Business Tax Consultants Dublin

From 1^st January 2024 employers will be required to report, collect and remit Income Tax, USC and PRSI, under the PAYE system, on any gains arising on the exercise, assignment or release of unapproved share options by employees and/or directors.  From 1^st January 2024, the tax collection method for share option gains will become a real-time payroll withholding obligation for the employer instead of the individual self-assessment system known as the Relevant Tax on Share Options (RTSO) system.

These new rules are a welcome development for employees and directors who, from 1^st January 2024, will no longer be responsible for filing and submitting Income Tax, USC and PRSI arising on the exercise of their share options.

Employees may still, however, be required to file an Income Tax Return for a relevant tax year, if that individual remains a “chargeable person.”

The due date for such returns is 31st March 2024 and there are different returns required depending on the type of share scheme operated / share remuneration provided.

Penalties for failure to file Returns may apply.

The following Forms are required for the following share schemes:

1. Form RSS1 for share options and any other rights to acquire shares or assets awarded to employees and Directors. https://www.revenue.ie/en/employing-people/documents/form-rss1.xlsm

2. Form KEEP1 – Key Employee Engagement Programme (KEEP) – Details of qualifying share options granted. https://www.revenue.ie/en/employing-people/documents/form-keep1.xlsm

3. Form ESOT1 – Employee Share Ownership Trust (ESOT) – Details of approved Employee Share Ownership Trust (ESOT) schemes. https://www.revenue.ie/en/employing-people/documents/form-esot1.pdf

4. Form ESS1 for details of Approved Profit Sharing (APSS) schemes. https://www.revenue.ie/en/employing-people/documents/form-ess1.xlsm

5. Form SRS01 for details of Save As You Earn Schemes (SAYE) https://www.revenue.ie/en/employing-people/documents/form-srso1.pdf

6. Form ESA – Restricted Stock Units (RSUs), Discounted / Free / Matching Shares, Employee Share Purchase Plans (ESPP), Restricted Shares, Convertible Shares, Forfeitable Shares, Phantom Shares, Stock Appreciation Rights, Growth/Hurdle/Flowering Shares and other Shares. https://www.revenue.ie/en/employing-people/documents/form-esa.xlsm

In circumstances where employers have globally mobile employees working outside Ireland for part of the year, the gains arising on the exercise of the stock option may need to be apportioned based on the number of days those employees worked in Ireland during the grant to vest period.  Employers will need to monitor the Irish workdays for these employees throughout the entire vesting period of the options.  Employers will also need to determine whether the stock option gain is exempt from PRSI.

Consideration must be given as to how the tax liabilities will be funded, especially in situations where there is insufficient income to cover the payroll taxes, where the globally mobile employee is not subject to Irish tax at the date of exercise but a portion of the gain has given rise to an Irish tax liability or where the employee or director has ceased their employment with the organisation. For example, by introducing a “sell to cover” mechanism.

In Summary:

• The RTSO system will be abolished with effect from 1^st January 2024.

• From 1^st January 2024, taxes arising on stock option gains will be collected through the payroll system.

• Currently there are no proposed changes that affect the obligation to file an annual RSS1 informational return by the employer. Therefore, the reporting obligations for share options by employers remain due on or before 31^st March of the following tax year.

• Share Option gains realised before 31^st December 2023 will be liable to tax under the self-assessment system with the employee being responsible for filing a Form RTSO1 along with the relevant tax payment within 30 days of the date of exercise.

Please be aware that the information contained in this article is of a general nature.  It is not intended to address specific circumstances in relation to any individual or entity. All reasonable efforts have been made by Accounts Advice Centre to provide accurate and up-to-date information, however, there can be no guarantee that such information is accurate on the date it is received or that it will continue to remain so. This information should not be acted upon without full and comprehensive, specialist professional tax advice.

Recently I’ve received a number of queries relating to the Irish tax treatment of CFDs or Contracts for Difference.  Although the information available is plentiful and appears to be straight forward, it’s important to be aware that each situation is different and as a result the tax treatment may vary considerably.

Firstly, what is a Contract for Difference?

Essentially it’s a contract between two parties i.e. the investor and the CFD Provider. At the close of the contract, the parties exchange the difference between the opening and closing prices of a specified financial instrument, including individual equities, currencies, commodities, market indices, market sectors, etc.  In other words, two parties take opposing positions on the difference between the opening and closing value of a contract i.e. the price will rise versus the price will fall.

Contracts for Difference offer wide access to different financial instruments from a single account for a fraction of the cost of buying shares.  They do not carry voting rights like ordinary stock and CFD trades on certain Irish stocks are not liable to Stamp Duty.

CFDs can be traded ‘long’ or ‘short’ to speculate on rising or falling markets i.e. the investor speculates that an asset price will rise by buying (long position) or fall by selling (short position).

CFDs do not confer ownership of the investment.  Instead the investor has access to the price performance which includes any dividend or corporate action equivalent.

What is the Irish tax treatment for profits / gains?

Contracts for Difference are treated as Capital Assets liable to Capital Gains Tax UNLESS they are deemed to be held in the course of a financial trade in which case the profits are liable to Income Tax under Case I, Schedule D.

According to Revenue eBrief No. 36/2007:

“The contracts require two parties to take opposing positions on the future value of a particular asset or index. Investments are often made on a margin of 20% of the contract amount. As well as the difference in value of the asset from beginning to end of the contract period, certain other notional income flows are taken into account in calculating the overall gain or loss.

• The first of these is notional interest, calculated on the non-margined value of the underlying asset for the contract duration.
• The second is the notional income which would have been earned by the asset during the contract period.

