Ireland’s Finance Bill 2023, published 19 October 2023, sets out a proposal whereby the taxation of gains realised on the exercise, assignment, or release of a right to acquire shares or other assets will no longer be subject to self-assessment, but instead will be taxed through the PAYE system. Therefore, effective 1 January 2024, the collection of taxes on gains from the exercise of share options will occur through the payroll process.
Under the existing self-assessment system, known as the Relevant Tax on Share Options (RTO)) system, employees were responsible for settling the income tax, Universal Social Charge (USC), and employee Pay Related Social Insurance (PRSI) liabilities within 30 days of the exercise of an option. The employee was also obliged to file a personal tax return (Form 11) as a chargeable person in the year the share options were exercised.
The repeal of the RTSO system from 1 January 2024 has shifted the responsibility for collecting taxes on these share option gains to the employer, who will now be required to account for the relevant income taxes and PRSI through the PAYE system. This is in addition to the employer’s current obligation to report the grant, exercise, assignment, or release of a share options on or before 31 March of the following tax year.
This measure will require employers to put in place a process to track all share option activity, as they will need to calculate and report these gains as part of their real-time PAYE reporting submissions.
Consideration will also need to be given to introducing a “sell to cover” mechanism as part of the share option exercise process to ensure employees have sufficient funds to cover the payroll taxes due on the gain.
Gains arising on or before 31 December 2023 will remain subject to the RTSO self-assessment process.
BDO in Ireland