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Advanced Personal Taxes

Advanced Personal Taxes. Lecture 3 Chapter 3. SHARE OPTIONS. Original Revenue view (applies to pre 5/4/07 options) TB31 Resident individuals IT MV on grant less option price (can exercise > 7 years) s.128(5) MV less [cost option + tax on grant + option price] s.128 CGT Base cost :

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Advanced Personal Taxes

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  1. Advanced Personal Taxes Lecture 3 Chapter 3

  2. SHARE OPTIONS Original Revenue view (applies to pre 5/4/07 options)TB31 Resident individuals IT MV on grant less option price (can exercise > 7 years) s.128(5) MV less [cost option + tax on grant + option price] s.128 CGT Base cost : cost of option (usually NIL) plus s.540(4) option price plus s.552(1) income tax charge s.128

  3. SHARE OPTIONS Non-resident individuals IT If resident at date of grant – liable on grant & exercise (even if no longer resident when exercise) If non-resident on grant – no Irish IT provided no connection between Irish employment and grant and no tax planning CGT ordinary rules apply – if not resident/ordinarily resident no Irish CGT unless shares are “specified” assets If non-domiciled and shares not Irish/UK registered only liable to Irish CGT if remit proceeds Base cost = cost of option + option price + income tax charge (if any)

  4. SHARE OPTIONS Amended Revenue view – following Mansworth v JelleyTB63 s.547(1)(c)(iii) where asset acquired in consideration for or recognition of services/past services of office or employment - deemed acquired at market value - applies to the option, but not the shares [option MV=NIL] s.547(3) s.547(1) doesn’t apply if: there is no corresponding disposal of the asset AND: there is no consideration for the asset, or the consideration is less than market value - applies to the shares acquired

  5. SHARE OPTIONS Base cost of shares for CGT is therefore: Cost of option (i.e. MV – s.547(1)(c)(iii)) usually NIL Option price paid for shares s.128 income tax charge (if any) tax on exercise Mansworth v Jelley [Revenue view] • was non-resident when acquired options – no IT charge • if had been IT charge – would be no CGT (sold immediately) UK Court of Appeal held base cost was market value of shares: • acquisition of shares and exercise a single transaction • single transaction was aquisitionby reason of employment • shares not newly issued (equivalent of s.547(3) didn’t apply)

  6. SHARE OPTIONS Where existing shares are issued on the exercise of a share option: - s.547(3) does not apply - the base cost for CGT is the market value of the shares

  7. SHARE OPTIONS Legislative change – s.16(1) FA 2005 s.128(2) adds: “... and shall be so chargeable notwithstanding that he or she was not resident in the State on the date on which the right was obtained” The amendment to s.128(3) came into operation by Ministerial Order on 5 April 2007 The Revenue issued Statement of Practice IT-1-07 in May 2007

  8. SHARE OPTIONS Questions

  9. SHARE OPTIONS No charge under s.128 will arise where: • the individual is non-resident when the option is granted • the individual’s emoluments are not within the charge to Irish tax (or are relieved from Irish tax) • none of the duties of the employment referable to the grant of the option are exercised in Ireland s.128(1)(b)(ii) provides that no charge arises on the option: “if section 71(3) does not apply in charging to tax the profits or gains of that office or employment” Revenue view: this means the “full amount” of the profits or gains - this is highly debatable

  10. SHARE OPTIONS Irish resident when option exercised (but not when granted) Where: - an Irish resident person makes a gain on a share option (either on grant or exercise), and - he/she is also liable to tax in a DTA country (i.e. employment is exercised to some extent there) - both countries tax the same income/gain Ireland will grant a credit for the foreign tax suffered

  11. SHARE OPTIONS To establish the extent to which the employment is exercised in the other country (for credit purposes): • estimate the period of employment the share option rewards - look at all circumstances, terms and conditions of option - not normally related to period after vesting period - distinguish between vesting and blocking periods - normally rewarding future, not past, services • apportion over working days in each country during period - apportionment on straight line basis if none of this period relates to the work in Ireland – no Irish income tax is charged (in DTA country for all of vesting period)

