Income Tax Ordinance, 2001 — Section 14: Employee share schemes

14. Employee share schemes.— (1) The value of a right or option to acquire shares under an employee share scheme granted to an employee shall not be chargeable to tax.

(2)Subject to sub-section (3), where, in a tax year, an employee is issued with shares under an employee share scheme including as a result of the exercise of an option or right to acquire the shares, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the fair market value of the shares determined at the date of issue, as reduced by any consideration given by the employee for the shares including any amount given as consideration for the grant of a right or option to acquire the shares.

(3)Where shares issued to an employee under an employee share scheme are subject to a restriction on the transfer of the shares

(a)no amount shall be chargeable to tax to the employee under the head “Salary” until the earlier of

(i)the time the employee has a free right to transfer the shares; or

(ii)the time the employee disposes of the shares; and

(b)the amount chargeable to tax to the employee shall be the fair market value of the shares at the time the employee has a free right to transfer the shares or disposes of the shares, as the case may be, as reduced by any consideration given by the employee for the shares including any amount given as consideration for the grant of a right or option to acquire the shares. 1 The words “such rate, if any, as the Federal. Government may, by notification, specify” substituted by the Finance Act, 2012 54 Chapter III – Tax on Taxable Income

(4)For purposes of this Ordinance, where sub-section (2) or (3) applies, the cost of the shares to the employee shall be the sum of

(a)the consideration, if any, given by the employee for the shares;

(b)the consideration, if any, given by the employee for the grant of any right or option to acquire the shares; and

(c)the amount chargeable to tax under the head “Salary” under those sub-sections.

(5)Where, in a tax year, an employee disposes of a right or option to acquire shares under an employee share scheme, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the amount of any gain made on the disposal computed in accordance with the following formula, namely: A—B where A is the consideration received for the disposal of the right or option; and B is the employee’s cost in respect of the right or option.

(6)In this sub-section, “employee share scheme” means any agreement or arrangement under which a company may issue shares in the company to

(a)an employee of the company or an employee of an associated company; or

(b)the trustee of a trust and under the trust deed the trustee may transfer the shares to an employee of the company or an employee of an associated company. 55 Chapter III – Tax on Taxable Income PART III HEAD OF INCOME: INCOME FROM PROPERTY