An attractive means for companies to reward their people, employee share incentive schemes (ESIS) can also be used to attract and retain top talent, motivate employees to perform well, and to align the interests of employees with those of the shareholders.

With these win-win benefits in mind, let’s take a look at what you need to know about participating in such employee share incentive arrangements, particularly if they happen to be offshore schemes.

What are employee share incentive schemes in South Africa?

There are two main types of ESIS: share incentive schemes and share option schemes:

• Share incentive schemes give employees shares in the company for free or at a discounted price. The shares may be vested immediately or over a period of time. Once the shares are vested, the employee owns them outright.
• Share option schemes give employees the right to buy shares in the company at a pre-agreed price at a future date. The employee does not have to exercise the option, but if they do, they will buy the shares at the pre-agreed price, even if the market price of the shares has gone up.

Participation in offshore share incentive or share option schemes

Can employees in South Africa be offered participation in a share plan where the shares to be acquired are in a foreign parent company? Yes, however, there are certain exchange control restrictions that need to be complied with. According to Section B.2(B)(iii) of the Currency and Exchanges Manual for Authorised Dealers, employees are allowed to use their R10 million foreign capital allowance and/or their R1 million single discretionary allowance to purchase shares in a foreign parent company.

Employees can also use the proceeds of authorised foreign assets to purchase shares in a foreign parent company but if an employee wants to recharge the cost of the shares to their foreign employer, they need to obtain approval from the Financial Surveillance Department of the South African Reserve Bank.

What are the tax implications of giving shares to employees?

It is important to note that the tax implications of participating in an offshore share incentive or share option scheme will vary depending on the individual’s circumstances. When a company gives shares to employees, the employees are liable for income tax on the difference between the market value of the shares and the price they paid for them (if any). This is called a share-based payment. The tax treatment of share-based payments in South Africa is complex and depends on a number of factors, including the type of ESIS, the terms of the scheme, and the employee’s circumstances.

Share-based payments tax treatment in South Africa

The tax treatment of share-based payments in South Africa is governed by section 8A of the Income Tax Act, which provides that an employee who receives a share-based payment is liable for income tax on the difference between the market value of the shares and the price they paid for them (if any). The amount of tax payable depends on the employee’s marginal tax rate. For example, if an employee’s marginal tax rate is 40%, then they will pay 40% tax on the difference between the market value of the shares and the price they paid for them (if any).

As with all rules, there are a number of exemptions to section 8A. For example, employees are not liable for tax on share-based payments that are made under certain government schemes or made to employees of small businesses.

What are the tax implications of the sale of shares in South Africa?

When an employee sells shares in South Africa, they are liable for capital gains tax on the difference between the sale price of the shares and the base cost of the shares. The base cost of the shares is the price the employee paid for them plus any costs incurred in acquiring the shares.

Is there Capital Gains Tax in South Africa on shares for individuals?

Yes, there is Capital Gains Tax (CGT) in South Africa on shares for individuals and the capital gains tax rate in South Africa is 18%. If you are a South African living overseas, you will be liable for CGT when you sell your shares. Similarly, when you cease tax residency, this triggers a CGT liability based on a deemed disposal.

Read more:
Capital Gains Tax on shares held in South Africa by individuals
Section 8C of the Income Tax Act and SARS: the facts for non-residents

Role of trusts in share incentive schemes

The use of trusts in share incentive schemes is common. A previous belief was that these trusts might trigger capital gains tax (CGT) when shares vested. However, Binding Private Ruling 277 (BPR277) has a different view, stating that if the trust obtains shares for the employees’ benefit from the beginning, there’s no CGT when the shares vest.

Having a trust in share incentive schemes can create tax-related issues. Recent rulings shed light on tax implications during the trust winding-up, especially when units vest and shares are transferred or sold. According to BPR277, there’s no CGT event when shares are given to beneficiaries, as they were held for their benefit, which highlights the trust’s critical role. In practical terms, a share incentive trust can act as a pass-through entity or one temporarily holding beneficial ownership in shares.

FinGlobal: cross-border financial specialists for South Africans

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