Taxation of employment related shares
Employee Share Purchase Plans (ESPPs)
Many companies, particularly subsidiaries or branches of United States (US) corporations, operate an ESPP.
An ESPP is a way for you to purchase shares in your company through payroll deductions, sometimes at a discounted price. The discount allowed is normally 15% of the market value of the shares on either the:
- first day of the offer period
- or
- last day of the offer period.
The discount is applied to the market value on whichever day had the lower value. The offer period is normally six months.
Main features
Once you have enrolled in the plan, your company will collect your payroll contributions to purchase shares on a specific date.
Generally, there will be a maximum percentage of salary that you can invest in the plan. You decide how much net salary or wages you wish to contribute to the plan. You contribute the same amount each month for the six-month period. Your contributions are held on your behalf by the company, usually in a non-interest-bearing account. At the end of the six months, the contributions can be used to purchase shares for you.
Taxation of ESPPs
You will be charged tax on the discount allowed by the company as a benefit derived from your employment. The amount chargeable is the difference between:
- the market value of the shares when they are purchased on your behalf
- and
- the amount you pay for those shares.
You will pay Income Tax, Universal Social Charge (USC) and Pay Related Social Insurance (PRSI) on the amount of the discount. Your employer will make the necessary deductions through payroll and pay the tax directly to the Collector-General.
Note
Some ESPPs might be drafted in such a manner that would make them share option plans. This will depend on each individual plan.
If you exercise a share option before 1 January 2024, you must report details of any gain you make to Revenue and pay any Income Tax liability directly. Your employer will not deduct Income Tax on your behalf through payroll.
If you exercise a share option on or after 1 January 2024, your employer will deduct any Income Tax liability through payroll.
Information about the treatment of unapproved share options is outlined in Unapproved share option schemes.
- Example 1
Lucy works for an Irish branch of a US corporation. Under her employer’s ESPP, she can purchase shares in the company at a discounted price of 85% of the market value. The ESPP is not treated as a share option plan.
Exchange Rate is €1 = $1.10.
She contributes the same amount each month for six months, which is held in a non-interest-bearing account. Shares were trading at €54 ($60) at the beginning of the six-month offer period on the stock exchange. At the end of the six-month offer period, they are trading at €60 ($66).
At the end of the six months, her contributions are used to buy shares at €46 per share (85% of €54). She must pay tax on the discount amount of €14 per share (€60 less €46). Her employer makes the deduction through the payroll system.
The cost of acquisition for Capital Gains Tax (CGT) purposes will be €60 per share.
- Example 2
Chris works for an Irish branch of a US corporation. Under his employer's ESPP, he has the option to purchase company shares at a discounted price at the end of the contribution period. This discounted price is 85% of the market value. The ESPP is treated as a share option plan.
Exchange Rate is €1 = $1.10.
He contributes the same amount each month for six months, which is held in a non-interest-bearing account. Shares were trading as €100 ($110) at the beginning of the six-month offer period on the stock exchange. At the end of the six-month offer period, they are trading at €120 ($132).
At the end of the six months Chris opts to use the contributions to buy shares at €85 per share (85% of €100). He needs to pay tax on the discount amount of €35 per share (€120 less €85). He needs to report details of any gain he has made directly to Revenue and pay any tax liability due.
The cost of acquisition for CGT purposes will be €120 per share.
Capital Gains Tax (CGT)
If you dispose of your shares, you may be liable for CGT. You must report this disposal to Revenue, even if no tax is due. Your employer will not deduct any tax or report the disposal for you.
Next: Growth shares (hurdle or flowering shares)