PwC’s Academy is organising a training session on Tuesday to explain the steps involved in setting up a share option scheme.

The granting of share options by employers has increased in popularity over the last years. Share options are a valuable benefit that businesses are increasingly introducing to create a higher level motivation and dedication.

The exercise of a share option by the employee is deemed to constitute a fringe benefit and is therefore subject to tax in line with the relevant provisions outlined in the Fringe Benefits Rules.

Tax is chargeable on the fringe benefit value at the time that the share option is exercised (rather than when the option has been granted to the employee). The fringe benefit value is calculated as 42.85 per cent of the excess of the market value of the shares at the time of exercise over the option price.

This results in an effective tax burden of 15 per cent of the excess of the market value of the shares at the time of exercise over the option price of the said shares, for employees subject to the highest marginal income tax rate of 35 per cent. Any gain arising from the assignment of a share option to any person constitutes a capital gain for tax purposes.

In addition, any gains resulting from the transfer of shares that were acquired through the exercise of an option shall constitute a capital gain for tax purposes.

In order to determine the resulting gain, one should take into consideration the market value of the shares on the date the share option was exercised as being the cost of acquisition. “Indeed, offering shares is a more complicated kind of reward than paying employees cash. There are various schemes available and a business needs to consider numerous factors when setting up a scheme including the legal requirements for setting up, fringe benefit implications for employees and disclosing share arrangements in the financial statements of a company,” PwC said.

http://www.pwcacademy.com.mt/CourseDetail.aspx?sid=306

Example

Practical scenario: An employee exercises the option to acquire 1,000 shares at €7 at a time when the market value of the shares is €10.