HOW DOES IT WORK? When establishing a scheme of this type, there is no requirement for the company to formally notify Revenue. At the outset, the board merely decides that it wants to introduce a share options scheme, passes a resolution to that effect, and then sets down the rules that will inform the scheme during its existence. The company will then identify which employees they want to be participants in the scheme, and presents them with an Option Agreement, which will include key information around the duration of the scheme, the number of shares involved and the option price. At this point, participants are effectively given the right to purchase a specified number of shares for a pre-determined price in the future after an agreed time period has passed (vesting period). Taxation arrangements may vary, depending upon whether the agreement is for short or long options. Whereas no income tax is levied on short options at the point that they are received, for long options – when the scheme will last for more than seven years
– Revenue reserves the right to levy a charge, based on the difference between the option price and the market price, assuming the market price is higher when the options are granted. For that reason, most companies will look to offer short options. With short options, there is no tax on the grant, but participants will be liable for tax at the point that the options are exercised. At that point, income tax, PRSI and USC will all be applied on the difference between the option price and the market price at the time of exercise, assuming a gain has been made, and must be paid within 30 days. Participants will then be liable for CGT on whatever profit they make when they sell their shares.
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