The tax treatment of employee share options schemes : a comparative analysis

Abstract

There are a number of top listed companies in Malta today offer some form of employee share scheme. Such employee share option schemes are locally and commonly known as executive share option schemes. More Maltese executive/non executive employees alike tend to participate in these share schemes and the popularity of these schemes is on the increase with both employers and employees. Employers use share schemes for a variety of reasons and the key ones being to promote and encourage wider employee share ownership by offering a tax efficient benefit to employees and to assist in improving industrial relations. These schemes also encourage employees to identify with the interests of shareholders and to motivate them as well as to provide a means of regular tax effective saving for employees by deduction at source from base salary. Generally speaking, employees see share schemes as a valuable employee benefit and are keen to participate because of the opportunity of financial gain. Cases where employees have made significant gains through share schemes are now common-place. Although the use of share-based payments is increasing, there is a lot of confusion amongst employees receiving these financial benefits because of the unclear presence of abiding laws on tax treatments of such schemes. The aim of this dissertation is to provide an analysis of the taxation of employee stock option schemes. Currently the taxability of the employee stock options is governed by the fringe benefits rule. An analysis of the situation in Malta will be tied to the provisions made elsewhere by internal revenue agencies in foreign jurisdictions particularly the United States and United Kingdom. The aim of this dissertation is to include a list of recommendations based on the findings of this study, so that a series of proposals for improvements to the Maltese tax system will be recommended.