How to pay tax on Employee Share Purchase Plans in Ireland

If you’re lucky enough to work for an employer who grants you company shares at a discount as an employment benefit, you need to understand your tax liabilities and responsibilities, or you could face penalties and interest from Revenue. This post goes into how to pay tax on employee share purchase plans (ESPP) in Ireland.

Mr. MH used to get shares from his company and we both found the taxes really hard to understand at the time. We have since figured it out and once you do it once, it makes a lot more sense. I’m hoping that by writing down our experience we can de-mystify the filing of taxes.

Filing taxes can be scary and frustrating. Tax guides use all kinds of technical jargon and you often cannot get the right answer unless you ask a very specific question which you already half know the answer to based on hours of trying to decipher tax language.

That said, it has taken me some time to come to this conclusion but in all my years of filing my own taxes (in Canada it is not PAYE and all individuals file taxes every year), I have finally come to be less afraid of the taxman and of getting something wrong.

My latest ethos is: as long as you file and pay what you think is due based on your best assessment, then at least you will not have any penalties for late filing and you will have less interest due if you get the calculations wrong.

Also Revenue can be very helpful if you have some specific questions that you need help with. Either write to them in your MyEnquiries in ROS or call them to get validation that you are on the right track.

What is an employee share purchase plan (ESPP)?

As a benefit or bonus, your company might give you shares, either at a discount or in their entirety as a bonus. I’m not sure if the bonus shares are taxed at source but the discounted shares usually aren’t.

As far as I know, these are classed as “ordinary shares”. If you are awarded shares of any other class (preference, redeemable, deferred etc), this article may not give you what you are looking for. For information on other stock classes and tax calculations, check out the linked articles.

The issue with receiving these shares in a pay as you earn (PAYE) tax culture is that many people avail of these share options and are oblivious to the need to file and pay taxes on them not only when they are sold but also when they are purchased.

How discounted shares work

I suspect different employers work this differently but in our case, Mr. MH set aside a percentage of his gross salary each month to go towards the purchase of company shares at a discount.

This money did not purchase shares each pay period. Instead they go into a savings pot and the company purchases shares under this scheme at a set schedule, typically twice a year.

When the company purchases the shares under this scheme it is called “exercised”.

The price you get is a set percentage lower than market value. Let’s say 15%. BUT the benefit of the purchase once every 6 months is that you get the LOWEST market value in that 6 month period minus the 15% discount.

So if you set money aside once a month out of every pay, and the value of the shares in January was 100€ and by June, when your employer goes to purchase the shares, the value is 200€, you get to buy them for 100€ minus the 15%.

You cannot by fractional shares so if you have any money left over after the purchase this will be carried over to the next exercise period.

The only downside is, this discount is NOT tax free and is classed as income in terms of taxes.

When your company “exercises” your share purchase, you need to file and pay taxes within 30 days of the purchase.

Unfortunately, these details or guidance on what to do are not typically shared by the employer (at least in our case).

If you have been part of a share scheme for a long time and you have NOT filed and paid these taxes along the way, firstly, check to see if your employer is doing this for you (some do but not all). If they aren’t you may want to get on this as soon as possible. If you are upfront with Revenue, they can be forgiving of your ignorance and can be open to negotiating on penalties and interest you may have incurred.

Where Revenue are less forgiving is if they catch you or audit you and you have not made it look like you have made any attempt to be compliant.

Revenue are starting to crack down on these, and audit people working for big companies, who they know offer these share schemes as many employees are not aware of their tax liabilities.

Worth noting is that a penalty will only be applied if you have not FILED what is due, and interest will only be applied to the amount owed for as long as it is not PAID. So if you do not have ALL have the money to pay what is due, you are still better to file and pay as much as you can to eliminate penalties and reduce interest. You may also be able to work out re-payment options with Revenue if you are struggling to pay off your full amount upfront.

Tax rates on share options

There are 2 types of taxes that apply to shares bought on discount.

1 is on the discount itself. This rate is your marginal income tax rate including PRSI and USC. As your income tax credits are usually used up by your payroll, this is straight forward enough to calculate. It’s typically either 52% if you are in the higher tax band or 21% if you are in the lower tax band.

The second are the capital gains taxes due or losses incurred when you actually sell. CGT is currently taxed at 33%.

How/When to file

Firstly, before I go into all the details below. I have built a calculator to help with all of these calculations which is available in my paid member’s area.

