Withholding employees' tax in respect of an incentive scheme

The South African Revenue Service (SARS) recently released Binding Private Ruling 117 in which it had to be considered whether, and by whom, employees’ tax had to be withheld in respect of certain share options granted to employees in circumstances where the employer and the person granting the share options are not the same person.

A foreign non-resident holding company and its local resident subsidiary wanted to implement two incentive schemes for the benefit of directors and employees of the subsidiary. The holding company would issue options to the relevant employees and directors that would entitle them to acquire shares in the holding company for no consideration. The exercising of the options would be subject to certain conditions.

SARS ruled that employees’ tax need not be withheld in terms of paragraph 11A of the 4th Schedule to the Income Tax Act, No 58 of 1962 (Act) at the time the option is granted, but employees’ tax will however have to be withheld when the option vests in terms of section 8C.

Essentially, section 8C(3) of the Act provides that an option will vest at the earliest of when the restrictions on the exercise or disposal of the option cease to have effect, or when the option lapses.

In respect of who would be liable for withholding the employees’ tax at the time of vesting, SARS ruled that the holding company and the subsidiary would be jointly and severally liable for withholding employees’ tax in terms of paragraph 11A of the Fourth Schedule of the Act if there is a gain in terms of section 8C of the Act.

Where the option is to be cash settled, the holding company and subsidiary will also be jointly and severally liable to withhold employees’ tax, but only in respect of the vesting of the option in terms of section 8C of the Act and not in respect of the cash amount paid.