Written by Sheena Doggett, A & L Goodbody Share Schemes Unit, originally published in European Legal Business.
The Irish Minister for Finance announced, in his December, 1998 Budget, the further development of profit sharing arrangements making them more attractive for Irish companies and their employees, with the extension of the tax relief to new Save As You Earn Schemes. Tax relief already exists for certain approved Profit Sharing Schemes.
The initiative, outlined in the Finance Bill published in February, 1999, is based broadly on the UK model for SAYE Schemes, which allows employees to save a portion of their gross salary over a fixed period and to use the savings to buy shares in their company at a future date.
Recent Irish Governments have shown strong commitment to employee share ownership and profit sharing generally. Such support is based in the main on encouraging employee participation in their employing company. Involving employees as shareholders is designed to highlight and strengthen the link between the employee both as a shareholder, interested in his/her investment, and as a member of a work force whose productivity can impact on the investment and will ultimately benefit the company. The existence of Employee Share Schemes can help facilitate the recruitment of new staff making remuneration packages more novel and attractive and can be useful in reducing existing staff turnover, encouraging employees to adopt a more long term view of their employment, thus reducing the costs for employers associated with recruiting and training new staff.
Forms of Schemes Available
With the introduction of tax incentives for SAYE Schemes, several quite distinct forms of Employee Share Ownership Schemes are now available to companies carrying on business in Ireland. Approved Profit Sharing Schemes and SAYE Schemes are the principal schemes utilised which attract favourable tax treatment.
These Schemes can be categorised according to who bears the costs associated with the shares to be acquired:
- On the case of the Approved Profit Sharing Schemes, shares are acquired by employees wholly or partly at the expense of their employing company and are distributed to employees, without charge, as a form of non-cash bonus.
- On the case of SAYE Schemes, shares are acquired by employees at their own cost and risk, albeit on favourable terms.
A key feature of Irish employee share schemes which attract tax favourable treatment is the requirement that they be made available to all eligible employees. Such schemes cannot be designed to favour only higher executives or company directors.
The distinctive categories of Share Schemes can be used in a complimentary fashion, with employees acquiring shares utilising either or both forms of Scheme.
Types of Companies which can avail of the Schemes
Approved Profit Sharing Schemes and SAYE Schemes are utilised by all types of Irish companies: public companies, whose shares are quoted on the Irish Stock Exchange, and Irish subsidiaries of foreign quoted companies. Schemes can also be adapted by private companies to avail of the relevant tax incentives. In the case of shares which are publicly quoted in Ireland or on overseas Stock Exchanges, there is a ready market available to employees to realise their investment on maturity. However, even in the case of private companies, mechanisms are available which can create an internal market in the shares or otherwise facilitate the sale of shares, permitting the employees to dispose of their shares and realise their investment at the appropriate time.
SAYE Schemes: Key Features
For tax purposes SAYE Schemes are regarded as consisting as two separate elements, a share option and a savings scheme. To join an SAYE Scheme, the employees agree to save a set amount of basic salary, for an agreed period, of three, five or seven years.
At the same time, the employees are granted options to buy shares based on the amount of money which will be saved by them at the end of that period. Through share options, the employees are given the right to purchase shares at a future date at an agreed price. The option can be priced to offer employees a discount to the market value of the shares at the time the option is created, which discount can be of the order of up to 25% of the market value. An employee is not eligable to participate if he owns more than 15% of the share capital of the company concerned and it is a close company.
SAYE Schemes are expected to lodge employee savings in Certified Contractual Savings Schemes with a wide range of qualifying financial institutions, including banks, building societies or the Post Office who can provide a tax free bonus on those funds based on a certain rate of interest. The amount of money that can be saved by an individual employee is to be capped at IR£250 per month.
At the end of the savings term, employees are under no obligation to exercise their share options and as such are protected from any downturn in the price of the company's shares. They can opt to use their savings to buy some or all of the shares, they can decide to take their savings as a tax free lump sum or they can hold their funds on deposit. Those who purchase shares and later sell them will incur capital gains tax liability as normal (currently 20%).
SAYE Schemes can be used by a company to compliment other employee share schemes. However, even by itself an SAYE Scheme provides a perfect solution to companies of every size and complexity who wish to give incentives to employees.
It is particularly attractive to companies who want to get the benefit of greater employee participation in the business, without having to tie themselves up with the costs and administration that can be associated with certain profit sharing schemes. SAYE Schemes are effectively funded by the employees themselves through their savings - so there is no significant cost to the employer.
Approved Profit Sharing Schemes: Key Features
In the case of Approved Profit Sharing Schemes, the shares are purchased by a Trust which has been established by the employer company with money received from that company. The shares are then allocated to the employees by the trustees. The Trust must hold the shares on behalf of the employees for what is known as a Period of Retention. Normally shares are held by the Trust for two to three years from the date of their initial appropriation, after which they can be transferred outright to the employees or disposed of by the trustees on behalf of the employees. The initial market value of shares appropriated to any one employee in any tax year must not generally exceed IR£10,000. Some exceptions apply which raise this limit in special cases to IR£30,000. The shares acquired must form part of the ordinary share capital of the company.
Every full time employee or executive director of the company must be eligible to participate in this type of Scheme, although a minimum required period of employment is permitted. An employee is not eligible to participate if he owns more than 15% of the share capital of the company concerned and it is a close company.
Tax Treatment of Approved Schemes
SAYE Schemes and Approved Profit Sharing Schemes require approval from the Irish Revenue Commissioners in order to avail of the favourable tax treatment.
Provided the Schemes meet the Revenue requirements and obtain the requisite approval they will receive favourable tax treatment.
In the case of Approved Profit Sharing Schemes:
- Companies will receive a tax deduction, within stated limits, for any costs incurred by them providing the shares.
- Employees are exempt from Irish income tax on the initial value of the shares appropriated to them and on any subsequent growth in value of the shares. The employees are entitled to income from the shares if any during the Period of Retention, but such income will be subject to tax.
In the case of SAYE Schemes:
- Companies will receive a tax deduction, within stated limits, for any costs incurred by them providing the shares.
- No tax is charged to the employee in respect of the benefit associated with receiving an option to acquire shares at less than the market value or in respect of an increase in value of the shares between the date of the grant of the option and the date of its exercise.
- No income tax is charged to employees on the terminal bonus or any interest received under the Certified Contractual Savings Contract, even where the option is not ultimately exercised.
Employees will incur a liability to capital gains tax, currently at a rate of 20%, but subject to exempt limits, on any increase on the value of the shares realised at the time of ultimate disposal of the shares by the employees.
Future Trends
In the years that Approved Profit Sharing Schemes have been available in Ireland, the number of such Schemes has increased dramatically. This increase is probably caused by a number of factors, including the improvements in the tax regime and the various tax incentives made to the Schemes in recent Finance Acts, the realisation by employers that profit sharing can contribute to greater partnership with improved results and the fact that profit sharing is an attractive means of rewarding effort. The overall improvement in the Irish economy has also been a significant factor.
It is anticipated that with the introduction of tax incentives for SAYE Schemes, further increases in the popularity of employee share schemes will occur.
This article was intended to provide general guidelines. Specialist advice should be sought about specific facts.