Employee Share Incentive Schemes

Employee share schemes are in operation in many Irish companies. In fact they have become best practice for rewarding and retaining employees. In some industry sectors employees expect share participation as part of their total remuneration package.

Employees have always welcomed share schemes as they allow the employee to participate financially, and in some instances tax efficiently, in the growth of their employer’s share price.

There is a tax saving of employer PRSI (at 10.95%) for the employer where remuneration is by way of equity participation when compared to cash or other benefits.

In this article we consider the following type of schemes:

• Share option schemes
• “KEEP” share option schemes
• ‘Save As You Earn’ share option schemes
• Approved profit sharing schemes
• Restricted share schemes
• Employee share ownership trusts

• Introduced in Finance Act 2017
• No income tax, USC or PRSI at the date of grant or exercise
• No employer PRSI
• Company must be a “SME”
• Options must be granted at market value
• There are limits on the value of options which can be granted
• Does not require Revenue approval

KEEP (Key Employee Engagement Programme) is a tax advantageous share option scheme introduced specifically for certain qualifying SME companies for their employees or directors.

The tax advantage for the participant compared to an unapproved share option is that there is no tax charge on the date of grant or exercise of the share option. The tax charge arises only on disposal of the shares acquired on exercise of the KEEP option.

A qualifying company is a company which is incorporated in Ireland or in an EEA State and is resident in an EEA State and carries on its business in Ireland through a branch or agency.

The company must be an unquoted trading company or a trading company quoted on an unlisted securities market other than the Euronext Growth market (operated by the Irish Stock Exchange plc as Euronext Dublin) or a similar Stock Exchange in a country with which Ireland has a Double Taxation Agreement.

The company must also be an “SME” which is defined as an enterprise which has less than 250 employees, has an annual turnover not exceeding €50 million and/or an annual balance sheet total not exceeding €43 million.

A number of changes were announced in Finance Act 2019 which were intended to broaden the definitions of group and holding companies. When KEEP was originally introduced, the rules operated to limit the applicability of KEEP to companies holding shares in a single subsidiary. These legislative changes provide definitions for a ‘qualifying company’ and a ‘holding company’ which effectively allow companies who operate through typical group structures to qualify for KEEP.

Certain enterprises are excluded where they carry on “excluded activities”. The excluded activities are:

• Dealing in commodities or futures in shares, securities or other financial assets 
• Financial activities
• Professional services companies providing certain excluded services
• Dealing in development land
• Building and construction
• Operations carried out in the coal industry or in the steel and ship building sectors.

No, however KEEP options can only be granted to qualifying individuals.

To be a qualifying individual and awarded KEEP options the individual must throughout the exercise period, which is in general a period commencing twelve months after the date of grant of the option and ending no more than ten years from the date of grant of the option;

• be full time employee or full time director of the qualifying company, and 
• devote substantially the whole of his or her time to the service of the company, with a minimum requirement of at least 30 hours per week. 

A number of changes were announced in Finance Act 2019 which will ease the conditions required to be met by qualifying individuals so that part-time employees may qualify. All of these changes were subject to a Commencement Order, as approval from the EU Commission was required.

Further, the ‘qualifying individual’ definition has been extended to include certain parttime and flexible working employees and for the movement of employees within qualifying group structures. In brief, KEEP has now been extended to individuals who devote at least 75% of their working time to a qualifying company or who work at least 20 hours per week for such a qualifying company.

At the date of grant of a share option the total market value of the issued but unexercised qualifying share options must not exceed €3,000,000 prior to 20 November 2023 and €6,000,000 thereafter. 

There are also restrictions on the total market value of all shares, in respect of which qualifying share options have been granted by the qualifying company to an employee or director. For options granted before 1 January 2019, these must not exceed:

• €100,000 in any one year of assessment,
• €250,000 in any three consecutive years of assessment, or
• 50% of the annual emoluments of the individual in the year of assessment in which the qualifying share option is granted.

For options granted on or after 1 January 2019 these must not exceed:

• €100,000 in any one year of assessment;
• €300,000 in all years of assessment, or
• the amount of the annual emolument of the qualifying in the year of assessment in which the qualifying share option is granted.

From 20 November 2023 the shares which may be acquired can be newly issued shares or existing shares in the qualifying company.