  12. SHARE OPTIONS CGT will only be chargeable in the country of residence on disposal – Article 13 Where resident in Ireland on disposal, base cost is: - option cost - option price - s.128 charge to income tax - foreign charge to income tax (provided the base cost does not exceed what it would have been if all of the exercise were chargeable under s.128)

  13. SHARE OPTIONS Irish resident when option granted (but not when exercised) Where: - an Irish resident person granted a share option - he/she exercises the option while resident in a DTA country Ireland will only impose a s.128 charge on part of gain relating to the period of option-related employment in Ireland This is apportioned over working days in each country during the period on a straight-line basis No Irish CGT will arise as Article 13 provides CG T can only be charged in the country of residence (NOTE: recent DTAs allow for CGT charge where remain ordinarily resident)

  14. SHARE OPTIONS Irish resident when option granted (but not when exercised) Where: - an Irish resident person granted a share option - he/she exercises the option while resident in a non-DTA country Ireland will impose a s.128 charge the full gain No credit will be allowed for foreign income tax, though a deduction may be available Irish CGT might arise (if the person were ordinarily resident and domiciled). A deduction may arise for any foreign CGT paid

  15. SHARE OPTIONS Not Irish resident when option granted or exercised, but some duties of employment exercised here in the interim Where: - a DTA resident person granted a share option - he/she exercises the option while resident in a DTA country Ireland will only impose a s.128 charge on part of gain relating to any period of option-related employment in Ireland This is apportioned over working days in each country during the period on a straight-line basis No Irish CGT will arise as Article 13 provides CG T can only be charged in the country of residence

  16. SHARE OPTIONS Options granted by virtue of directorship Where options are granted to a director of an Irish company by virtue of his directorship (and not his employment): - Article 16 of the DTA applies - time apportionment is not necessary – the full gain may be taxed in both countries Note: the Ireland/US treaty is slightly different. No Irish charge to tax is allowed in relation to fees from board meetings held in the US

  17. SHARE OPTIONS “However, while the allocation will be used for purposes of determining on which part of the income the State of residence is obliged to give credit, it will not operate to restrict the taxing rights of that State except, of course, if such restriction results from the fact that relief of double taxation is provided through the exemption method” OECD, ‘Cross Border Income Tax Issues Arising from Employee Stock Option Plans’ (23 August 2004) Paragraph 33

  18. CONVERTIBLE SECURITIES 128C (3) - section applies where: employee/director acquires “employment-related securities” - shares, debentures, loan stock, quoted/traded options, options to acquire shares under tax avoidance arrangement, instruments giving rights (including right to sell) over other people’s shares [128C (1)] - acquired as employee/director of company/another company those employment-related securities are: “convertible securities” or an interest in “convertible securities”

  19. CONVERTIBLE SECURITIES 128C (4) - “convertible securities” means: holder entitled (immediately/in future, conditionally/unconditionally) to convert securities into: - securities of different description - money or money’s worth contract/arrangement/condition to grant right of conversion in certain circumstances contract/arrangement/condition provides for conversion by someone other than the holder of the securities

  20. CONVERTIBLE SECURITIES 128C (1) - “interest in convertible securities” means: a interest in the securities that is less than full beneficial ownership an interest in the proceeds of the sale of the securities doesn’t include a right to acquire the securities (e.g. shares held in a form of trust)

  21. CONVERTIBLE SECURITIES 128C (2) - section also applies where: any other person acquires convertible securities by virtue of the director/employee’s employment (including a former or prospective employment) (e.g. securities given to spouse/children by employer)

