The use of shares options for the payment of goods and services is becoming increasingly common. While some companies use it to manage their cashflow, notably with the use of equity-settled share-based payments, other companies include it as part of the remuneration package of their directors, executives and other employees.
Typical employee share-based remuneration includes some conditions known as “vesting conditions” that must be satisfied for the counterparty to be entitled to either cash, assets or equity in share-based structures. International Financial Reporting Standards (IFRS) 2 – Share-based Payment details two types of vesting conditions which are:
(i) non-market based vesting conditions such as employees completing a minimum period of service, achieving a minimum sales or earnings target or completing particular projects; and
(ii) market-based vesting conditions which include achieving a minimum increase in the share price of the company, achieving minimum increase in shareholders’ return or a specified target share price.
In this brief, we set out the tax consequences or implications of using share options for payment of goods and services.
Capital Allowance: Based on the Companies Income Tax Act (CITA) 2004, companies or taxpayers are entitled to claim capital allowance for incurring cost to acquire qualifying capital expenditure (QCE), and the applicable rates are set out in the second schedule of CITA. This provision of the law is applicable to QCE acquired using share options. Therefore, companies or taxpayers that have or intend to acquire QCE through share options should consider claiming the capital allowance on the asset acquired in its tax returns.