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Do you have a tax risk when the company you work for gives you shares?

Do you have a tax risk when the company you work ...

“Wealth Redistribution” seems to be one of the subjects that most people are talking about. In the statement to the National Conference on Wealth Redistribution and Poverty Eradication by His Excellency, Dr. Hage Geingob, President of the Republic of Namibia, it was said that part of the plan under consideration is aimed at owners of companies diluting shareholding to include employees.

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This being said, is there a tax risk for employees that receive shares in their employers’ companies and what is the employers’ responsibility in respect of this distribution?

Employees working in Namibia are taxed on amounts, whether in cash or otherwise, which they receive or which accrues to them as a result of services they render within Namibia. Amounts can even accrue to an employee for tax purposes where they have entitlement thereto but have not actually received them.

Also included in an employees’ taxable amount is any benefit they receive as a result of services rendered or to be rendered.

The question that follows is, what happens when an employer offers an employee shares as an incentive for a job well done during the current year which they can only dispose of after being in the employment of the firm for an additional 5 years.

 Based on the aforementioned taxation rules, it is clear that the said employee has received an amount, although not in cash, the amount was received in the form of shares and the value thereof would be the market value at the date the shares are received taking into account the fact that, in terms of the agreement, they can only dispose of the shares after 5 years. It can therefore be said that offering employees shares for the services they render triggers a taxable amount in their hands.

It should also be noted that the liability for tax is also triggered where employers offer shares to potential employees as an incentive when negotiating employment contracts. For example, an employee may receive shares upon signing of the employment contract but may only dispose of those shares once the probation period has been completed Thus by accepting the employment contract, a tax liability is triggered before the employee has rendered any services and before the employee is able to dispose of the shares upon successful completion of the probation period.

So when exactly does this amount become taxable? In terms of current legislation, this is as soon as the shares have been received or the right to the shares has accrued, irrespective of the fact that you can only sell them at a later date. Furthermore, on the basis that the said amounts are linked to the services rendered or to be rendered by the employee, legislation further provides that the employer should withhold the tax from the employee and pay this over to the taxation authorities.

In most instances, it is more likely than not, that at the time of the shares becoming taxable, employees do not have the funds to pay the tax owing by them.  They cannot even sells the shares to raise the cash to pay their taxes, due to the restrictions imposed under the agreement they made with their employers.

Under the first example set out above, the employee had to be in the employment of the employer for 5 years, and in the second example, the employee would have had to complete the probation period before they would become entitled to dispose of the shares.

The question that follows is, how can this burden be alleviated? Drawing guidance from our neighbouring country, South Africa has legislation in place which defers their tax authorities’ right to tax compensation in the form of shares until a date when all restrictions lift and the employee may dispose of the shares. 

 It is therefore clear that what Namibia also needs is legislation that will alleviate the current burden placed on employees being taxed on the receipt of an asset that they can only dispose of at a later stage. Perhaps this too will be an integral part of the “wealth redistribution” efforts. Time will tell.

© 2018 KPMG Advisory Services (Namibia) (Pty) Ltd, a Namibian company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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