Tax treatment of Employees’ Stock Options in Pakistan
Stock options are a type of employee compensation that allows employees to purchase company stock at a predetermined price, known as the strike price. Stock options can be an attractive benefit for employees, as they allow them to potentially profit from the appreciation of the company’s stock.
In Pakistan, the taxability of stock options depends on a few factors. The first component of taxation is whether the shares have vested to the employee with or without restrictions on transfer or sale. If the shares have vested to the employee with restrictions on transfer, they will not be considered as issued and therefore not taxable until the restriction is removed. On the other hand, if the shares have vested to the employee without any restrictions, they will be considered as issued and taxable as salary by the amount of the market value minus any strike price paid for the shares.
The market value for a listed company is the quoted price on the stock exchange, while the market value for a private company is the balance sheet break-up value, calculated as the equity divided by the number of shares.
The second component of taxation relates to the disposal of the shares. After the shares have been issued and any tax has been paid on them as salary, they will be reflected in the personal wealth statement until they are disposed of. When the shares are disposed of, any capital gain (the sale consideration minus the amount taxed as salary and the strike price paid) will be taxed.
In the case of a private company, the full amount of the capital gain will be taxed at normal rates, which range from 5% to 35% depending on the amount. In the case of a listed company, the capital gain will be taxed at a declining rate, starting at 15% if disposed of within one year and decreasing to 0% after six years. This rule applies to shares issued after July 1, 2022.
In conclusion, the taxability of stock options in Pakistan depends on the vesting and transfer restrictions of the shares, as well as the timing and circumstances of their disposal. It is important for employees to understand the tax implications of stock options in order to properly plan for and manage their financial affairs.