The options must be granted at the market value of the shares at the date of grant of the share options.

There is no charge to income tax, Universal Social Charge (“USC”) or social security (“PRSI”) on either the date of grant of the option or on the date of exercise of the option.

The charge to tax arises on subsequent disposal of the shares acquired on exercise of the KEEP option.

In general, a share disposal should be regarded as a capital disposal within the charge to capital gains tax. The base cost of the shares for CGT purposes will be the amount paid i.e. the option price on acquisition. There is an annual exemption from CGT of €1,270 per individual. The current rate of CGT is 33%.

There are two payment dates:

• For disposals between 1 January and 30 November in the tax year – 15 December in the tax year
• For disposals between 1 December - 31 January in the following tax year

Options granted over 5,000 shares. 
Marginal Income Tax rate 40%. 
USC rate 8%.
PRSI rate 4%.

*Assumes no other CGT liabilities

The costs of establishing the scheme are allowed as deductions for corporation tax purposes, however the cost of funding a share issue will not be allowed for corporation tax purposes.

The company: Companies must complete returns of information regarding KEEP options. The due date for filing the return is 31 March following the end of the tax year. Failure to file a return may result in the company ceasing to be a qualifying company.

The employee: Under the self assessment system an employee must return details of the exercise of options, and subsequent disposal of the shares on his/her tax return. The due date for which is 31 October annually.

• No immediate income tax liability
• No employer PRSI 
• USC and employee PRSI is levied on the income tax free appropriation.
• All employees who have been employed for a minimum period, set by the employer, not exceeding three years must be eligible to participate on similar terms.
• Shares must be fully paid up, non redeemable ordinary shares in the company or parent company 
• Shares may be sold or taken into own hands after two years, with tax consequences
• Shares may be disposed of after three years, free of income tax, USC and PRSI. Capital gains tax may apply 
• No employee may be allocated more than €12,700 worth of shares in any one tax year
• Requires Revenue approval.

Under an Approved Profit Sharing Scheme, the usual arrangement is that employees are given the right to convert a profit sharing bonus into shares in their employing company or its parent.

Under Revenue practice, employees may also apply a percentage of basic gross salary towards the purchase of shares. This is known as ‘salary forgone’. The salary forgone element must be a subsidiary part of the overall scheme. The amount forgone cannot exceed 7.5% of basic salary or the amount of the employer funded bonus, whichever is lower. The salary forgone option must be voluntary rather than compulsory.

Also under Revenue practice, it is possible for employees to purchase shares from their own resources i.e. after tax salary. This is known as a ‘Contributory Scheme’. The contributory element must be a subsidiary part of the overall scheme with the same 7.5% restriction as stated above.

There is an overall annual limit on the value of shares which can be appropriated free of income tax of €12,700 per employee per tax year. This €12,700 can in certain circumstances in one year only (at earliest year five) be increased to €38,100 where shares are appropriated to the APSS from an Employee Share Ownership Trust (ESOT).

The income tax free appropriation amount is subject to USC and employee PRSI.

Under an APSS shares are held in trust for a minimum of two years. After that time the members may dispose of them but may be subject to income tax. Shares held for three years may be sold free of income tax, USC and PRSI, however CGT may apply.

Employees benefit by receiving a potentially income tax free stake in the company’s success through growth in the value of shares. The employer has an opportunity to offer a tax effective incentive linked to profitability/ productivity and to involve the work force in the fortunes of the company.

Practically all companies - whether private or public. This applies no matter where the company or its parent is based. For private companies there can be practical difficulties regarding valuation and providing a ready market for the shares. Companies can, subject to restrictions and conditions, buy back their own shares. The scheme itself can also provide a market for the shares.

Yes. All employees, and full-time directors of the company establishing the scheme, who have been employed for a specified period of no more than three years must be allowed to participate on similar terms. A parent company can, subject to anti-avoidance legislation, establish a scheme without any of its subsidiaries participating. Alternatively, it can establish a group scheme and choose which of its subsidiaries, and thus which employees, are to participate.

Shares may be allocated on the basis of length of service, level of basic salary and attendance. It is also possible, with Revenue agreement, to operate different levels of allocation for different business units within a company based on the relative performance of those units, or by reference to individual performance appraisal.

