Employee Share Schemes
EMPLOYEE SHARE SCHEMES
Finance Act 2011 fundamentally changed the basis of taxation of all share schemes. Share schemes have been brought within the charge to employer PRSI and USC, as well as subjecting the shares to employee PRSI. Share schemes include share awards, unapproved share options, Revenue approved profit sharing schemes, Revenue approved save as you earn schemes and Revenue approved share option plans.
Share awards
Employers are obliged to operate PAYE, PRSI and USC in respect of share awards received by employees, and to allow the withholding of shares by the employer to fund the income tax and USC charge before transferring the balance of shares to the employee, where this liability has not already been met by the employee.
Share Options
Where an employee is granted share options by reason of an employment, a charge to income tax and USC will arise on the actual exercise of the option, irrespective of whether the employee retains or sells the shares. The charge to income tax will be the excess of the market value of the share on exercise over the option price and this share option gain will be taxable at the employee’s marginal rate of IT.
The Income Tax and USC must be paid by the employee within 30 days of the date of exercise of the option; a Form RTSO1 must be filed at the time the payment is made.
Key Employee Engagement Programme (“KEEP”)
Currently, where an employee exercises a share option, a
liability to IT, USC and employee PRSI generally arises on the
date the option is exercised. Most SME companies are at a
disadvantage to listed companies as SMEs cannot offer their
employees a market in the shares which would allow the
employee to sell shares to fund their tax liability.
The new KEEP scheme introduced in Finance Act 2017
confirms that the tax liability for employees can only arise at
the date of the disposal of the relevant shares and will be
subject to Capital Gains Tax. This gives rise to a saving of up to
19% based on current rates.
There are many conditions attaching to this scheme which is
due to apply to options granted to qualifying employees in the
period from 1 January 2018 to 31 December 2023. Where
reporting requirements for the qualifying company are not
met by 31 March of the following tax year, the tax relief will be
lost entirely.
Share Purchase Schemes
Revenue Approved Profit Sharing Schemes (“APSS”) and save as you earn (“SAYE”) share options are exempt from IT. However, on appropriation of shares to the APSS or on the exercise of the approved SAYE options, USC (at a rate of up to 78%) applies, as does employee PRSI of 4% and employer PRSI of 10.75% on the market value of the shares on this date.
Profit Sharing Schemes
A full-time employee or director, or a part-time employee, can be given up to €12,700 (€38,100 in the case of an Employee Share Ownership Trust where the shares are held for a period of at least ten years) worth of shares, tax free, each year under a Revenue approved profit sharing scheme (APSS). The scheme must be available to all employees on similar terms. To avoid an Income Tax penalty, the shares must be held in trust for a total of three years. If the shares are sold within three years, Income Tax is charged on 100% of the value of the shares.
A disposal of the shares may give rise to a Capital Gains Tax liability on the difference between the sales proceeds and the market value of the shares on the day that they are awarded. The scheme must have prior approval from Revenue and the cost of administering the scheme is tax deductible for the company.
Revenue will not approve a profit sharing scheme unless they are satisfied that there are no arrangements in place that provide for loans to be made to employees eligible to participate in the scheme. Shares cannot be shares in certain service companies.
Save As You Earn Scheme (SAYE)
Companies may set up a Save as You Earn share option scheme (SAYE) which must be Revenue approved. A company may grant options under an SAYE scheme at a discount of up to 25% of the market value of the shares at the beginning of the saving period. Employees must make a commitment to monthly savings of between €12 and €500 from after tax income for a period of three years at the end of which the employee can use the savings to purchase shares. Any interest paid on the savings at maturity will be exempt from DIRT. The cost of setting up the SAYE scheme may be claimed by the company as a deduction against trading profits. No charge to Income Tax arises where the shares are purchased at the discounted price. The shares are liable to Capital Gains Tax when disposed of, the base cost for CGT purposes being the amount the employee paid for the shares.
Restricted Shares
Where shares are restricted, an abatement of IT to reflect the
period of the restriction may be available. Conditions include
where shares are held in a trust (established in the State or in
another EEA State by trustees resident in the State or in an EEA
State) for employees, and where there is a genuine commercial
restriction on the disposal of the shares, and where there is a valid
written contract in place imposing the restriction on the sale.
The abatement amounts that apply to the income chargeable to
tax are outlined below by reference to the period of restriction
| Years of Restriction | Abatement |
| 1 | 10% |
| 2 | 20% |
| 3 | 30% |
| 4 | 40% |
| 5 | 50% |
| 5+ | 60% |
Where shares are forfeited the employee will be entitled to a rebate of tax paid.
Where the value of the shares are abated the base cost for capital gains tax is also reduced.
The charge to PRSI and USC is calculated by reference to the abated amount and not the full value of the shares.
Returns:
For share option schemes, a return of information outlining
details of beneficiaries must be provided to Revenue by 31
March after the end of the relevant tax year i.e. 31 March 2018
for the 2017 period. Where a company or trustee fails to make
the return, relief may be withdrawn. In addition, penalties will
apply where an employer fails to make the required returns, or
where a negligent or a false return is made.
The following table is a summary of the current tax treatment of share schemes:
|
Scheme Type |
Income Tax @ 40% |
USC @ 8% |
Employee social security/PRSI (4%) |
|
Share Awards |
Yes-PAYE |
Yes-PAYE |
Yes-_PAYE |
|
Share Option gains |
Yes-Self Assessment (within 30 days of exercise) |
Yes-Self Assessment (within 30 days of exercise) |
Yes-PAYE (if no longer an EE subject to self assessment) |
|
Approved Profit Sharing Schemes (APSS) |
No |
Yes-PAYE |
Yes-PAYE |
|
Save As You Earn Schemes |
No |
Yes-PAYE (if no longer an EE subject to self assessment) |
Yes-PAYE (if no longer an EE subject to self assessment) |
Tax Tip:
No charge to employers PRSI arises on share based remuneration and therefore it is still an attractive incentive for employers to incentivise employees.
