Paul Pace Ross, Director, International Tax Advisory, KPMG in Malta
Share awards, share options, and phantom shares are all types of incentives that employers may include in a remuneration package to retain employees and motivate them to achieve performance targets.
The value of these incentives is typically linked to the value of the employer’s company.
But what’s the difference between them?
Share options are similar to share awards, but instead of receiving shares outright, employees are given the option to purchase shares at a set price, often at a discount or even for free.
After acquiring the shares through the option (or even share award) scheme, employees can either keep them (and receive dividends) or sell them to realise a gain.
Phantom shares, sometimes referred to as ‘shadow shares’, differ from the above two in that no actual shares are transferred to the employee.
Instead, employees receive a cash payment equivalent to the value of a certain number of shares, but without becoming legal shareholders.
Maltese income tax treatment
All three types of incentives are taxable under Maltese law.
However, there is a key difference in how they are taxed:
- Share awards and share options benefit from a special flat tax rate of 15%, as provided in the Fringe Benefit Rules.
- Phantom shares do not qualify for a reduced rate and are taxed at the standard rates, which can go up to 35%.
Example:
Suppose an employment contract provides for a share award scheme in terms of which an employee is granted 1,000 shares in the company for free after five years of service.
No Maltese income tax is due when the employment contract is signed. Tax is only triggered when the legal title to the shares is actually transferred to the employee after five years.
The taxable amount is the market value of the shares at that time. If the 1,000 shares are worth €1,200 at the time of transfer, the tax due at the 15% rate would be €180.
The employer will deduct this tax from the employee’s salary and pay it to the Maltese tax authorities on behalf of the employee.
After receiving the shares, the employee can either hold onto them or sell them. If say the employee sells the shares a year later when their value has increased to €1,900, the €700 gain (€1,900 – €1,200) would be taxed at the normal income tax rates.
However, a tax exemption may apply on the €700 gain, particularly if the shares in question are listed on a recognised stock exchange.
Maltese duty implications
The Duty on Documents and Transfers Act does not provide for any special rules or incentives in respect of share awards, share options and phantom shares and therefore the normal duty provisions apply.
The general applicable rate of duty is 2% on the selling price of the shares (or actual market value if higher).
However, certain exemptions also apply, particularly in the case of listed shares.
This article is for general information purposes only and does not constitute legal or tax advice. It is not intended to address any specific fact pattern. Professional advice should be sought based on the particular circumstances involved.
