The use of shares options for the payment of goods and services is becoming increasingly common. While some companies use it to manage their cashflow, notably with the use of equity-settled share-based payments, other companies include it as part of the remuneration package of their directors, executives and other employees.

Typical employee share-based remuneration includes some conditions known as "vesting conditions" that must be satisfied for the counterparty to be entitled to either cash, assets or equity in share-based structures. International Financial Reporting Standards (IFRS) 2 - Share-based Payment details two types of vesting conditions which are: (i) non-market based vesting conditions such as employees completing a minimum period of service, achieving a minimum sales or earnings target or completing a particular projects; and (ii) market-based vesting conditions which include achieving a minimum increase in the share price of the company, achieving minimum increase in shareholders' return or a specified target share price.

In this brief, we set out the tax consequences or implications of using share options for payment of goods and services.

Tax Implication.

Capital Allowance: Based on the Companies Income Tax Act (CITA) 2004, companies or taxpayers are entitled to claim capital allowance for incurring cost to acquire qualifying capital expenditure (QCE), and the applicable rates are set out in the second schedule of CITA. This provision of the law is applicable to QCE acquired using share options. Therefore, companies or taxpayers that have or intend to acquire QCE through share options should consider claiming the capital allowance on the asset acquired in its tax returns.

Value Added Tax (VAT): Goods or services supplied and paid for using share options fall within the purview of the Value Added Tax Act (VATA), and are liable to VAT (Input VAT) at 5% except to the extent to which such goods or services are exempted from VAT. Companies in the manufacturing and retail sectors can offset the input VAT from their output VAT (VAT on sales) and pay the excess to the government or claim refund for excess input VAT.

Cost of issuing Share Options: Issuing a share option usually comes with some costs. Based on the extant tax law provisions in Nigeria, and FIRS circular on the adoption of IFRS these are capital costs and as such are not allowable as deductions for income tax purposes.

Pay-As-You-Earn: In 2017, the Lagos State Internal Revenue Service (LIRS) issued a circular on the taxation of share based payments. The thrust of the circular was to provide guidelines as to the taxation of share based compensation for employees. According to the circular, the intrinsic value which is the difference between the market value of the shares and the exercise price of the share options constitutes a benefit-in-kind (BIK) and is taxable under the Personal Income Tax Act (PITA). Consequently, employers are obligated to deduct the tax and remit to the tax authority. The duty to deduct tax arises on the exercise or payment date.


Many companies are gradually adopting the use of share-based payments given the benefits it has on the long-term success of a company and the various stakeholders. However, this must be done having fully assessed the tax implications to the company and counterparty.

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.