  22. CONVERTIBLE SECURITIES 128C (11) - section will not apply where: employment not taxable at time of acquisition of securities (e.g. convertible shares granted at time not resident in Ireland) securities are shares in company of particular class all shares in class are convertible an event happens (i.e. a “chargeable event”) where: all the shares convert right of conversion of all shares is released for payment all the shares are sold while still convertible money received in respect of right of conversion for all shares before that event, majority of company’s shares not convertible

  23. CONVERTIBLE SECURITIES In essence, section applies where: employee/director gets shares in employer /(other) company shares can be converted into different shares/money Section also applies where: convertible shares given to relative of employee/director conversion is conditional on some event happening in future arrangement to grant right of conversion at some future point provision for shares to be converted by someone else employee/director doesn’t have full beneficial ownership of shares employee/director only has interest in proceeds of sale of shares

  24. CONVERTIBLE SECURITIES 128C (5)(a) – tax on grant of convertible securities: for purposes of: s.112 – taxation on grant of shares as emolument (perk) s.128 – taxation on grant/exercise of share option s.122A – taxation on notional loan if shares not fully paid up if shares are convertible, market value of shares determined as if they were not convertible

  25. CONVERTIBLE SECURITIES 128C (5)(a) – Example: Granted 1,000 “B” shares: no rights to dividends, vote or share in distribution on winding-up convertible in 3 years into “A” shares (with full rights) Value “B” shares on grant (including right of conversion) €10,000 Value “B” shares on grant (without right of conversion) € 100 Cost of “B” shares to employee NIL Value “A” shares on date of grant €15,000

  26. CONVERTIBLE SECURITIES S.112 charge – Schedule E on €100 at marginal rate

  27. CONVERTIBLE SECURITIES 128C (5)(b) – tax on grant of convertible securities: if convertible securities acquired under tax avoidance scheme market value of shares determined: as if the right to convert had already been granted (where there is an agreement for a future grant of the right) as if the decision to convert had already been taken (where the right to convert is held by another person) as if securities are convertible immediately and unconditionally - so as to obtain maximum gain - without giving consideration/incurring expenses only applies if this would yield a higher market value

  28. CONVERTIBLE SECURITIES 128C (5)(b) - Example: Granted 1,000 “B” shares under tax avoidance scheme: no rights to dividends, vote or share in distribution on winding-up convertible in 3 years into “A” shares (with full rights) Value “B” shares on grant (including right of conversion) €10,000 Value “B” shares on grant (without right of conversion) € 100 Cost of “B” shares to employee NIL Value “B” shares if unconditionally convertible today for no consideration (i.e. value of “A” shares today) €15,000

  29. CONVERTIBLE SECURITIES S.112 charge – Schedule E on €15,000 at marginal rate

  30. CONVERTIBLE SECURITIES 128C (6) - charging section: Where: employee/director has beneficial interest in employment-related securities and a “chargeable event” occurs - charge under Schedule E on the “chargeable amount”

  31. CONVERTIBLE SECURITIES 128C (7) – “chargeable event” means: conversion of the securities into securities of a different type (where employee/director beneficial owner of different securities) release of the right of conversion for consideration disposal of securities while they are “convertible securities” (i.e. where present/future, conditional/unconditional right to convert) any other benefit in money/money’s worth in connection with entitlement to convert (other than securities acquired on conversion/consideration for release right of conversion/consideration for sale of securities)

  32. CONVERTIBLE SECURITIES 128C (8)(a) – “chargeable amount” means: A gain realised on chargeable event - B consideration given for entitlement to convert (only if and to the extent that consideration given for acquisition of securities exceeds market value at acquisition assuming not convertible securities – 129C(9)) any other expenditure in connection with conversion/disposal/release of rights/other benefit No amount to be deducted more than once (129C(10))

  33. CONVERTIBLE SECURITIES 128C (8)(b)(i) - “gain realised on chargeable event” means: Where securities are converted to securities of different description C market value of securities into which securities are converted (valued as if they were not themselves convertible) - D market value of employment-related securities (assuming they were not convertible) + E consideration given for conversion

