28 March 2024

Do Employee Share Options Encourage Employee Retention?

CSB Group


Established in 1987, CSB Group offers diverse yet specialised business solutions and commercial services to a vast portfolio of corporate and private clients seeking to setup a business or relocate to Malta. With an 100+ team of qualified professionals we strive to be a partner of choice to our clients, providing them with tailor-made solutions, uniquely aimed at helping them succeed.
Employee share options are a popular method utilised by companies to incentivise their employees by offering them the opportunity to acquire shares in the company...
Malta Employment and HR
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Employee share options are a popular method utilised by companies to incentivise their employees by offering them the opportunity to acquire shares in the company as part of their remuneration package. This practice aims to align the interests of employees with those of the company and its shareholders, fostering loyalty, motivation, and a sense of ownership among employees.

Legal Framework

So far, there are no specific legal frameworks in Malta for companies providing share options to their employees. In this sense, companies are free to structure their own share option schemes in conformity with the applicable Maltese laws, such as the Companies Act (Chapter 386 of the Laws of Malta) and the Income Tax Act (Chapter 123 of the Laws of Malta). Moreover, companies must comply with the reporting requirements set forth by regulatory authorities, such as the Malta Financial Services Authority (the ‘MFSA') and the Inland Revenue Department.

Essentially, provided that the options consist solely in administering employee-participation schemes, companies are exempted from obtaining an investment services license, as per the Investment Services Act (Exemption) Regulations (S.L. 370.02), thereby offering better incentive opportunities to employees. Having said this, companies opting for such schemes need to submit their plan with the MFSA for its confirmation on such exemption. Additionally, the prohibitions laid down in the Companies Act as regards financial assistance (particularly under Articles 106 and 110), do not apply where the acquisition of the company's own shares is carried out for the benefit of its own employees.

Share Option Plan

For a company to implement an employee share option scheme, the first key step would be to draw up a share option scheme, which would need to be approved by the board of directors and shareholders of the company, outlining the terms and conditions under which eligible employees can acquire shares. The eligibility criteria for participation in the share option scheme, including factors such as employment tenure, performance, and position within the company, are to be determined solely by the company.

Within this scheme, eligible employees would be granted options to purchase company shares at a predetermined price, which is typically set at the fair market value of the shares at the time of grant. Having said this, it is important to keep in mind that employee share options often have a vesting period during which employees must remain employed by the company to become entitled to exercise their options. Vesting periods may vary depending on the terms and conditions of the scheme but would be generally planned over several years to promote employee retention. Once the share options become vested, employees would be able to exercise such options within a specified exercise period, which period would be determined by the scheme and may expire after a specific term or upon the happening of a particular event, such as the termination of employment.

Good Corporate Governance

When implementing and managing share option schemes, the principle of good corporate governance comes very much into play. Transparent disclosure of relevant information in the company's financial statements, annual reports, and other corporate communications will aid in maintaining trust and confidence among shareholders, investors, and employees. Thus, companies need to maintain proper records of share option grants, exercises, and any other transactions in this regard.

Tax Implications

It is also important to keep in mind the tax implications brought about by share options. The taxation of employee share options in Malta can be complex and depends on various factors, including the nature of the options, the timing of their exercise, and the individual circumstances of employees. Generally, employees may be subject to tax on the gain realised upon exercising their options, while employers may have reporting and withholding obligations. In fact, employee share options are established by the Fringe Benefit Rules (S.L. 123.55) and the Income Tax Act as being a fringe benefit, which are ultimately taxable on the date that the option is exercised by the employee. This is a tax efficient form of remuneration by virtue of Rule 37 of the Fringe Benefit Rules 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”, and this at a fifteen percent (15%) tax charge.


All in all, employee share options can be an effective tool for attracting and retaining talent, encouraging and motivating employees to contribute to the company's growth and success, and aligning their interests with those of the company. Nonetheless, companies should seek professional advice when looking into offering employee share options as these may end up having an opposite effect to the intended scope if not administered properly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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