax treatment of share options is seen as important to entrepreneurs because start-ups use them as an alternative to cash payments to attract employees

A tax on exercised share options that must be paid within 30 days even if the shares haven't been sold netted the Exchequer €118m last year, according to figures released by the Revenue Commissioners to the Sunday Independent.

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The figures shed light on the hole that would be left in the public finances if it were abolished.

The tax was recently criticised by Enterprise Ireland chairman Terence O'Rourke, who said the Revenue's treatment of share options led to "a crazy situation".

"It's not a tax-efficient structure if you compare with other countries, the Irish structure is one that requires cash payments at an earlier stage when there isn't cash available from the value of the shares. There are smarter ways of doing that than what we have at the moment, so that needs to change for sure," Mr O'Rourke told the Sunday Independent.

"I came across a guy a few years ago - I don't know if it's the current tax regime or not - but he made a lot of money on paper on share options, had a big tax charge, and had no cash. And he actually had to remortgage his house... and move in with his parents to pay the tax charge".

A share option is a right granted by a company to its employees or directors to acquire shares in the company or in another company at a pre-determined price. The employee or director is not given shares outright but is given the right to acquire them at a fixed price. In some cases, the employee or director will have to pay something for the option itself.

When a person exercises a share option and acquires shares for less than the market value, they are liable to income tax on the difference between the market value of the shares and the price paid. Capital gains accrued between the exercise of the options and the sale of shares are also liable for capital gains tax.

The tax treatment of share options is seen as important to entrepreneurs because start-ups use them as an alternative to cash payments to attract employees.

"The more critical thing in share options is when people are trying to incentivise their employees, to say: 'Listen, stick with us. We can't pay you very much because we're growing, but we will be giving you shares in the company if it goes well," Mr O'Rourke said.

Revenue said the tax pulled in €60m in 2011, €77m in 2012 and €86m in 2013.

The Government's public consultation on tax barriers to entrepreneurship to "assess what is and is not working as well as considering options to better incentivise entrepreneurs", ended on Tuesday.

Issues identified will form part of Finance Minister Michael Noonan's considerations ahead of the next Budget, the Government said.

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