Tax Implications of Employee Share Schemes in South Africa

Employee Share Schemes (ESS) are an increasingly popular method of remuneration in South Africa, where employees are awarded shares in the company they work for.

While these schemes have benefits for both the employer and the employee, there are several tax implications that need to be considered.

In this article, we will explore the tax implications of employee share schemes in South Africa and fill you in on all there is to know.

What are Employee Share Schemes?

Employee Share Schemes are arrangements where employees are given shares or options to acquire shares in the company they work for.

These schemes are typically used as a way to incentivize employees to work harder and help grow the company.

There are several types of employee share schemes, including share option plans, restricted share plans, and performance share plans.

Share Option Plans

Share option plans give employees the option to buy shares in the company at a specific price, known as the exercise price.

The exercise price is typically set at a discount to the market value of the shares at the time the option is granted.

Employees can exercise the option at a later date, either to sell the shares or to keep them.

Restricted Share Plans

Restricted share plans award employees with shares in the company, but these shares are subject to restrictions.

For example, the shares may be subject to a vesting period, where the employee has to wait a certain period of time before they can sell the shares.

Alternatively, the shares may be subject to performance conditions, where the employee has to meet certain performance targets before they can sell the shares.

Performance Share Plans

Performance share plans are similar to restricted share plans, but the shares are awarded based on the employee meeting certain performance targets.

For example, the employee may be awarded shares if they increase the company’s revenue by a certain percentage.

Tax Implications for Employees

While employee share schemes can be a valuable way to receive compensation, there are several tax implications that need to be considered.

Income Tax

When an employee is granted shares or options, the value of these shares or options is considered income for tax purposes.

This means that the employee will be liable to pay income tax on the value of the shares or options.

Capital Gains Tax

If an employee sells the shares that they have acquired through an employee share scheme, they may be liable to pay capital gains tax on the profit they have made.

Capital gains tax is calculated based on the difference between the sale price of the shares and the original cost of the shares.

Dividend Tax

If an employee receives dividends on the shares they have acquired through an employee share scheme, they may be liable to pay dividend tax. Dividend tax is a tax on the dividends that are paid to shareholders.

Tax Implications for Employers

Employers also need to consider the tax implications of employee share schemes.