particularly listed companies, offer employees so-called share options (also
referred to as share incentive schemes or employee share ownership plans
(ESOPs)) as a form of further remuneration and even as an employee retention
mechanism. In unpacking and understanding the tax consequences linked to ESOPs,
the provisions of section 8C of the Income Tax Act need to be considered.
Section 8C replaced section 8A, which was previously the taxing provision in
relation to ESOPs, in 2004. This article considers some of the more practical
challenges when dealing with share schemes.
seeks to tax the gain
with regard to the vesting
in a year of
assessment of an equity instrument
acquired by an employee if such an
equity instrument was acquired by the employee by virtue of his employment or
the office of a director.
defines an “equity instrument” as:
… a share
or a member’s interest in a company, and includes—
option to acquire such a share, part of a share or member’s interest;
financial instrument that is convertible to a share or member’s interest; and
contractual right or obligation, the value of which is determined directly or
indirectly with reference to a share or member’s interest;”
instances, the equity instrument which is the subject matter of section 8C
(i.e. share options) would be the right of an employee to acquire shares in the
company, subject to certain requirements being met, which are typically catered
for in the ESOP Rules of the Company. This would typically include the employee
staying in the employment of the company for a fixed period of time and not
breaching any of the conduct policies of the company. Typically companies allow
equity instruments to vest every 3 years.
instruments can also be so-called phantom share options, where the rights are
purely contractual and will only ever grant the employee the right to receive
the after-tax gain in relation to the equity instrument, with the price of the
equity instrument, pegged to the value of the shares in the company, and never
the actual shares in the company.
for section 8C purposes, envisages that the equity
(as defined) in question is restricted, and refers to an equity
instrument which is, amongst others:
- subject to restrictions that prevent the employee from freely
disposing of the shares at market value. (This envisages that the employee
should have the right to dispose of the shares to any party at market value.);
- subject to restrictions which could
result in the employee forfeiting ownership or the right to acquire, other than
at market value.
tax trigger for section 8C is “vesting”, which is defined for purposes of that
section, it is only these defined section 8C vesting events which will trigger
the inclusion of a gain (or loss).
In terms of
Section 8C, instruments vest when a “restricted equity instrument” becomes an
“unrestricted equity instrument”, which occurs on the earliest of, amongst
others, the following events:
- when all restrictions cease to have effect; or
- immediately before the hold of the share options disposes of
the restricted equity instrument, unless certain equity instrument swap
exclusions find application; or
- immediately after that equity instrument, which is an option
or a financial instrument, terminates (otherwise than by the exercise or
conversion of that equity instrument); or
- immediately before the holder of the
share options dies, if all the restrictions relating to that equity instrument
are or may be lifted on or after death.
of the above is that in most circumstances a holder of share options will be
taxed as soon as all restrictions are lifted, even though he/she may not have
actually disposed of the equity instrument (being the subject matter of the
share option) at that time. This could potentially lead to a liquidity problem
for the employees. Practically, companies granting these share options should
inform their employees of section 8C’s workings and the practical difficulties
pertaining to liquidity.
have complicated and sometimes unintended tax consequences and it is advisable
to get professional assistance prior to the implementation of ESOPs.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)