  34. CONVERTIBLE SECURITIES 128C (8)(b)(i) - Example Granted 1,000 “B” shares: no rights to dividends, vote or share in distribution on winding-up convertible in 3 years into “A” shares (with full rights) on payment of €2,000 Value “B” shares on grant (including right of conversion) €10,000 Value “B” shares on grant (without right of conversion) € 100 Cost of “B” shares to employee € 1,000 Value “A” shares on date of grant of “B” shares €15,000

  35. CONVERTIBLE SECURITIES S.112 charge on grant - NIL (paid in excess of MV - €100 - for shares)

  36. CONVERTIBLE SECURITIES 128C (8)(b)(i) - Example 3 years later – “B” shares are converted into “A” shares Value “A” shares on date of conversion of “B” shares €50,000 Value “B” shares (if not convertible) € 200 Amount paid for conversion € 2,000

  37. CONVERTIBLE SECURITIES 128C (8)(b)(i) - Example Chargeable amount (taxable under Schedule E): A = C (MV “A” shares date conversion) €50,000 - D (MV “B” shares if not convertible) € 200 + E (consideration for conversion) €2,000(€2,200) = gain €47,800 - B (consideration for entitlement to convert) €1,000 (€ 100)(€ 900) Taxable €46,800

  38. CONVERTIBLE SECURITIES 128C (8)(c) – convertible securities where 128C(5)(a) does not apply Where: employment-related securities acquired under tax avoidance scheme market value of securities at grant is value as if convertible immediately and unconditionally chargeable amount reduced by: H Excess of MV on grant over what would have been if not a tax avoidance transaction - I Total of previous reduction in chargeable amount under this subsection

  39. CONVERTIBLE SECURITIES 128C (8)(c) - Example Granted 1,000 “B” shares: no rights to dividends, vote or share in distribution on winding-up convertible in 3 years into “A” shares (with full rights) on payment of €2,000 Value “B” shares on grant (including right of conversion) €10,000 Value “B” shares on grant (without right of conversion) € 100 Cost of “B” shares to employee € 1,000 Value “A” shares on date of grant of “B” shares €15,000

  40. CONVERTIBLE SECURITIES S.112 charge on grant value if immediately convertible to “A” shares at no cost €15,000 less amount paid for shares on grant (€ 1,000) Taxable under section 112 €14,000

  41. CONVERTIBLE SECURITIES 128C (8)(c) - Example 3 years later – “B” shares are converted into “A” shares Value “A” shares on date of conversion of “B” shares €50,000 Value “B” shares (if not convertible) € 200 Amount paid for conversion € 2,000

  42. CONVERTIBLE SECURITIES 128C (8)(c) - Example Chargeable amount (taxable under Schedule E): A = C (MV “A” shares date conversion) €50,000 - D (MV “B” shares if not convertible) € 200 + E (consideration for conversion) €2,000(€2,200) = gain €47,800 - B (consideration for entitlement to convert) €1,000 (€ 100)(€ 900) €46,800

  43. CONVERTIBLE SECURITIES 128C (8)(c) - Example Chargeable amount under 128C(8)(b)(i) €46,800 - H (MV shares on grant) € 15,000 (MV shares on grant if no tax avoidance) (€ 100) €14,900 less consideration for entitlement to convert (already deducted – 128C(10)) € 900(€14,000) €32,800 - I (total previous reductions under 128C(8)(c)) NIL Taxable €32,800

  44. PREVIOUS EXAM QUESTIONS Share options and residence question: Question 1(b) May 2010 Share schemes question: Question 3(a) May 2010 Restricted shares question: Question 6(b) May 2011 Forfeitable shares question: Question 6(a) September 2011

  45. Next session Next session is on: Sunday 8 January 10am – 2pm Read: Chapter 4 – pre-reading and section of the manual Chapter 5 – pre-reading and section of the manual Last 2 interim exams – all sections

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