Deirdre Clune
Question:215 Ms Clune asked the Minister for Finance if he will revise the Finance Act, 2001, to allow capital gains tax treatment to stock options rather than benefit-in-kind; and if he will make a statement on the matter. [4703/02]
Written Answers. - Tax Code.
The general situation is that the gain arising from shares acquired as a result of employee share options is chargeable partly to income tax – on the difference between the price paid for the shares and the market value at date of exercise of the option; and partly to capital gains tax – on the difference between the market value at the date of exercise and the proceeds received on any subsequent sale of the shares. The case had been made to me that the gain from such shares was more in the nature of a capital receipt than income and should, therefore, be chargeable to capital gains tax only. It was argued this treatment would help companies recruit and reward highly skilled and internationally mobile staff as well as facilitating participation by all employees in the fortunes of the company they work for.
Accordingly, last year I introduced an amended tax treatment of share options that provided for favourable tax treatment whereby, on disposal, the gain from shares acquired as a result of employee share options would be chargeable to capital gains tax only, providing certain conditions were satisfied. This was done following extensive and prolonged consultation with representative bodies and relevant state agencies.
To receive approval from the Revenue Commissioners for such favourable tax treatment, a share option scheme must be open to all employees and must provide that employees be eligible to participate on similar terms. There is a key employee provision, whereby options can be granted without similar terms conditions; no more than 30% of the total number of shares over which rights are granted in any year can be used for the key employee element and employees cannot participate in both elements of the scheme in the same year. These "all employee-similar terms" rules are a feature of the other tax relieved employee share schemes – approved profit sharing schemes, employee share ownership plans and save as you earn schemes. There is also a minimum retention period of three years between the time the option is granted and the time the shares may be sold by the employee. As with all tax reliefs, I will continue to monitor it to ascertain that it is fulfilling the aims for which it was introduced.
I understand the Deputy is concerned about a situation where the value of the shares held is less than the tax liability which arises on exercise of the option. This tax liability arises, at that stage, because the taxpayer has been given a benefit by their employer equal to the difference between the market value of the shares at exercise and the price the employee paid when exercising. The taxpayer is then the owner of the shares and has the choice of selling or retaining them. The difficulties referred to by the Deputy arise not because of an unusual or anomalous application of tax law, but wholly as a result of the holding of shares in a declining equity market. Equity investment is a risky business and the Exchequer cannot be expected to underwrite the negative impact on taxpayers of such capital losses.
Having said that, I should point out that provisions in Finance Act, 2000 – section 128A of the TCA 1997 – allows the deferral of payment of the income tax charge, where an option is exercised on or after 6 April 2000, for a period of seven years or until the shares are sold, whichever is the earlier. Clearly this deferral option is not available where the shares are sold. Where the deferral option is used, it is possible that shares may increase in value in the future. If an individual is not in a position to pay the tax charge it would be open to that individual to seek to negotiate with the Revenue Commissioners to pay the tax charge by instalment. There are no fixed rules in relation to instalment payments; however, I understand that Revenue will agree instalment schemes in hardship cases.