Arthur Cox LLP has made a submission to the Department of Finance as part of the public consultation on the taxation of share-based remuneration.
Role in Ireland's FDI offering
The targeted submission highlighted that share-based remuneration will play an increasingly important part of the offer by jurisdictions in attracting senior executives and key employees. In a post-pillar two environment many multi-national groups are reviewing their global operations and will be increasingly seeking to align substance in key jurisdictions. In addition to the corporate tax environment, the personal tax offering is an essential consideration in making decisions on investment location. Ireland has a reputation as a high personal tax location and does have high rates of personal income tax compared to other OECD jurisdictions, and particularly those jurisdictions with which it competes for FDI. In choosing Ireland as an investment location, Ireland can no longer rely as heavily as it once did on the low statutory corporation tax rate, and as such must improve the offering in other areas, both in corporation tax (such as the introduction of a participation exemption and simplification of rules on interest deductibility) but also on personal tax considerations for senior employees to locate in Ireland.
Therefore, to position Ireland as an attractive location for senior employees to base themselves and alleviate the consequences of the very high personal income tax rates an improved system of share-based remuneration, is necessary.
Facilitating Employee Ownership
The Submission focuses on a topic that is increasingly popular in jurisdictions internationally, facilitating employee ownership.
Arthur Cox's submission focused on options that would accommodate companies wishing to encourage employee participation, looking both at changes to existing legislation and introduction of new models.
The central recommendation is that an employee ownership trust scheme, based on the successful Employee Ownership Trust in the UK, should be introduced.
In 2014, the UK introduced the Employee Ownership Trust (EOT), which allows the owners of a company to pass ownership of the company to the employees through the establishment of a trust that becomes the majority owner of the company. The trustees own the company and are bound by the terms of the trust to apply their control of the company for the benefit of all the employees of the company. A company operating under an EOT structure is therefore not owned and controlled by individual shareholders, but by the trustees of the EOT.
In order to qualify for favourable tax treatment, the EOT must satisfy certain conditions including that it must be trading, the scheme must be open equally to all employees (in service for more than 12 months) and the trustees must be entitled to more than 50% of the company, that is more than 50% of the ordinary share capital and voting rights, profits available for distribution and, assets on a winding up.
Disposals of shares in a trading company or the parent company of a trading group to the trustees of an EOT can be made fully free of capital gains tax. If the shares are disposed of in the form of a gift, it can be made free of capital acquisitions tax. Certain conditions must be satisfied to avail of this relief, most notably that the disposal of the shares must result in the trustees holding a controlling interest in the company (although this still means that the owners can hold up to 49% so are not totally excluded). In addition, qualifying annual bonuses of up to £3,600 annually per employee can be made from the trust, free of income tax for the employees and available as a corporation tax deduction for the company (subject to certain conditions).
The recent public consultation held by the HMRC in July 2023 to mark the 10-year anniversary of the establishment of the EOT concluded at the outset that when “Assessed against the objective of encouraging the creation of EOT, the reliefs have been successful”. Companies which are employee owned, or who have large and significant employee ownership stakes, now contribute £30 billion to UK GDP. According to the Employee Ownership Association in the UK, there are at least 1,650 employee and worker owned businesses (EOBs) in the UK as of October 2023. It states that the sector is growing because employee ownership is proving to be a durable, successful business model that's extremely well suited to the challenges of 21st century management. Professional services firms account for the greatest portion of conversions to EOT style structures. Given the large role played by this sector in the Irish economy, such a scheme would be a valuable new mechanism to encourage growth of this sector, particularly the indigenous services sector. This is not to say it is confined to services, but is utilised across the economy, including in manufacturing, construction, retail and information and communications. Given the success of the UK model and the similarities in the UK and Irish tax system, the introduction of a similar scheme is recommended.
The Arthur Cox Submission also made recommendations for specific legislative changes such as the elimination or extension of the 20-year time-limit on the holding of shares in an Employee Share Ownership Trust. The submission also highlighted aspects of both discretionary trust tax legislation and close company legislation and practice that could be amended or clarified to allow for more effective and efficient implementation of trusts to encourage employee participation.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.
