Employee share option schemes

Rules

Approved Profit Sharing Schemes

Approved Profit Sharing Schemes allow an employer to give an employee shares in the company up to a maximum value of €12,700 per year tax-free. Approved Profit Sharing Schemes are subject to certain conditions set out in legislation and administered by the Revenue Commissioners.

Providing the scheme meets the required conditions, an employee will pay no tax on shares up to a maximum value of €12,700 per year. The employer must hold the shares for a period of time (called the "retention period") and the employee must not dispose of the shares before three years. If an employee disposes of shares before this time, he or she is liable to pay income tax on whichever is the lower of the following:

• The market value of the shares when they were given to the employee or,
• The value of the shares at the time of sale

Approved Profit Sharing Schemes are subject to a number of conditions that should be checked with the Revenue Commissioners. More information can be found in Revenue's publication Approved Profit Sharing Schemes IT62 (pdf).

Stock options

Employee stock options are shares in the company that are offered to an employee at a preferential price. Clearly there is a tax benefit to the employee when the preferential price is less than the market value.

The amount of tax an employee is expected to pay depends on whether the share options are part of an "Approved Share Option Scheme" or an Unapproved Share Option Scheme.

Approved Share Options Scheme rules came into effect in 2001. Under these rules, if an employee purchases shares from a company at preferential price then he or she becomes liable for Capital Gains Tax of 30% if he or she sells the shares. The Capital Gains Tax is charged on the difference between the purchase price and the subsequent sale price of the shares.

Unapproved Share Option Schemes require the employee to pay tax on the difference between the market value of the shares and the purchase price of the shares at the time the employee exercises the right to buy them. If the employee subsequently sells the shares, he or she is also liable for Capital Gains Tax if the shares have increased in value from the time of purchase to the time of sale.

Tax in chargeable on all dividends arising from profit sharing schemes and share option schemes.

It is important to check with the Revenue Commissioners and your employer as to what rules apply to your share options and when you are liable to pay tax, if any. You can find information in Revenue's publication A Guide to Savings-Related Share Option Schemes (pdf).