Where the contract is long (expectation of a rise in price), notional interest is a deduction and notional income a credit in the calculation.

Where the contract is short (expectation of a fall in price), notional interest is a credit and notional income a deduction.

The chargeable gain will be calculated on the gain or loss resulting from the computations above and including a deduction for all necessary broker fees incurred in the full contract.

Actual interest paid, if any, on the margin amount put up will be chargeable under Case III  in the ordinary way and does not come into the CGT calculation.”

What’s the difference between holding Capital Assets and operating a financial trade?

The concept of a “trade” is a matter of interpretation and is usually determined by a number of factors known as “badges of trade.”

For example, a once off transaction would not normally be considered a “trade.”  Depending on the circumstances and the timing it may be liable to Capital Gains Tax or indeed may be exempt from tax.  If, on the other hand, the investor was involved in a large number of transactions throughout the year of assessment then this activity would be most likely be considered to be a trade and therefore liable to Income Tax.

What are the “Badges of Trade”?

There are a number of factors which will determine the existence of a “trade”. There is, however, no decisive test and no legislative definition.  There is considerable case law concerning this issue and in 1954 a Royal Commission was set up in the United Kingdom to consider what factors should be taken into account in deciding whether a trade exists.  A report was published outlining the “Badges of Trade” which are as follows:

1.      THE SUBJECT MATTER OF THE SALE.

While almost any form of property can be acquired to be dealt in, those forms of property, such as commodities or manufactured articles, which are normally the subject of trading, are only very exceptionally, the subjects of investment.

Again, property, which does not yield to its owner an income, or personal enjoyment merely by virtue of its ownership is more likely to have been acquired with the object of a deal than property that does

2.      THE LENGTH OF PERIOD OF OWNERSHIP.

Generally speaking, property meant to be dealt in is realised within a short time after acquisition. But there are many exceptions from this as a universal rule;

3.      THE FREQUENCY OF SIMILAR TRANSACTION.

If realisations of the same sort of property occur in succession over a period of years or there are several such realisations at about the same date a presumption arises that there has been dealing in respect of each;

4.      SUPPLEMENTARY WORK.

If the property is worked on in any way during the ownership so as to bring it into a more marketable condition, or if any special exertions are made to find or attract purchasers, such as the opening of an office or large-scale advertising, there is some evidence of dealing. When there is an organised effort to obtain profit there is a source of taxable income. But if nothing at all is done, the suggestion tends the other way;

5.      THE CIRCUMSTANCES THAT WERE RESPONSIBLE FOR THE REALISATION.

There may be some explanation, such as a sudden emergency or opportunity calling for ready money that negates the idea that any plan of dealing prompted the original purchase;

6.      MOTIVE.

There are cases in which the purpose of the transaction and sale is clearly discernible. Motive is never irrelevant in any of these cases and can be inferred from surrounding circumstances in the absence of direct evidence of the seller’s intentions.

In Summary

1. If goods or services are provided regularly with a commercial motive this will generally indicate the existence of a trade.
2. The length of ownership of the asset can be relevant but not conclusive in determining the existence of a trade.
3. The frequency and number of similar transactions by the same person should also be considered.
4. Making the items more marketable or improving them is generally considered to be an indication of a trade.
5. The intention of making a profit makes the transaction or transactions more likely to be a trade.
6. The nature of the asset may not be relevant in deciding whether or not trade is involved. The purchase/sale of land and/or shares can often be viewed as trading activities once the above factors have been taken into account.

Say an individual is employed in an investments role by day and makes considerable CFD profits in his/her spare time based on a significant number of transactions, how would this income be taxed?

Although opinions published by Revenue in the context of financial services are primarily concerned with group financing and treasury operations I believe they have direct relevance to this situation and should certainly be taken into consideration in ruling in favour of Income Tax Treatment.

In one such case, Revenue believed that the company was trading on the basis that the company was actively managing the business and making strategic decisions regarding financing and treasury operations. Despite the fact that the activities of the company were outsourced (i.e. no individuals were employed in the company), the outsourcing arrangement was managed and controlled by Irish resident directors with the appropriate level of specialized expertise in this area.

In this example, as the individual’s Irish PAYE employment relates to the area of financial services/investments, it would be difficult to see how Revenue could treat his/her C.F.D. activities as anything other than trading activities liable to Income Tax.

In summary, as the C.F.D. relates to a large number of transactions with a profit motive which requires a considerable amount of skill and expertise, it would be highly probable that this income would be liable to Income Tax and not Capital Gains Tax.

IN CONCLUSION

1. Capital Gains Tax will arise on CFD Gains.
2. Capital Gains Tax will arise on the difference between opening and closing values of an asset.
3. Income Tax will arise on deposit interest earned on margin.
4. The margin is the initial equity investment which is usually up to 20% to show the investor can complete the contract on closing.  If there are significantly negative market variations then additional capital will be required by investors so as to avoid forfeiting or losing the full margin deposit.
5. The ‘non-margin’ is defined as the balance which is leveraged or borrowed to purchase the position at the outset of the CFD.
6. Income Tax will arise on the accounting profits if the CFDs are held in the course of a trade.

Please be aware that the information contained in this article is of a general nature.  It is not intended to address specific circumstances in relation to any individual or entity. All reasonable efforts have been made by Accounts Advice Centre to provide accurate and up-to-date information, however, there can be no guarantee that such information is accurate on the date it is received or that it will continue to remain so.. This information should not be acted upon without full and comprehensive, specialist professional tax advice.