In the ever-competitive world of employee retention and the desire to retain talent companies have sought out ways in which remuneration can be paid to talent which is both beneficial to the employer and beneficial to the employee.
On a day-to-day basis companies in sectors such as fintech, technology, social media, pharma and bio med often offer creches, parking, in-house gymnasiums and the usual perks such as healthcare, pension and bonuses.
Flexible working patterns are almost a given (and appear here to stay as a result of covid 19!) These measures all assist in ensuring that employees are able to achieve a work-life balance and are happy today and tomorrow.
However, in the world of increased, all-encompassing stakeholder involvement and companies’ own desires to ensure that employees are truly invested in the long-term journey, other forms of emoluments have over recent years sprung up and are now almost as prevalent as the salary, bonus and pension core structure. These are share awards and the various hybrid structures associated with same.
This long-term employee buy-in often takes the form of share options, share appreciation rights (SAR’S) and Restricted stock units (RSU’s) and a multitude of hybrid versions in between these three industry mainstays.
The purpose of this article outlines the tax treatment of RSU’s in Ireland and the interaction of such tax treatment with residency. Currently there is no specific legislation in relation to Restricted Stock Units, with the tax treatment of same initially being driven by the Revenue’s publication of Tax Briefing 63.
The benefits for an Employer of paying out emoluments by way of Restricted Stock Units are primarily two-fold in Ireland. As per the revenue share schemes manual, the employer does not have to pay employer PRSI on the award of such share centric remuneration (thus saving 10.75% on the value of such share awards made). Secondly the awarding of such options often comes with a vesting period.
The benefit to the employer is that, should employees leave prior to vesting, any accrued rights not yet paid fall away and the employee does not receive the shares which have not vested. An automatic employee retention incentive thus being created.
This article looks at the tax efficiencies of same from the perspective of employees moving within Europe (which is becoming increasingly common generally) and in particular the Irish angle of employees working in Spain.
Most European countries have devised some sort of tax break for taxpayers to entice talent making its way towards a particular EU member state, the excellent and long standing 10-year break offered in Portugal being just one such example. In fact an Irish Individual (Billy Cunningham) was at the
forefront of that particular piece of legislation.
Spain has its well-publicised “Beckham Law” which in effect allows individuals moving to Spain (subject to certain qualification criteria) to be treated as fiscally non-resident (and thus subject to the remittance basis of taxation) for the year in which they obtain fiscal residence and the following 5 years. The immediate benefit of this is that Spanish employment income will be taxed at only 24% (up to a 400k annual salary limit) and foreign income not remitted to Spain will not be taxed at all in Spain.
An additional benefit relates to any Restricted Stock Units (RSU’s) which were awarded prior to taking up fiscal residence in Spain.
The Irish position in relation to RSU’s is quite clear from the Revenue guidance. If an individual is not resident in Ireland at the time that the awards vest, then they are not subject to Irish Income tax. This position sits at odds with the taxation of many European countries who seek to charge such awards to tax if the individual was resident in the EU member state at the time of granting of the awards as opposed to their vesting date.
We recently acted for a Spanish national who had not been living in Spain for a long number of years prior to 2018 (at which point they moved to Spain and remained with their Company albeit employed by a Spanish Company within the group post their move). Our client had received Restricted Stock Units in 2015, 2016 and 2017 whilst working in Ireland, under an Irish employment contract and which time the individual was only resident in Ireland. These awards came with a 3-year vesting period
meaning that in 2018 (by which time the individual was Spanish resident) the formerly Irish resident taxpayer became entitled to RSU’s which had been awarded back in 2015. The Irish position was quite clear; as the individual was not resident at the date of vesting, the awards were not taxable in Ireland.
We provided advices prior to their move to Spain setting out exactly what the taxation position would be in relation to their salary and RSU awards and post the employees move to Spain. We subsequently sought and obtained a ruling from the Spanish Tax authorities which set out quite clearly that as the awards related to economic activity which had taken place prior to the person becoming fiscally resident in Spain then the awards were not subject to either taxation in Spain or any withholding tax.
The evidence that the awards were made prior to obtaining Spanish tax residence was substantial and included, inter alia:
• The awards formed part of the employee’s remuneration package for the year as to them in the years 2015,2016 and 2017
• During 2015, 2016 and 2017 the employee worked solely for an Irish Company
• The employee’s awards were made under an Irish employment contract
• The employee carried out their duties of employment in Ireland (with only minor days spent in a number of countries both inside and outside of the EU).
• The employee was Irish Resident and not resident anywhere else during 2015, 2016 and 2017
As a result of this, the transplanted former Irish Employee (now based in Spain) has since 2018 been entitled to take advantage of the Beckham law – and thus pay only 24% income tax on their Spanish employment income and further has the right to receive any Restricted Stock Awards which vest at a time in which they are Spanish resident but which they awarded in years prior to moving to Spain fully free of tax both in Spain and Ireland, thus actually meaning they are not in fact taxable anywhere.
Perhaps unintended, but the circumstances outlined above highlight how when there is a lack of uniformity across EU member states in relation to the taxation of the same item, tax advisors will be able to identify efficiencies resulting in various income streams falling outside of the charge to tax anywhere within the EU. This is likely to be of particular interest to multinational companies with an EU presence in various member states and a requirement for mobility of workforce throughout same.
Aidan García is a founding shareholder and director of Sabios, a boutique tax and restructuring practice providing tax advices across a number of EU jurisdictions and the UK.
For any needs you may have as an employer – or as an employee relocating to Europe, Aidan can be contacted at aidan.garcia@sabios.ie or on +353 1 598 0800.
