One of the many ways in which a company can encourage its employees to contribute to its success is to align the employees’ financial interest with that of the company. This alignment can be achieved by compensating the employees with the shares of the company through various share compensation plans. These plans are designed to either give the employees the option to purchase the shares of the company (“Employee Share Option Plans” or “ESOPs”) or grant free shares to the employees (“Share Award Plans”) provided however, that some conditions are fulfilled.
It is essential that the tax implications of these plans are carefully considered before a company offers these plans to its employees. Although there is no specific guidance on the tax treatment of these plans under the income tax law that applies to individuals – the Personal Income Tax Act 2011 (as amended) (PITA) – nonetheless classifies income derived from these plans as an ‘emolument’.
Section 5(5) of the PITA defines gross emoluments as “wages, salaries, allowances (including benefits in kind), gratuities, superannuation and any other incomes derived solely by reason of employment”.
Taxation of Employee Share Schemes in Nigeria (003)