Understanding Employee Share Based Compensation Taxes for Employers & Employees in Nigeria

News Consulting STRANSACT

As competition tightens, businesses across industries constantly innovate to attract and retain the best and brightest minds. One strategy gaining significant traction is Employee Share-Based Compensation (ESBC).

ESBC programs offer employees a stake in the company’s success. They receive shares or stock options, essentially becoming mini-owners alongside shareholders. This incentivizes them to perform well and contribute to the company’s growth, as their financial well-being becomes directly tied to the company’s performance. It becomes a win-win situation: the company thrives with a motivated workforce, and employees share in the rewards of their hard work.

However, a crucial gap exists in employee knowledge. Many individuals participating in ESBC programs may be unaware of the potential tax implications. This lack of understanding can lead to unexpected tax burdens and ultimately diminish the program’s intended benefits. Imagine the disappointment of an employee who receives shares, only to discover later they owe a significant amount in taxes they were not prepared for.

This article aims to bridge this gap by providing a comprehensive review of the tax implications of ESBC in Nigeria, empowering both employees and employers to make informed decisions and unlock the full potential of share-based compensation.

Understanding Employee Share-Based Compensation (ESBC)

Employee share-based compensation (ESBC) offers employees a stake in a company’s growth and aligns their interests with shareholders.

These programs come in various forms, including:

Stock Options: Employees receive the right to buy company shares at a predetermined price (exercise price) within a specific timeframe.
Restricted Stock Units (RSUs): Employees are granted shares that vest over time, typically after meeting certain performance conditions.
Employee Stock Purchase Plans (ESPPs): Employees can purchase company shares at a discount through payroll deductions.
Stock Appreciation Rights (SARs): Employees receive cash compensation based on the increase in the share price from the grant date.

While ESBC incentivizes employees and promotes long-term commitment, it also carries tax implications for both employers and employees.

Read More: Taxing Times: A Q&A with Stransact's Victor Athe on Nigeria's Tax Landscape

Tax Implications for Employees in Nigeria

The tax treatment of ESBC for Nigerian employees varies depending on the type of award and the timing of certain events. Here is a breakdown of key considerations:

Grant Date: Section 3(b) of the Personal Income Tax Act (PITA) defines all employment income as taxable. However, there is currently no specific provision in PITA addressing taxation at the grant date of stock options or RSUs.
Vesting: Like the grant date, Nigerian tax law does not explicitly address taxation upon vesting for RSUs or stock options.
Exercise (Stock Options): Following a 2017 public notice by the Lagos State Internal Revenue Service (LIRS), employees exercising stock options are liable for tax on the difference between the fair market value of the shares at exercise and the exercise price. This difference is considered taxable income.
Disposal (Sales of Shares): The sale of shares acquired through ESBC triggers capital gains tax on any appreciation in value since the acquisition.

However, the Finance Act 2021, exempts disposal of shares from CGT charge, if:

The disposal proceeds are reinvested in Nigerian Companies.
Disposal proceeds are less than N100 million in any 12 consecutive months and adequate returns are made to the Tax Authority.
The shares are transferred between an approved borrower and lender in regulated securities lending transactions per CITA.

It’s important to note that tax laws can be complex and subject to change. Consulting with a qualified tax professional is recommended to determine the specific tax implications for your situation.

Tax Implications for Employers in Nigeria

Employers offering ESBC programs also have tax considerations:

Tax Deductions: Employers may be eligible for tax deductions on expenses related to employee stock options or other equity awards, subject to specific conditions outlined by Nigerian tax authorities.
Financial Reporting: As per the International Financial Reporting Standard (IFRS) 2, employers are required to report share-based compensation transactions on their financial statements.

Read More: How Does Internal Audit Contribute to Good Corporate Governance?

Conclusion: Navigating the ESBC Landscape with Confidence

The tax consequences of Employee Share-Based Compensation (ESBC) encompass a range of considerations for both employees and employers within the Nigerian fiscal framework. While the legal framework continues to evolve, a clear understanding of current tax regulations and proactive planning are necessary for optimizing the benefits of these incentive programs.

How Can We Help?

At Stransact, we help businesses in Nigeria design and implement effective ESBC programs while navigating the associated tax complexities. Our team of experienced advisors can provide comprehensive guidance and ensure compliance with all relevant regulations.