The Lagos State Internal Revenue Service (LIRS) recently issued a public notice (the Notice) with respect to the taxation of share-based payments in the hands of employees.
The Notice defines share/ stock options “as an agreement that gives employees the right to a company’s shares based on prices agreed on the initiation date (grant date). However, the employees must wait for an agreed period (known as the vesting period) before they can exercise the right”, and provides guidelines on the taxation of share based compensation for employees and investment income of individuals who are shareholders.
Where employers grant company shares/stocks to employees at a price lower than the market value or free shares, LIRS’ position is that such share scheme arrangements give rise to a benefit in kind which is taxable in the hands of employees. This position is premised on Section 3(1)(b) of the Personal Income Tax Act (PITA), which imposes tax on all gains or profits from employment including compensations, bonuses, premiums, benefits or other perquisites.
Consequently, employers are obligated to deduct pay-as-you earn (PAYE) tax on such benefits.
The following are tax implication of various share-based payments as highlighted in the notice:
- Taxable benefit is the difference between market price of the shares and the exercise price (if any)
- The obligation to deduct tax arises on the exercise date or the effective date of payment for phantom shares; while remittance would be by the 10th day of the following month
- The market value of shares is determined as follows:
Publicly listed entities – the price the shares are traded on the stock exchange at the date of exercise.
Non-listed companies – the net assets of the company issuing the shares (reported in its penultimate financial statement) divided by the total number of shares.
- Employers are required to file a schedule showing information on its employees’ share options along with their annual returns
- The obligation to deduct PAYE tax also applies to phantom or unvested shares where the employee owns no legal title to the shares and a dividend equivalent or cash is payable to the employee
- Dividends paid to individuals that are shareholders is liable to withholding tax at 10%.