Revenue Note for Guidance
A charge to income tax under Schedule E is imposed on any gain realised by a director or employee from a right granted to him/her, by reason of his/her office or employment, to acquire shares or other assets in a company. The person in receipt of such a gain is, generally, to be regarded as a chargeable person under self-assessment for the year in which the gain was realised. The amount chargeable is the difference between the market value of the asset at the time of acquisition and the aggregate amount or value of the consideration, if any, given for the asset and for the grant of the right to acquire the asset.
The section applies to rights granted on or after 6 April 1986 where the recipient is resident in the State at the time the right is granted. With effect from 5 April 2007 the section also applies to cases where the recipient of the right is not resident in the State when the right is granted.
A company which grants such rights to its directors or employees is obliged to return this information to the Revenue Commissioners. In the event that the company is not resident in the State but operates here through a subsidiary, branch or agency, the responsibility for making the return will rest on the subsidiary or the company’s representative in the State.
(1) “branch or agency” has the same meaning as in section 4, i.e. “any factorship, agency, receivership, branch or management”.
“company” is a company for the purposes of the Corporation Tax Acts (see section 4).
“director” is, broadly, any person occupying the position of director and includes a manager and any person who is to be or has been a director.
“employee” is, broadly, an officer, director or manager of the company and includes a person who is to be or was an employee.
“right” is the right to acquire any asset or assets, including shares, in the company.
“market value” is the price which an asset or assets might reasonably be expected to fetch on a sale in the open market.
“shares” includes securities and stocks.
(1)(b)(i) References to the release of a right include references to agreeing to the restriction of a right.
(1)(b)(ii) The scope of the charge is limited to directors and employees who are chargeable to tax (under Schedule E or D) on the full amount of their emoluments and who are granted the right to acquire shares or other assets by reason of their office or employment. Individuals chargeable on the remittance basis of taxation under section 71(3) are excluded. The charge also arises where a right is granted by reason of an individual’s office or employment but which comes to him/her through another person or where it is granted to him/her before the commencement of the employment or after the cessation of the employment.
(2) A charge to income tax arises where a director or employee realises a gain from the exercise, assignment or release of a right obtained by him/her on or after 6 April 1986. The gain is taxed under Schedule E in the year of assessment in which the gain is realised. With effect from 5 April 2007, the charge applies irrespective of whether or not the director or employee was resident in Ireland at the time the right was detained.
(2A) Persons in receipt of share options which arise by virtue of their being directors or employees of a company are chargeable persons for the purposes of Part 41A (Self Assessment) other than where the person is exempted from the requirement to make a tax return under Self Assessment.
(3) Where a charge to tax arises on a gain realised by the exercise of a right, no charge to tax arises under any other provision of the Tax Acts. An exception to this rule arises, however, where a right is capable of being exercised more than 7 years after it is obtained – see subsection (5).
(4) The gain charged under this section is calculated in different ways depending on whether the gain arises from the exercise of a right or from the assignment or release of a right. It is also provided that, in calculating the gain, the performance of the grantee of his/her duties in connection with his/her office or employment is not regarded as part of the consideration given by him/her for the grant of the right. In addition, only one deduction is allowed in respect of the consideration given for the grant of the right.
Where the gain is realised by the exercise of any right, the gain is the difference between the market value of the asset at the time it is acquired and the aggregate amount or value of the consideration, if any, given for the asset and for the grant of the right.
Where the gain is realised by the assignment or release of any right, the gain is the difference between the amount or value of the consideration for the assignment or release and the amount or value given for the grant of the right.
Any consideration paid by a person for the grant of a right may be apportioned by an inspector between any assets which may be acquired by the exercise of the right. Similarly, where the consideration covers both the grant and something else, the consideration may also be apportioned by the inspector between the grant of the right and that something else.
(5)(a) Where a right need not be exercised for more than 7 years, subsection (3) does not prevent the charging of tax under some other provision of the Tax Acts (for example, section 112) in respect of the actual receipt of the right. Any income tax so charged on the receipt of the right is deductible from any income tax which is subsequently charged under this section when the right is exercised, assigned or released.
(5)(b) The value of any right charged under any other provision of the Tax Acts is to be not less than the market value, at the time the right is obtained, of the asset or assets which may be acquired by the exercise of the right (or the market value of any asset or assets for which the asset or assets that can be acquired by the exercise of the right may be exchanged). The value so determined is reduced by any consideration payable for the asset or assets.
(6) A director or employee is chargeable in respect of a gain realised by virtue of a right obtained by reason of his/her employment even though the gain may be realised by some other person. This applies where —
In such cases the realised gain is treated as reduced by the amount of any gain realised by the previous holder on an assignment of the right. (A gain realised by another person includes a gain realised on the exercise of a right by the director or employee, where it is exercised by the director or employee as nominee or bare trustee, or otherwise on behalf of the other person).
(7) Where a director or employee is divested of a right following his/her bankruptcy or otherwise divested of the right by operation of law, he/she is not chargeable to tax in respect of a gain realised by some other person from the exercise of the right. Instead, the assessment in respect of the gain is made under Case IV of Schedule D on the other person.
(8) & (9) Where rights are exchanged between directors and employees or a company grants a new right in exchange for the surrender of an old right, the new right and the old right are looked at as one for the purpose of the charge to tax under this section. For the purposes of calculating a gain, if any, arising from the exercise of the new right, the value of the old right is not treated as part of the acquisition cost of the new right, but account is taken of any consideration given for the grant of the old right to the extent that it has not been offset at the time of its assignment or release by any consideration other than the receipt of the new right. These provisions also apply where exchanged rights are acquired by means of a series of transactions.
The operation of subsection (8) does not prevent a charge arising under this section on the exercise of the original right (where, for example, as part of a scheme or arrangement, the purpose or one of the main purposes of which is the avoidance of tax, it is the original right and not the new right that is exercised, and the director or employee benefits from the exercise of the original right).
(10) Where shares acquired under a right are disposed of, the amount on which income tax is charged is added to the acquisition price in computing the amount on which capital gains tax is chargeable.
(11) Companies must provide information to Revenue about the grant, assignment or release of rights or the allotment of shares or the transfer of any asset under a right granted. Such information is to be delivered in an electronic format approved by the Revenue Commissioners not later than 31 March in the tax year following that in which such an event takes place.
(12) Where the person granting rights to acquire shares or other assets is not resident in Ireland, and the person in receipt of the rights is a director or employee of a company which either—
then the return of particulars to the relevant inspector must be made by either the resident company or, if the company is not resident here, by the company’s agent, manager, factor or other representative.
Relevant Date: Finance Act 2019
