- Approved Share Option Schemes
- Unapproved Share Option Schemes
- Share Purchase Schemes
- Profit Sharing Schemes
- Save As You Earn Scheme (SAYE)
- Returns:
- Restricted Shares
Tip: Rewarding employees with equity in the company will give staff a focus on increasing the value of the company while providing a very tax efficient method of rewarding staff, as well as providing substantial PRSI savings to employers.
The Finance Act 2011 fundamentally changed the basis of taxation of all Share Schemes. The following share schemes have been brought within the charge to PRSI and the Universal Social Charge, as well as subjecting the Shares to Employers PRSI.
- Share awards
- Unapproved share options
- Revenue approved profit sharing schemes
- Approved save as you earn schemes
- Approved share option plans
- With effect from 1 January 2011 employers will be obliged to operate PAYE, PRSI and the USC in respect of share awards received by employees.
Approved Share Option Schemes
Approved Share Option Schemes have been abolished since 24 November 2010, which means that no approved options can be granted after that date.
Share options granted prior to 24 November 2010 but exercised on or after 24 November 2010 will be subject to income tax. In addition Share options granted prior to 24 November 2010 but exercised on or after 1 January 2011 will be subject to Income tax, PRSI and the USC, and employers will be liable to a charge to employer PRSI at 10.75% on option gains at the time of exercise.
Prior to this Revenue Approved Share Option Schemes afforded favorable tax treatment for certain share option schemes. Approved schemes had the effect of eliminating income tax at either grant or exercise of an option and provides instead for capital gains tax on disposal. The gain will be the excess of the net sales proceeds over the price paid for the shares. The favorable tax treatment was not available where the option shares are sold within three years from the date of grant.
Unapproved Share Option Schemes
Where an employee is granted unapproved share options by reason of an employment, a charge to income tax 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 tax.
The charge to income tax also applies where the recipient of the option was not resident in Ireland when the option was granted.
The 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.
The operation of PRSI by the employer on unapproved share options is unclear at this point.
Tip: Where possible, all schemes ought to be Revenue approved in order to avoid an income tax exposure where unapproved. The exercise of the option and the subsequent disposal of the shares should be timed to ensure that there are sufficient funds available in order to meet the tax liability.
Share Purchase Schemes
Employees/directors were entitled to a deduction for part of the cost of acquiring new ordinary shares in their employing company. The lifetime limit on the amount deductible of €6,350 has been abolished with effect from 7 December 2010.
Approved Profit Sharing Schemes and SAYE share options continue to be exempt from income tax. However, on appropriation of shares to the APSS or on the exercise of the approved SAYE options, USC at a rate of up to 7% applies, employee PRSI of 4% and employer PRSI of 10.75% will also apply to 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 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 3 years. If the shares are sold within 3 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 the Revenue Commissioners 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. In addition shares appropriated to employees on or after 4 February 2010 cannot be shares in certain service companies.
Tip: An employee profit sharing allocation may be a substitute for salary if certain conditions are met.
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 a 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 3 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 Capital Gains Tax purposes being the amount the employee paid for the shares.
Tip: As there is no obligation on the employee to use their savings to purchase the shares at the end of the designated savings period, an employee with an option to avail of this scheme ought to do so as they cannot suffer from a fall in the value of their shareholding during the life of the scheme.
Returns:
For share option schemes, approved SAYE schemes and approved profit sharing schemes a return of information outlining details of beneficiaries must be provided to Revenue by 31 March 2011 for 2010. 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, and of course where a negligent or a false return is made.
Restricted Shares
Where shares are restricted there has been a long established practice to allow an abatement of income tax to reflect the period of the restriction. Where shares are held in a trust for employees which must be established in the State or in another EEA State by trustees resident in the State or in an EEA State, 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 are outlined below by reference to the period of restriction:
| Years of Restriction | Abatement |
| 1 | 10% |
| 2 | 20% |
| 3 | 30% |
| 4 | 40% |
| 5 | 50% |
| 6+ | 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.
