1 Introduction
1.1 Share incentive schemes
Employee share incentive schemes provide an effective means of rewarding employees by offering tax savings on the acquisition of company shares. They also encourage employee loyalty and participation through long-term equity incentive awards.
There are benefits to both the employer and employee with the introduction of a share incentive scheme. In particular, schemes offer a variety of advantages as follows:
(a) A share scheme is a cost-effective method of rewarding and motivating key staff. Offering employees a stake in the business (or parent company of the business) is a less expensive and more realistic alternative to giving cash bonuses or pay rises in the current climate.
(b) Share schemes are a useful employee retention tool. The offer of a deferred reward encourages loyalty to the company and can increase productivity amongst employees.
(c) Share schemes offer a means of involving employees in the success / performance of a business.
(d) The costs of setting up and operating share schemes are deductible for corporation tax purposes. No employer social insurance (PRSI) is payable on share-based benefits offered to staff although employee PRSI may be payable.
(e) There can be significant tax savings for employees and employers depending on the type of scheme used.
(f) Share schemes can help underpin the financial performance of a business or set the groundwork for an exit strategy.
(g) There are significant advantages of offering shares as remuneration in a 'bear' market (ie, the theory of offering shares at a relatively low market value with scope for greater returns as the economy improves).
1.2 Types of share incentive schemes
The following are some of the main types of employee share incentive schemes which can be implemented in Ireland, many of which offer significant tax advantages, and which are discussed in detail in this paper:
- Unapproved Share Option Schemes
- "Save As You Earn" Share Option Schemes (SAYE)
- Approved Profit Sharing Schemes (APSS)
- Employee Share Ownership Trusts (ESOT)
- Restricted Stock Schemes / Share Clog Schemes
- Partly Paid Shares Schemes
- Phantom Option Schemes
1.3 How we can help
Our highly specialised Employee Benefits and Tax Groups can provide both general and specific advice in relation to:
(a) Establishing new or restructuring existing equity-based employee incentivisation packages, specifically, advising in relation to both approved and unapproved schemes.
(b) Devising and implementing the most tax-efficient schemes for different categories of employee within a business.
(c) Advising on legal issues arising from corporate restructurings, mergers and acquisitions such as they relate to employee share schemes.
(d) Advising on the tax and securities law implications arising from establishing and administering share schemes in Ireland.
(e) Ongoing advice in relation to administration issues / dispute resolution.
(f) Advising on imminent or recent changes in the law or applicable tax regime.
2 Share / stock option schemes
The purpose of a share option scheme is to provide eligible employees with the opportunity to participate in the world-wide growth and profitability of a company. Typically, a share option scheme works as follows:
(a) Each eligible employee is granted options to acquire shares in the employer company at a certain price, which can be at a discount to the market value of the shares on the date that the options are granted.
(b) Each eligible employee to whom a share option has been granted is required to exercise that share option within a specified period (typically up to seven years) from the date of grant of the option.
(c) Upon exercise of the option, the employee acquires shares in the company in return, where applicable, for payment of consideration equal to the price specified in the option granted to him. Typically, share options are not exercised until there is a market for the shares, eg, on a flotation, trade sale, etc. In such circumstances, on exercise of the option the employee can sell the shares immediately to clear any borrowings used to fund the exercise of the option and any tax liability arising (a 'cashless exercise').
(d) Provisions can be included in the scheme to prevent the employee from selling the shares acquired before a specified date or event.
3 Recent changes
There have been a number of relatively recent changes to the taxation regime applicable to stock option schemes in Ireland. Up until 24 November 2010, Irish social insurance contributions (pay related social insurance ("PRSI") at rates up to 4% for Irish employees and 10.75% for employers) and an employee health levy (4% / 5%) did not apply to stock option schemes. However, from 24 November 2010, changes to the tax regime now mean that Irish employee social insurance contributions will now apply to these stock option schemes. The government had also initially sought to apply employer PRSI to such schemes but they have since rowed back from this position. Thus, no employer PRSI charge will arise in respect of stock option schemes.
In addition, from 1 January 2011 a new Universal Social Charge ("USC") at rates of up to 7% (which encompasses and replaces the previous income levy and health levy charges), has applied on taxable events in relation to stock options together with employee PRSI (where the options are granted to Irish employees). The application of such charges will represent a substantial increase in the cost of providing these schemes in future.
From 1 January 2012 the charge to employee PRSI applies to all options exercised. A grandfathering provision had applied in 2011 only in respect of options granted before 1 January 2011.