That said, as I say in my detailed disclaimer, I want to reiterate I am not a tax specialist and the views in this post and calculations in my calculator are based on my own experience and research. Please refer to Revenue directly for the latest rates and guidelines. If any tax specialists do read this and have any feedback on things I may have gotten wrong, please do let me know in the comments below so I can update and benefit all who read.

Gains on discount at time of purchase

The gain you make on the discount needs to be filed on an RTSO1 form. This needs to be FILED and PAID within 30 days of purchase/exercise.

To complete this form you need:

• Name
• Address
• PPSN
• Date the share was exercised (purchased by your company)
• Total gain made on the discount (this is different to the gain on sale)
• Total liability (taxes due)

If you have multiple purchase periods to report, I think you’ll need a separate RTSO1 form for each purchase period.

How to calculate

To calculate the gain made from discount you’ll need the details from your employer. In our case these were made available in an employee portal. What you need are:

• Fair market value on exercise date (purchase)
• Exercise period price (price you bought at a discount)
• Number of shares purchased
• Exchange rate on exercise date (on date of purchase)
• Your marginal income tax rate inc PRSI and USC

To calculate, you take the:

• Fair market value on exercise date (purchase)
• –
• Exercise period price (price you bought at a discount)
• x
• Number of shares purchased
• x
• Exchange rate on exercise date (on date of purchase)
• x
• Your marginal income tax rate inc PRSI and USC

Example

• John contributed to his company’s ESPP scheme from Jan-Jun 2020 and built up 1,000€ in his pot.
• In June, when the company purchased the stocks, the shares were at a market value of 150$USD
• The lowest value of the stocks in the last 6 months was 117.65$USD.
• John’s company gives him a 15% discount on the lowest price.
• This means John gets the shares at a cost of 100$USD each.
• The exchange rate at the time of purchase was .84 making his 1,000€ worth 1,190$USD
• This means his 1,190$USD buys him 11 shares for 1,100$USD.
• The remaining 90$ (75.60€) is kept in the pot for the next purchase date.
• John is in the higher tax bracket.
• As the company purchased the shares on June 1, John has to file his RTSO1 form AND pay the taxes due by June 30 (30 days).

The taxes due in this scenario would be calculated as per below:

Item	Value
Fair market value on exercise date (purchase)	150$USD
–	–
Exercise period price (price you bought at a discount) – let’s say the lowest value in the last 6 months was 117.65$USD * 0.85% (for 15% discount)	100$USD
x	x
Number of shares purchased	11
x	x
Exchange rate on exercise date (on date of purchase) if applicable	.84
x	x
Your marginal income tax rate inc PRSI and USC	52%
Total tax liability (taxes due)	240.24€

Follow the steps on the RTSO1 to file the form and make the payment.

Gains on sale

When you eventually sell the stocks, you will incur a capital gains tax (if the shares are worth more than when you bought them) or a capital loss (if it worth less than what you bought it for).

Again you will need the details from your employer or share platform.

Capital gains taxes (CGT) are filed on your Form 11 or Form 12, depending on which applies to you. Whenever you have ANY income outside of your employment income (non-PAYE) you need to file additional tax forms each year to file and pay any additional taxes or record any losses incurred throughout the year which can be used against future gains.

When and how do you pay and file CGT?

The dates you pay and file CGT are based on the date you sold the shares

Your payment for CGT is due before you file your return.

If you sell your shares between January and November, payment is due by December 15th of the year you sold the shares.

If you sell your shares in December, payment is due by January 31st of the next year to the year you sold the shares.

BUT you only need to file the details of this payment by October 31st of the next year to the year you sold the shares.

How to calculate

What you need to calculate your CGT due will be:

• Purchase price (if you are selling shares that were bought at different dates and rates see the next section)
• Total fees (allowable expenses) incurred in the purchase and sale
• Exchange rate on date of purchase
• Value of shares sold
• Exchange rate on sale date (if applicable)
• Current capital gains tax rate
• Current capital gains tax annual credit rate
• Information on any allowable losses from previous years

The high level calculation will be:

• Total sale costs converted to Euro
• minus
• total paid for purchase including any allowable expenses like purchase or sale costs converted to Euro
• minus
• any individual capital gains annual tax credits and any allowable losses from previous years or other reliefs, other reliefs MAY include withholding taxes that were applied by different governments so check with your employer if you have any credits here to apply against your taxes due
• x
• 33% (current capital gains tax rate for shares)

