Due to Irelands low corporation tax rates, membership or the EU and diverse workforce, it has attracted a large number or multinational companies to operate here. According to IDA Ireland approximately 275,384 jobs have been created by large multinationals.
The remuneration packages of these companies can often include RSUs (Restricted Stock Units), but what are the tax implications for employees? In this blog post we take a look at some of the questions you may have on RSUs.
What is an RSU (Restricted Stock Unit)?
Forming part of an employee’s/director’s incentive scheme, a Restrictive Stock Unit is a promise to an employee/director that they will receive a certain number of company shares or the cash equivalent value of these shares, once they remain with the company for a certain period of time called the ‘vesting period’ and meet certain conditions such as individual performance and KPIs.
The employee/director will not have title to the shares or entitlement to the cash value until the vesting period is completed. Generally as stipulated in the agreement if the employee/director leaves the company before the vesting period ends, they forfeit their right to the shares.
How much tax do you pay on a RSUs (Restricted Stock Units) in Ireland?
There may be more than one taxable event for the employee/director who is entitled to the shares. Let’s now have have a look at each stage of the process and see what the tax responsibilities are.
Grant Date: This is the date where the agreement is struck – no taxable events arise at this stage for employee/director.
In terms of the employers responsibilities, any company that is operating a RSU for its employees/directors must submit a Form ESA with the Revenue Commissioner every year by the 31st of March.
Vesting Date: On this date the employee/director becomes entitled to the shares or cash equivalent of the shares. The value of the shares on this date will be processed through the employees payroll.
Therefore the employee/director must pay PAYE, USC and PRSI on the total value of the shares are the vesting date. This will likely be at the higher rates of income taxes which can reach 52% at their highest.
The income tax due at the grant date is often a large sum of money the employee/director may have to sell some of the shares to cover the tax bill. See next section for further details.
The employee does not have any reporting obligations at this time with the Revenue Commissioner if they have not sold the shares. This responsibility is all with the employer to complete the PAYE reporting.
Date of Disposal of Shares: After the vesting date the shares become the property of the employee/director.
When they shares are disposed of, the employee/director must submit a Capital Gains tax return (CG1) to the revenue commissioner or include the capital gain in their personal annual income tax return (Form 11/Form 12).
The cost basis for the shares will be the market value of the shares on the vesting date. 33% Capital Gains tax will be due on any increase in value between the date of vesting and date of disposal. Individuals are also entitled to an annual capital gains exemption of €1,270 which can be offset against any realised profits.
Even if the price has between the vesting period and the date of disposal you will still be required to include this loss on your tax return so you can offset this loss against your other future investments.
What about Dividends? : under some agreements the employee director may be entitled to the equivalent of all the accrued dividends since the grant date. These dividends must also be included in payroll and taxed at PAYE, USC and PRSI rates.
Employers’ PRSI: If the RSU is cash settled then the company must pay Employers’ PRSI on this amount. If however, the RSU is share settled there may be an exemption of Employers PRSI for qualifying companies.
How does tax residency effect RSU?
For the employee:
The RSU is fully taxable in Ireland if you are an Irish tax resident at the vesting date, even if you have been a tax resident in another country in years prior.
If when the RSU vests you are not tax resident in Ireland then the income is not taxable in the state even if you had spent some of the initial vesting period being tax resident in Ireland. Non-resident directors may have to pay tax in the state on any amounts not covered by a double taxation treaty credit.
Capital Gains Tax
Individuals who are not domiciled in Ireland and hold the shares in a brokerage that is not residing in Ireland may not be liable to any Irish capital gains tax on the profits made on the shares once the proceeds are not remitted to Ireland.
Disclaimer: this blog post is for informational and educational purposes only and should not be construed as financial advice.