Taxation of employee share options: how does it work?

Employee share option schemes are commonly used by companies to incentivise and motivate employees by providing them with the option to acquire company shares as part of their compensation package.
Share options can be an effective way of retaining employees, encouraging their participation and loyalty, acknowledging their achievements, or attracting new talent to the company. Employees welcome share option schemes as they allow them to participate financially, and in some instances tax efficiently, in the growth of their employer’s share price.
What are share options?
Share options represent the right granted to employees or officers to purchase or subscribe to shares in the company they are employed with, or in an associated company, at an agreed price (generally lower than the market price) and within a specific period of time (vesting period). Exercising the share options (that is acquiring the shares) is an employee’s right and not an obligation. In certain cases, share options are granted on the basis that employees or officers remain with the company for a certain period of time before they become entitled to exercise the options.

Share option prices vary between companies and industries and depend on the company’s option strategy. Such share option price may be valued at:
  • The market price at the time of grant; or
  • A preferential price at the time of grant; or
  • A preferential price at the time of exercise.

What is the tax treatment of share options?
The basis for taxation of employee share options is Article 4(1)(b) of the Income Tax Act (Cap. 123 of the Laws of Malta), which stipulates that gains or profits from any employment or office, including the value of any benefit provided by reason of any employment or office, are subject to income tax in Malta. Such income is subject to tax in Malta regardless of whether it is received in cash or in kind and whether it is received in terms of the normal conditions of the contract of service or by way of a special allowance.

Share options fall within the definition of fringe benefits in terms of Rule 3 of the Fringe Benefit Rules (S.L.123.55), as they represent a benefit in kind provided by reason of employment or office by an employer to employees or officers. The Fringe Benefits Rules provide that the grant of share options is not a taxable event, with the liability of tax being triggered only at the point in time when the share options are exercised/the shares are actually acquired.  In terms of Rule 37 of the Fringe Benefits Rules the value of the share option fringe benefit is the excess of the market value of the shares at the time when the shares are exercised/granted, over the price paid for those shares by the employee or the officer. 

The shares granted as a fringe benefit are then taxable at a flat rate of 15%. For tax purposes, the taxable value of the fringe benefit is treated as income that is separate and distinct from the beneficiary’s other income.
Tax = 15% * (MV of the shares – Acquisition Price)
Tax = The tax liability on the grant of the shares
MV = Market Value of the shares
Acquisition Price = Price at which the shares are acquired

The Fringe Benefits Rules defines the market value of the shares as “the price that the shares would fetch if sold in the open market”. The exercise of a share option connected with a Maltese employment or office is always taxable in Malta irrespective of the residence status of the employee or officer, since this is deemed to be a Maltese source income. The employee or officer may dispose of the shares at a later date. For the purpose of calculating the capital gains arising on the disposal thereof, the cost of acquisition of such shares would be the market value used in calculating the taxable fringe benefit, rather than the actual (lower) exercise price.
How BDO Malta Can Help with Payroll Services
At BDO Malta, we specialise in assisting companies with payroll services, particularly in managing the taxation and administration of employee share options. We provide expert guidance on share option taxation to ensure compliance with Maltese tax laws. Our team efficiently handles the administration of share option schemes, including valuation and tax calculation. We seamlessly integrate share options into the payroll system, offering customised solutions aligned with company policies. By leveraging our expertise at BDO Malta, companies can maintain accurate, compliant, and efficient payroll services.
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