Employee share schemes
Employee share schemes contain many of the features found in the United Kingdom. In the same way, there are a number of schemes designed to facilitate employee share options in the employer or a group holding company of the employer, which reflect provisions for tax relief.
The basic principle is that an employee benefit is taxable. There is a charge to income tax on the grant of an unapproved share option if it is at a discount relative to the market price and it is capable of being exercised outside of seven years after the grant. There is also a taxable benefit on the exercise of an unapproved share option.
Where free shares or discounted shares are given, there is a tax charge for the employee who receives them. The fair market value of the shares at the time of acquiring ownership is taxable. Any price paid reduces the benefit.
The employer’s obligation in respect of payment of income tax, pay related social insurance and universal social charge through the PAYE system is immediately applicable. Employee’s PRSI applies to share-based benefits. Employer’s PRSI does not apply.
Where shares are subject to restrictions that prohibit the employee from selling them for a period and certain other conditions are satisfied, the taxable value of the benefit is reduced. The restrictions on disposal of the shares must be for commercially justifiable reasons.
The reduction in taxable benefit depends on the period for which the restriction applies. The maximum reduction is 60%, in the case of a restriction for over five years. It is 10% for one year 20% for two years et cetera.
Revenue Approved Schemes
There are a number of revenue approved employee share schemes. Employees are exempted from income tax on shares received up to €12,700 annually from Revenue approved profit-sharing scheme.
Ordinarily, the appropriation of the shares to the employees is subject to employee PRSI and universal social charge which must be accounted for by the employer through the PAYE system. Employers PRSI does not apply.
If the shares are held in trust for three years, income tax may be avoided. The scheme must be available to all employees on similar terms. The ultimate disposal of the shares is subject to capital gains tax treatment, rather than income tax treatment.
The key employee engagement programme permits employers to grant options at market value to a category of employees or all employees. Taxation may be postponed until disposal on the sale of the shares. At that point, capital gains tax treatment applies. This is a 33% rate at present rather than the income tax plus levies applicable to an ordinary employee benefit.
The employer must report details of the share options to Revenue by 31st March annually.
Under the terms of a Revenue approved Save As You Earn share option scheme, options in the shares may be granted with discounts up to 25% of the market value at that time. The exercise must be funded by regular monthly savings of to a maximum of €500 from after-tax income over a period of three years to five years.
The scheme must be open to all employees on equivalent terms. Subject to conditions, the options granted are not subject to income tax on the grant or exercise. Exercise of the options is subject to employees’ PRSI and universal social charge. On the ultimate sale of the shares, capital gains tax applies. Employers PRSI does not apply.
Companies must return particulars of approved share scheme activity during the tax year. This applies to the grant, exercise, release or assignment of a share option or equivalent rights. The employer must file them electronically by 31st March after the relevant tax year.
Share awards subject to employer withholding obligations need not be reported. The applicable tax must be returned in the same manner as uner PAYE.
Taxable share awards must be reported as granted as and from 2017 in accordance with the modernised scheme of PAYE accounting. The must also be set out in the annual P35 return.
Scheme returns are required for all approved share schemes by 31st March following the year. The trustees have obligations to make returns by 31st October after the end of the tax year
There is similar anti-avoidance legislation to that in the United Kingdom for certain unapproved employee benefit schemes. They may be held outside the state sometimes subject to discretionary trusts for the benefit of employees or connected persons whom loans or other assets are advanced which might otherwise be outside the scope of benefit in kind provisions. The legislation does not apply to the standard approved pension schemes and the favourable tax treatment such as for restricted shares approved share option schemes.