Participating employees accumulate funds from profit sharing bonuses and, if applicable, a percentage of salary. This fund is passed on by the company to trustees of a trust established for the purposes of the scheme. They in turn acquire and hold shares in the company or parent for the benefit of the employees concerned.

The shares may be acquired on the open market or out of a new issue of shares. Shares held by the trustees of an approved Employee Share Ownership Trust (ESOT) can be transferred to the trustees of an APSS.

The trustees, who must be Irish resident, are appointed under a trust deed which governs the scheme. They acquire and hold shares on behalf of the employees. Under tax law, these shares must be retained by the trustee for a minimum of two years.

The employees are the beneficial owners - the trustees have legal ownership but merely hold them on behalf of the employees. While shares are in the hands of the trustees, the employee can exercise shareholder rights and is entitled to the dividend stream.

The shares which the trustees acquire under an APSS must be:

• Fully paid up
• Non redeemable

In general, not subject to restrictions. There can, however, be a restriction in respect of the disposal of shares on leaving the company If the company has more than one class of shares,  the majority of shares in that class must be held by persons other than those who acquired their shares by reason of their employment.

Each participating employee can have a maximum allocation of shares of €12,700 per tax year. The trustees must retain the shares for at least two years.

There is no income tax charged on appropriation of shares. The income tax free appropriation amount is charged to the USC and employee PRSI. This USC and employee PRSI should be withheld by the employer via the PAYE system and remitted to Revenue for the month of appropriation.

After this two year period, the employee may allow the trustees to continue holding the shares for a further year. As long as the shares have been held in trust for three years, there is no income tax, USC or PRSI liability on the transfer of ownership to the employee at the end of the three year period.

If the shares are subsequently sold or gifted there will be a CGT exposure.

A potential CGT liability may arise if an employee disposes of his/her shares at a gain. In calculating the gain, the allowable cost is the market value on the date the shares were allocated to the employee. However, CGT will only apply where capital gains realised in the tax year exceed €1,270.

Gains on the APSS shares are aggregated with other gains in the tax year. The current rate of CGT is 33%.

Employee invests €2,000.
Marginal Income Tax rate 40%.
USC rate 8%.
PRSI rate 4%.

Trustees must retain shares for the first two years.

There are 2 payment dates:

• For disposals between 1 January and 30 November - 15 December in the tax year 
• For disposals between 1 December and 31 December - 31 January in the following tax year.

Subject to conditions, the company obtains tax relief for the funds given to the trustees to acquire shares and, the cost of establishing and running the scheme.

The company may pay dividends to the trustees on shares held by them. The trustees in turn allocate the net dividend they receive among the employees in proportion to their individual shareholding. It is the responsibility of the individual employee to declare details of the dividend and pay the taxes due when making a tax return for the year. Dividends can be liable to foreign withholding taxes and to Irish dividend withholding tax.

The Trustee: The trustees must report annually (Form ESS1) to Revenue indicating all share allocations under the scheme and provide information on capital receipts and company reconstructions. The due date for filing the form ESS1 is 31 March following the end of the tax year. They must also keep available complete records of all transactions carried out on behalf of members. The employee must detail acquisitions and disposals of shares and dividends received on his/her annual tax return. Failure to file a return may result in the withdrawal of approval from Revenue for the scheme.

The employee: Under the self assessment system, an employee must return details of the acquisition of the shares and subsequent disposal of the shares on his/her tax return. The due date for which is 31 October annually.

 When a company undergoes a reconstruction (e.g. merger, amalgamation, takeover, reorganisation of capital) and new shares are issued to members in place of those already held under the scheme, the new shares are treated, as far as possible, in the same way as the original shares so that the member’s tax liability is not affected by the change. Any sum paid as part of the reconstruction is treated as a capital receipt. 

Yes. Any monies applied to shares via an APSS are regarded as pensionable by Revenue.

