The Minister for Finance announced in his Budget 2018 speech the introduction of a new tax-advantaged share scheme in Ireland known as the “Key Employee Engagement Programme” (KEEP). The scheme was formally enacted on 14 January 2018.
Share-based remuneration can play an important role in rewarding key employees at all stages of a businesses’ development and it can significantly reduce fixed labour costs and free up business cash-flow. KEEP is a share option incentive scheme aimed at small growing companies to help them recruit and retain employees in Ireland. The scheme has a significant number of tax advantages for employees and their employers.
1. How does the relief work?
Under the terms of a share option agreement, an employee exercises his option and acquires shares at an agreed price. This is generally at some time in the future, i.e. after the employee has worked for a set number of years or an IPO or the company is sold to a third party.
Subject to meeting qualifying conditions, the tax reliefs under KEEP are generous:
there is no income tax on a grant of a qualifying share option;
there is no income tax, USC or employee PRSI liability on exercise if qualifying share options were granted between 1 January 2018 and 31 December 2023;
the employee will only pay Capital Gains Tax (CGT) on the ultimate disposal of the shares; and
The value of shares acquired by key employees under the KEEP incentive will also be exempt from employer PRSI contributions, in accordance with the current regime applying to share-based reward.
1.1 How is KEEP different to the original standard share options?
Below is a summary of the key differences between the original standard share options, which still exists, and the proposed new KEEP regime:
1.2 Example of relief due under KEEP
To illustrate the overall tax benefit due from the scheme, an example was provided by the Department of Finance in its “Budget 2018: Tax Policy Changes” document as follows:
Options provided on 10/04/2018 to purchase €10,000 €1 shares at €1 (current market value at the date of grant).
10/04/2021: shares are worth €3 per share so employee exercises the option and purchases for €10,000, i.e. benefitting from a discount of €20,000.
10/04/2024: shares are worth €4 per share and individual sells for €40,000.
The overall tax benefit is outlined below.
2. Qualifying Companies
To be eligible to grant options over its shares under the KEEP scheme, a company must be a “qualifying company”, which means that it must:
be incorporated and resident in Ireland, or resident in an EEA State and carrying on business in Ireland through a branch or agency;
exist wholly or mainly for the purpose of carrying on a “qualifying trade” on a commercial basis with a view to the realisation of profit;
be a micro, small or medium-sized enterprise (“SME”) within the meaning of the Annex to Commission Recommendation 2003/361/EC;
be an unquoted company none of whose shares, stock or debentures are listed in the official list of a stock exchange or quoted on an unlisted securities market of a stock exchange other than on the Enterprise Securities Market of the Irish Stock Exchange or on any similar or corresponding stock exchange in an EEA country or country with which Ireland has a double taxation agreement;
not be regarded as a company in difficulty for the purposes of EC Commission Guidelines on State Aid; and
not issue qualifying share options of the company with a market value exceeding €3,000,000.
A company which directly holds the entire issued share capital of a qualifying company may also grant options to its employees and directors under the KEEP incentive.
3. What is a “qualifying trade”?
A key requirement is that the company must carry on a “qualifying trade”. Broadly, this involves the carrying on of a trade except for the following “excluded activities”:
adventures or concerns in the nature of trade,
dealing in commodities or futures in shares, securities or other financial assets,
professional services companies (see note 1 below),
dealing in or developing land,
building and construction,
operations carried out in the coal industry or in the steel and shipbuilding sectors.
‘Professional services’ are:
(a) services of a medical, dental, optical, aural or veterinary nature,
(b) services of an architectural, quantity surveying or surveying nature, and related services,
(c) services of accountancy, auditing, taxation or finance,
(d) services of a solicitor or barrister and other legal services, and
(e) geological services.
Under a European Commission Recommendation, the main factors in determining whether a business qualifies as an SME are based on staff headcount and either turnover or balance sheet total as follows:
4. Qualifying share options
A “qualifying share option” means a right granted to an employee or director of a qualifying company to purchase a predetermined number of shares at a predetermined price, by reason of the individual’s employment or office in the qualifying company.
The following conditions apply:
a) the share which may be acquired by the exercise of the share option is new ordinary fully paid up shares in a qualifying company, which carry no present or future preferential right to dividends or a to a company’s assets on its winding up and no present or future preferential right to be redeemed.
b) the option price at the date of grant is not less than the market value of the same class of shares at that time
c) there must be a written contract or agreement in place specifying:
the number and description of the shares which may be acquired by the exercise of the share option,
the option price,
the period during which the share options may be exercised, and
the option price at the date of grant is now less than the market value of the same class of shares at that time.
d) the total market value of all shares in respect of which qualifying share options have been granted to an employee or director does not exceed:
€100,000 in any one year of assessment,
€250,000 in any 3 consecutive years of assessment,
50% of the annual emoluments of the individual in the year of assessment in which the share option is granted.
e) the share option must be exercised by the qualifying individual during a period of not less than 12 months from the date of grant,
f) the shares are in a qualifying company, and
g) the share option cannot be exercised more than 10 years from the date of grant.
In addition, there is an overall "purpose test" meaning that the option must be granted for commercial reasons to recruit or retain an employee and not as part of a scheme or arrangement of which the main purpose (or one of the main purposes) is the avoidance of tax.
Where relief applies under the KEEP incentive, further tax relief will not be available for investment in corporate trades under the Employment and Investment Incentive or Seed Capital Scheme.
5. Qualifying individual
Must be full time employee/ director (30+ hours per week) of the qualifying company throughout the entirety of the relevant period.
The employment/office must be capable of lasting at least 12 months from the date the KEEP options are granted.
The individual cannot hold a material interest (15%) in the qualifying company.
The individual must hold the options for 12 months prior to exercise.
6. Employer reporting requirements
Where a qualifying company grant a qualifying share option under KEEP, it will be required to submit a return to the Revenue Commissioners by 31 March of the following year of assessment in a specified format.
In addition, the Revenue Commissioners may require a company which grants KEEP share options to provide information which will allow Revenue to publish the following information on the incentive as it applies to employees/directors:
the name, address and Companies Registration Office (CRO) number of the company;
the date of exercise of the qualifying share options;
the amount of the tax advantage granted;
details on the principal activity of the company and the territorial unit (as defined under EC Regulations) in which the company is located.
If the above requirements are not met, the company will cease to be regarded as a “qualifying company” for the purposes of the relief.
7. Proposed amendments (Finance Act 2019)
Finance Act 2019 contains the following provisions to help address some of the restrictions with KEEP; however, while Finance Bill 2019 was signed into law on 22 December 2019, the proposed amendments below to KEEP are still subject to a Ministerial commencement order being signed.
Employees of companies who perform employment duties across a group may now qualify for KEEP, subject to meeting certain conditions. Broadly, a group for this purpose will comprise the 50% direct and indirect subsidiaries of a holding company, at least one of which should be carrying on a qualifying trade as defined.
The ‘qualifying individual’ definition will be amended to allow for part-time and flexible working employees to qualify.
Share options under KEEP will be provided over existing shares in a qualifying company.
If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Mazars employment tax team below:
Employee share incentive schemes are an effective way of offering tax savings to employees and encouraging employee participation and retaining staff. Share schemes are important as they allow the employee to participate and share financially in the growth of the company in a tax efficient manner.
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