The Hidden Risks of Share-Based Compensation - Part IV

The Hidden Risks of Share-Based Compensation

Part IV: From Gross to Net 

In our previous article on SBC, we looked at the gap between the returns people should get from putting their money to work and the lower returns they tend to get instead. Often that is because they are not experts in financial planning and investing, or they simply do not have the time. If you earn equity, you are likely better off outsourcing the work of closing these gaps and spending your time earning and enjoying your position.

At Biograph, we close these gaps for our clients. That leaves one final gap: Tax.

The tax is high when your shares vest and there is no way to avoid it. The chart is illustrative, but the gap between the two net bars is real, created by what happens after the tax is paid.

Ireland offers few tax-advantaged routes. An RSU vesting in Dublin is taxed as income on the day it vests: 40% income tax, 8% USC and 4.35% PRSI, a combined 52.35%, collected through payroll before a single share is sold. Unapproved options and ESPP discounts are taxed the same way, and the reliefs that exist rarely reach the multinational employee holding the most equity.

Common employee equity structures in Ireland, separated by tax treatment, include:

Each has its own eligibility rules, tax treatment, reporting forms and deadlines. The deeper you go, the uglier the complexity gets. For example, and with clear forewarning: try not to gloss over the next paragraph…

Shares in a US-incorporated company are US-situs assets, wherever the account sits. Ireland’s 1949 estate tax convention with the US allocates shares to the country of incorporation, so it offers no shelter. For an Irish-domiciled holder who is not a US citizen, only the first USD 60,000 is exempt. The balance is exposed to US federal estate tax at rates up to 40%, payable in dollars within nine months of death. Ireland allows a credit against CAT for US tax paid, but a spouse’s inheritance is CAT-exempt, so on a first death there is usually nothing to credit it against. The US broker may hold the shares until an IRS transfer certificate issues.

Most people skim that and give up. It is also the largest unmanaged tax exposure we see among Irish employees of US multinationals, and it grows with every vest. Luckily, understanding it and planning around it is someone’s job.

Here is what people worry about, and the mistakes they make when they DIY, ranked from experience.

Top 5 Concerns:

1. I don’t want to pay so much tax
• Tough. The tax at vest is largely fixed. What you control is where the net proceeds go: pension funding at up to 40% relief is usually the highest-return action available, then diversification.
2. I don’t want to get anything wrong with my taxes
• Double taxation after a move mid-vesting and unreported disposals are frequent and costly. Your employer reports the vest, not the sale, and Revenue does not send reminders.
3. My entire wealth is in one company
• Your income and capital are tied to one balance sheet. Rebalancing into broad market funds reduces how much of your net worth rides on your employer.
4. I can’t afford a big tax bill if I sell
• Especially in private or pre-IPO firms, where exercising an option creates a tax bill before the shares can be sold. Liquidity planning is essential.
5. I’m worried about selling at the wrong time (or am locked in by trading windows)
• A pre-committed sell-down plan addresses this without emotional timing.

The concerns are valid. The traps are where acting on them without expertise gets expensive.

Top 5 Traps:

1. The CGT payment date
• Gains made between January and November are payable by 15 December of the same year; December gains by 31 January. The return is filed later. The money is not.
2. Base cost and currency
• Twenty quarterly vests is twenty acquisitions, each with its own euro base cost and exchange rate. A dollar loss can be a euro gain. Without records, you overpay.
3. ESPP look-back
• Revenue taxes the gap between purchase-date market value and the amount paid, not the headline 15% discount. On a stock that has run, the charge is far larger than expected.
4. Holding US shares directly
• The structural fix is to hold diversified money in Irish-domiciled funds, which are not US-situs assets. The immediate fix is life cover in trust, sized to the exposure.
5. Where the money goes next
• Reinvesting into Irish or EU funds brings exit tax, now 38% and due to fall to 35%, with a deemed disposal every eight years. Pension first, then the wrapper decision, then the fund.

What all of this means in a B.I.G. nutshell is: mo’ money, mo’ complexity, mo’ points of failure.

SBC is a great wealth driver; the key is managing it intentionally. Partnering with specialists to fill the gaps and avoid the traps will likely represent a modest outlay relative to the net value provided, and it protects your time and energy for the work that earns it.