An Irish employee or an employee within the charge to tax in Ireland on stock option gains receiving and / or exercising stock options is responsible for payment of income tax, PRSI and USC themselves, on a self-assessment basis and there are strict time limits within which the tax must be paid. Prior to 1 July 2012, the obligation fell upon the employer to operate the employee PRSI charge. However, social welfare legislation has amended this position with the result that the employee is now the accountable person with respect to all taxes and charges upon a gain arising on the exercise, assignment or release of stock options.
4 Unapproved share option schemes
The concept of "approved" share option schemes was abolished in Ireland with effect from 24 November 2010. However, even when the legislation provided for "approved" share option schemes, "unapproved" share option scheme proved a more popular choice among employers because of the flexibility afforded by such schemes. All companies are eligible to issue unapproved options and Revenue approval is not required, with the company selecting the employees to whom options will be offered. Where an international group wishes to roll out its existing stock option plan in Ireland, this will normally take the form of an "unapproved" share option scheme.
4.1 Principal features
- May be implemented by any company.
- Does not have to be offered to all employees.
- No tax liability if the option is not exercised.
- Revenue approval is not required.
- Income tax, employee PRSI and USC payable on gain made on exercise, assignment or release of option.
- Employee PRSI and USC payable on any occasion on which income tax applies.
- CGT payable on additional gains on disposal of the shares.
4.2 Operation of the scheme
Under an "unapproved" share option scheme, the company has total discretion to select the individuals who will receive options and to establish the terms and conditions applicable to the options, including the option exercise price.
4.3 Tax consequences
4.3.1 Income tax on grant
Where an option granted to an employee is exercisable within seven years of the date of grant, no charge to income tax, employee PRSI or USC arises on the grant of the option.
Where the option granted can be exercised later than seven years after its grant (a 'long option'), Revenue reserve the right to treat the grant of the option as giving rise to a benefit in kind valued at the difference between the market value of the shares at the date the option is granted and the price at which the shares can be acquired by the employee on exercise of the option. As such, income tax, employee PRSI and USC will apply to the grant of long options on this difference. In order to avoid such a charge to income tax, it is therefore recommended that the option price for the shares should match the market value of the shares at the date on which the option is granted if the option exercise period exceeds seven years.
4.3.2 Income tax on exercise, assignment or release
When the option is exercised, assigned or released, income tax, employee PRSI and USC arises on the difference between the option price and the market price at the date of exercise (see example below). This is payable by the option holder within 30 days (see 4.4 below). In the event that a long option is exercised, which was taxed on grant, a credit is available for any tax paid at the time the option is granted.
4.3.3 CGT
CGT at a rate of 33% (from 6 December 2012) will be charged at the date of disposal of the shares on any gain arising between the acquisition of the shares and the disposal of the shares. The gain equals the proceeds on disposal of the shares less the market value of the shares on the date of exercise (ie, the consideration paid for the shares, together with the share option gain which was subject to income tax on exercise), subject to the annual exemption of €1,270 per person.
4.4 Due date for income tax, PRSI and USC
Income tax, PRSI and USC is payable by the employee within 30 days from the date the option was exercised. A Form RTSO1 must be submitted to Revenue along with the payment due. It is important to note that it is the individual employee who must pay the tax due and include the details in his / her income tax return. Failure to pay the relevant taxes and charges by the due date will give rise to daily interest charges from the due date of payment until the liability is paid.
4.5 Issues for the company
As noted above, from 1 July 2012, the obligation to pay all taxes and charges rests with the employee. Therefore, the employer no longer accounts for employee PRSI through payroll.
A deduction for the costs incurred by a company in establishing an "unapproved" share option scheme is in practice allowed in computing the taxable profits of a company. The basis for claiming the deduction is that the costs fall within the statutory provision, which permits a deduction for any expenses that are incurred wholly and exclusively for the purposes of the trade carried on by the company.
A company granting share options to an employee is required to give particulars in writing to Revenue on Form RSS1 where any of the following events occur:
(a) the granting of a share option in respect of which tax may become chargeable;
(b) the allotment of any shares or transfer of any asset in pursuance of any option or right;
(c) the payment of any consideration for the assignment or release, in whole or in part, of any such option or right; and
(d) the receipt of written notice of the assignment of any such option or right.
The relevant return must be made not later than 31 March in the year following the year in which any of the above events take place.
Additionally, legislation provides for penalties for failure to make the return specified above, or for the making of a false return, or aiding the making of a false return.
To view the complete Briefing Paper, please click here.
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.
