Employment and Industrial Relations Law

Employee Share Options

05 Oct 2023

7 min read

Authors: Ann Bugeja, Christine Borg Millo & Thea Bonett

The fundamental characteristics of a striving work environment are employee engagement, development, and retention. However, in an ever-changing and highly competitive job market, this has proven to be a challenge that many companies face. An effective strategy to retain employees is by creating short-term and long-term incentive schemes that strike a balance between the needs and aims of employees, and the demands and opportunities of the company itself.

These incentive schemes are strategies used by companies to reward high level performance and exceptional results with additional benefits. The type of scheme adopted depends on the company’s strategic goals, the purpose of implementing an incentive scheme, the company’s future plans and expected growth, and the market conditions in which the company operates.

Employee Share Options

Employee share options are a long-term incentive scheme through which employees are granted the right to acquire shares in a company at a predetermined future date and at a specified or benchmarked value. This is not an obligation on employees to buy or subscribe to shares in the company or an associated company; rather it is a right which employees can exercise at their own discretion within the exercise window.

These schemes are made available through options, derivative contracts or instruments, whereby the performance of the underlying asset throughout the option period determines the value of the share at acquisition. The option exercise window is that period after the lapse of the lock-in or vesting period during which the employee can exercise the option, as such, it is possible that the actual value of the share would have exceeded the predetermined option price, and the employee would have made a profit in exercising the option. This element of share options in conjunction with the lock-in or vesting period required to lapse before an employee can exercise the right, increases employee retention, and instils a sense of commitment towards the company.

Share options are often granted as part of a cost-effective performance-based remuneration scheme to improve employee performance and align the interests of key employees with those of the company. The specific class of shares offered through employee share option schemes differ from other classes of shares, to the extent that they may carry different rights. Additionally, share option prices vary between different companies depending on each individual company’s option strategy, and the option price may be valued either at:

  • The market price at the time of award;
  • A preferential rate of the market price at the time of award; or
  • A preferential rate at the time of exercise.

Legal Basis

Despite the increasing popularity of employee share options, there is a lack of legal framework specifically regulating their nature and provision, and companies are, in the most part, free to structure such schemes in any way they deem fit. The main statutory provisions in terms of such schemes are found in the Investment Services Act (Exemption) Regulations (Subsidiary Legislation 370.2) and the Companies Act (Cap. 386 of the Laws of Malta).

By virtue of article 3(1)(g) and (bb) of the Investment Services Act (Exemption) Regulations, ‘persons providing investment services consisting exclusively in the administration of employee participation schemes’ are not required to be in possession of a licence for investment services. Additionally, article 5(1)(c) exempts schemes operated by a company for its own employees, former employees, and their dependents or for such persons of companies in the same group, from requiring a collective investment scheme licence. These are not automatically operative exemptions, as they are subject to a determination in writing by the competent authority.

Similarly, article 106 of the Companies Act prohibits undertakings from acquiring their own shares other than on original subscription if it fulfils certain requirements. However sub-article 4 exempts the requirement of authorisation being given by an extraordinary resolution, where the shares acquired are for distribution to employees of the company or of a group company within one year. Furthermore, article 110 makes it unlawful for a company:

  • to subscribe, hold, acquire, or deal in its own shares or of its parent company; or
  • to give financial assistance for the purpose of an acquisition or subscription of any shares in the company or its parent company.

Sub-article 2 exempts such transactions when effected for the purpose of acquiring of shares by or for the company’s employees or the employees of a group company.

Hence, other than satisfying these main requirements and being in conformity with the law, the scope, terms and conditions of the scheme are left at the company’s discretion provided it is so authorised by the Memorandum and Articles of Association to grant share options to employees.

Tax Treatment of Employee Share Options

Share options are not only a cost-effective remuneration scheme, but also a tax efficient form of remuneration. The basis for taxation of employee share options are the Fringe Benefit Rules (S.L. 123.55) and article 4(1)(b) of the Income Tax Act (Cap. 123 of the Laws of Malta) which stipulates that any gains and profits derived from employment or office are subject to income tax.

Share options fall within the definition of fringe benefits in terms of Rule 3 of the Fringe Benefit Rules, as they are a benefit provided by reason of employment or office by an employer to his employee. However, as per Rule 36 of the Fringe Benefit Rules, it is only upon the exercise of the option by an employee that it is deemed to constitute a benefit and not the mere granting of the option. Hence, every time the option is exercised, and the employee acquires shares in the company, the transfer shall be deemed to be a fringe benefit taxable under article 4(1)(b) of the Income Tax Act.

This is a tax efficient form of remuneration by virtue of Rule 37 which states that the taxable value of a share option is “the excess, if any, of the price which the shares in question would fetch if sold in the open market on the date when the benefit is provided over the price paid or payable by the beneficiary for those shares”. Moreover, the income represented by the benefit’s value is considered to constitute a separate and distinct form of chargeable income, and as such is subject to a tax rate of 0.15c for every €1.00. Thus, the price paid or payable by the beneficiary for those shares is taxable only on the difference between the market price and the option price at the time of acquisition, at a fifteen percent (15%) tax charge.

To take the following as an example:

In 2012, an individual is granted an option to purchase shares in the company that employs him at €3 each. In 2016 the employee exercises his option by purchasing 1,000 shares at €3 each. The market value of shares at that time is €5 each). In 2018 the employee sells the shares at €7 each.

  1. In 2012, there was no fringe benefit;
  2. The exercise of the option in 2016 (i.e. when the employee acquired the shares) constitutes a fringe benefit;
  3. The amount of the fringe benefit is the difference between the market price of the shares and the option price at the time the option is exercised, that is, €5,000 – €3,000 = €2,000;
  4. The tax payable on the fringe benefit is 15% of €2,000 = €300;
  5. The gain on the disposal of the shares in 2018 will constitute a capital gain chargeable under article 5 of the Income Tax Act. It is calculated on the difference between the sale price of the shares and the market price of the shares at the time when the option was exercised, that is: €7,000– €5,000 = €2,000.


An ideal method to optimise employee performance, retain employees and align interests, incentive-based remuneration schemes are not without their risks, and companies should take various key components into account before implementing such schemes. It is essential to consider the objectives for implementing such a scheme and the complexity of operating it, what components should be catered for and what performance goals an employee needs to meet before being offered the share options. These, amongst others, are considerations which could help companies tailor incentive strategies in accordance with their unique culture and long-term objectives, provided they are in conformity with any applicable laws.