• Securities and sums (cash amounts) must be offered on similar terms
• Securities can be transferred to the trustees of an APSS 
• No employer PRSI 
• If established in conjunction with an APSS, securities can be distributed to employees in an income tax efficient manner 
• USC and employee PRSI charges imposed on APSS subject to grandfathering rules where shares were held before 1 January 2011, also apply to shares appropriated from an ESOT to an APSS 
• Trust requires Revenue approval

Payments made by a company to an ESOT set up to acquire and distribute securities to its employees are tax deductible. An ESOT is usually established in conjunction with an APSS. The APSS (see page 13) is used to afford the employee beneficiary income tax relief on appropriation of securities up to an annual limit of €12,700.

Any company can establish an ESOT as long as it is not under the control of another company. Schemes to date have in general been established in ‘semistate’ bodies.

Yes. All employees and full-time directors of the founding company, or a group company, who have been such for a qualifying period of not more than three years, must be eligible to be beneficiaries under the ESOT.

In general, former employees and directors can only be beneficiaries of an ESOT or participants in a APSS for up to 18 months (“18 months rule”) after they cease employment, however, the period of participation can increase up to 15 years (“15 year rule”), where the following conditions are met:

• The person must have been an employee/director of the founding company or group company 
  • (i) during a qualifying period, and 
  • (ii) on the date the ESOT was established or
  • (iii) within nine months prior to that date or at any time in the five years beginning with that date 
• In the five years (or a lesser period approved by Dáil Eireann) since the ESOT was established, 50% of the securities held by the trustees were pledged as security for borrowings 
• The ESOT has been established for more than 20 years.

An ESOT operates by the company passing funds to the trustees who use the funds for qualifying purposes which include acquiring company securities. These securities after a holding period are distributed to employee participants via an APSS. A trust deed and rules are drafted which must gain prior Revenue approval.

The trustees are appointed under a trust deed. Unless there is a single corporate trustee, at all relevant times there shall be not less than three trustees all of whom must be Irish resident.

Three alternative forms of trustee are provided for:

• Majority employee representation 
• Equal company/employee representation
• Single corporate trustee with a board of directors comprised of company and employee nominated directors and a professional trustee director.

The sums received by the trustees must be expended for qualifying purposes normally within nine months.

Qualifying purposes include the following:

• Acquisition of securities which are shares (including stock) and debentures in the company
• Repayment of borrowings
• Payment of interest on borrowings
• Payment of any sum or shares to a beneficiary, or personal representatives of a deceased beneficiary
• Meeting expenses.

The trust deed must provide that securities acquired by the trustees shall be shares in the founding company which form part of the ordinary share capital, are fully paid up, not redeemable and are in general without restrictions. This has been relaxed somewhat whereby the transfer of securities other than ordinary shares to beneficiaries in an ESOT/APSS in the circumstances of certain takeovers may take place in a manner to preserve the tax benefits of the beneficiaries as set out below.

Payments received out of the ESOT are taxable. Employees will suffer income tax, USC (and possibly PRSI) on payments out of the trust.

However, if shares are distributed to the trustees of an APSS these shares can in turn be distributed to employees income tax free up to €12,700 (€38,100 at earliest in year five, if certain conditions are satisfied) in a tax year. The securities must have been held for three years by the trustees of the ESOT/APSS for the income tax relief to apply.

There is an exposure to CGT where the beneficiary employee disposes of shares acquired through the ESOT either directly or through an APSS. The annual small gains exemption is €1,270. The current rate of CGT is 33%.

There are 2 payment dates:

• For disposals between 1 January and 30 November - 15 December in the tax year 
• For disposals between 1 December and 31 December - 31 January in the following tax year.

Yes. The ESOT can be subject to income taxes, surcharge and CGT, and are subject to the rules of the self assessment system.

However, dividend income can be received free of income tax if used for qualifying purposes within a qualifying period.

There is no CGT payable on transfer of shares to the trustees of an APSS or when the proceeds are used to repay borrowings or make distributions to the personal representatives of deceased beneficiaries.

The company obtains tax relief for the costs of setting up an ESOT and for contributions made which are used by the trustees for qualifying purposes within the qualifying period.

The trustees: Trustees must report annually (Form ESOT1) to Revenue regarding details relating to the trust. The due date for filing a return is 31 March following the end of the tax year. Failure to file a return may result in the withdrawal of Revenue approval for the scheme.

The employee: Under the self assessment system an employee must return details of the acquisition of the shares and subsequent disposal of the shares on his/her tax return. The due date for which is 31 October annually.