Tuesday, September 26, 2017 3:30PM / Deloitte
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%.
Visit Deloitte’s blog to keep yourself abreast of business alerts, subject matter expert perspectives and so on.
This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this publication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this publication.
1. Reformed Pioneer Status Incentive in Nigeria: Any Contradiction to Tax Revenue Drive?
2. Joint Tax Board issues Public Notice on abuse of Voluntary Pension Contribution Scheme
3. LIRS clarifies the definition of reasonable removal expenses for the purpose of tax exemption
4. Microfinance banks and the VAT legislation: Is there a case for exemption?
5. Nigeria signs multilateral agreements to tackle international tax avoidance and evasion
6. Matters Arising - Implications of Pioneer Status Incentives on SMEs
7. Pioneer Status Incentive Scheme In Nigeria: Wider coverage with weightier conditions – any grey area