The Department of Finance recently published the Tax Strategy Group's paper on possible change to the taxation of share-based remuneration. The Tax Strategy Group is an interdepartmental committee chaired by the Department of Finance which provides input into the budgetary process.
Share-based incentive schemes are a key tool for businesses in recruiting and retaining employees. This has been acknowledged by the Government and the current Programme for Government contains a specific commitment to explore the mechanisms through which small and medium sized enterprises (SMEs) can reward key employees with share options in a tax-efficient manner.
We look at some of the issues raised by the public consultation process and the potential tax changes which may be on the way as a result.
The (Tax) Problems
The key issues which arose from the public consultation were as follows:
- In the case of a share option scheme which is not approved by Revenue, an employee is liable to pay the tax (at marginal income tax rates which often exceed 50%) at the time the option is exercised and the employee acquires the shares. However, in unquoted companies there may be no market for the employee to sell some of these shares to fund the tax bill. This is particularly relevant to start-up companies. Employees may need to pay the tax liability using other income, which has already been taxed. This can undermine the value to the employee of the share options.
- The rate of capital gains tax (CGT) has increased from 20% to 33% in recent years. Some submissions raised questions over whether Revenue approved share option schemes or restricted share schemes are still a viable incentive for employees in light of this.
- The Revenue approved Save As You Earn share option schemes (SAYE) and Approved Profit Sharing Schemes (APSS) must be made available to all employees on similar terms.
- The relative attractiveness of Ireland's tax treatment of share-based remuneration compared to other jurisdictions was also raised in submissions. However, the paper refers to a 2014 project which suggested that Ireland compares favourably with other European countries in terms of the support it offers to encourage employee financial involvement.
Options for Change
The paper identified the following options for changes to the tax treatment of share-based remuneration.
- Allowing existing Revenue approved schemes to target key employees.
- For other forms of share-based remuneration, postponing the tax charge on acquiring shares in an unquoted company until the value is actually realised on the disposal of the shares.
- For both Revenue approved and unapproved schemes, introducing a reduced CGT rate for the disposal of shares acquired by employees/directors of a company. It was noted that the existing CGT Entrepreneur Relief provides for a reduced CGT rate of 20% but only for individuals who hold a minimum 5% of the company's ordinary shares.
However, the paper does note that any measures would need to take account of State Aid rules and flags the limited fiscal space available for taxation measures. It suggests consideration might be given to whether existing Revenue approved schemes should continue and whether the exemption from Employer PRSI on share-based remuneration should be reconsidered.
We do not yet know what action the Government will take in the area of share-based remuneration but we expect further insight in Budget 2017, which is likely to be in October.
What we do know is that change is needed. High personal tax rates are often raised as a potential impediment to Ireland's competiveness. We hope that changes to the taxation of share-based remuneration will breathe new life into what is a valuable tool for employee motivation and retention.
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