Tax Implications of Employee Share Schemes in Nigeria

Employee share schemes have tax implications for both the company issuing the shares and the employees receiving them. Understanding these implications is essential before designing a scheme. This article provides a general overview of the key tax considerations for Nigerian listed companies and their employees.

Tax at Allotment: PAYE on the Value of Shares Received

When an employee receives shares for free or at below market value, the benefit may be treated as employment income subject to Pay As You Earn (PAYE) tax. The taxable amount is generally the market value of the shares at allotment, less any amount the employee paid for them. The company is responsible for withholding and remitting PAYE on this benefit. The specific treatment depends on the scheme structure and how the Federal Inland Revenue Service (FIRS) treats it.

Withholding Tax on Dividends

Dividends paid to employee shareholders are subject to withholding tax (WHT), deducted at source by the company before payment reaches the employee. This is the same treatment that applies to all dividend payments to individual shareholders in Nigeria — employee scheme shares receive no special treatment. Verify the applicable rate with your broker or a qualified tax adviser, as WHT rates are set by regulation and may change. WHT is a final tax; no further income tax is payable by the employee on the dividend.

Capital Gains on Disposal of Shares

When an employee sells shares that were acquired under an employee share scheme, any gain realised may be subject to capital gains tax (CGT). In Nigeria, the Capital Gains Tax Act imposes a tax on chargeable gains from asset disposal. However, gains from the disposal of Nigerian stocks and shares traded on the NSE/NGX are historically exempt from CGT under applicable exemption provisions. This position is subject to legislative change — consult a qualified tax adviser to confirm the rules applicable to your situation before making decisions.

PAYE Implications at Option Exercise

For stock option plans, the tax point is generally when the employee exercises the option and acquires the shares — not at the grant date. The taxable benefit is typically the difference between the market value at exercise and the exercise price. This gain may be treated as employment income subject to PAYE. The exact treatment depends on the scheme structure and current FIRS guidance.

Company Tax Deduction

The company may be able to claim a deduction for the cost of the employee share scheme — either the cash cost of purchasing shares in the market, or the forgone value of newly issued shares. The deductibility and timing of this depends on the scheme structure and current Companies Income Tax Act (CITA) rules. Tax advisers should review this.

Key Takeaways for Nigerian Companies

• Shares received for free or below market value at allotment may be subject to PAYE
• Dividends on employee-held shares are subject to withholding tax, deducted at source — verify the current rate with a qualified tax adviser
• Gains on disposal of NSE-listed shares are historically exempt from CGT — consult a qualified tax adviser to confirm the current rules
• For option plans, PAYE typically applies at exercise on the gain over the exercise price
• The company may be able to claim a tax deduction for the cost of the scheme
• Always take qualified Nigerian tax advice before designing your scheme