To get this you need to do the following:

Total sale costs =

• Total sale value
• x
• Exchange rate on sale date (if applicable)
• =
• Total sale value in Euro

Total purchase including expenses =

• Purchase price (I believe this is the fair market value NOT the discounted value you paid as you already paid tax on those gains on the RTSO1 form)
• +
• Total fees incurred in the purchase and/or sale (such as brokerage fees)
• x
• Exchange rate on date of purchase
• =
• Total purchase costs and expenses in Euro

Taxes due =

• Sales
• minus
• Purchase and expenses
• minus
• individual capital gains annual tax credit and any allowable losses from previous years or other reliefs
• x
• 33%

Example

Building on the above example, let’s say that by June 2021 John wants to sell all of his 11 shares that he bought 1 year earlier.

• John bought his original 11 shares for 1,100$USD as per the example above BUT as he has already paid the taxes due on the discount he can include the fair market value of the stock at time of purchase which for this example let’s say was 200$USD (*previous example used 150$USD FMV but upped to 200 for this example to simplfy calculations). So his fair market value purchase price for the purposes of calculating the gain is 200$x 11 shares = 2,200$USD (purchase price) x0.84 exchange rate from date of purchase = 1,848€
• The shares are now worth a market value of 230$USD/share.
• John sells his 11 shares for 2,530$USD.
• The exchange rate on date of sale is 0.87 coming to 2,201.10€
• The current annual CGT tax credit for individuals is at 1,270€
• The current capital gains tax rate is 33%

As John has no taxes due, no payments need to be made, however, John still needs to FILE his CGT by October 31, 2022. If John had taxes to due he would have needed to PAY his taxes due by December 15, 2021. If John’s chargeable gain was less than 0, this would constitute a loss that could be applied against other gains for John or his spouse in the same year or carried forward to another tax year. If John did not FILE his form 11 or form 12 on time, he could be liable for penalties for late filing but no interest as no taxes were due.

Purchase price based on FMV in Euro	2,200
+
Purchase costs	–
+
Sale costs (broker fee etc)	2.50
x
Exchange rate on purchase	0.84
=
Total Purchase costs	€ 2,058
Value of shares sold	2,530.00
x
Exchange rate on sale	0.87
=
Total sale	€ 2,201.10
Total sale	€ 2,201.10
–
Total costs (purchase and expenses)	€ 2,058.00
=
Chargeable gain	€ 143.10
–
Annual CGT credit	€ 1,270.00
–
Allowable losses
–
Other reliefs
=
Taxable gain	€ -1,126.90
x
Capital gains tax rate	33%
=
CGT due	€-371.88

Selling shares bought on different dates

If you have shares bought on different dates, this calculation gets a bit more complicated.

When you sell off some of the shares, the oldest shares are treated as being sold first. This is known as the First-in First-out (FIFO) rule.

As I mentioned above, I have built a calculator to help with this which will be made available on my paid member’s area which you can access here.

When you sell shares your broker MAY calculate your purchase price for you based on this methodology but I’m not 100% sure.

Using the purchase example above, we saw that in June 2020, John bought 11 shares for 100$USD each, the fair market value at that time was 200$USD each. This is the figure to use for CGT. By Jan 2021, John had built up another pot and bought another 10 shares for 120$USD each with a fair market value of 220$USD each.

In June 2021, John wants to sell off 14 shares (some of which were bought in June 2020 for 200$ and some were bought in Jan 2021 for 220$).

To calculate the purchase price to calculate his CGT due, using the FIFO method, John takes the first 11 shares at 200$ and 3 from the second pot at 220$.

This means his purchase price for calculating CGT is:

• 11 shares from Jun 2020 purchase x 200$ FMV = 2,200$ x .84 exchange rate = 1,848€
• 3 shares from the Jan 2021 purchase x 220$ FMV = 660$ x 0.87 exchange rate = 574.20€
• 1,848€ + 574.20€ = 2,422.20€

This is simple enough to calculate for the first sale, but as John continues to buy more shares on different dates and sell off shares on different dates, you’d really need to maintain an ongoing spreadsheet to help with this. Unless of course your broker does this for you.

How to pay CGT

If you are:

• registered for CGT, you must pay your CGT online using Revenue Online Service (ROS) or myAccount
• not registered for CGT, you must register for CGT and then make a payment using ROS or myAccount

Revenue have some other details on this while topic if you need to read more here.