tax benefits of ireland's most popular employee share schemes

Tax Benefits of Ireland's most popular Employee Share Schemes WebinarGemma Jacobsen & Michael Rooney

8 June 2016

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The Webinar will begin at 12 noon

2© 2016 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Ireland.

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Employee Share Plans: Benefits

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Tax Benefits of Ireland's most popular Employee Share Schemes WebinarGemma Jacobsen & Michael Rooney

8 June 2016

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Employee Equity Participation PlansMost common in Ireland• Approved Profit Sharing Scheme/Contributory Scheme

- Revenue approved, tax favoured on “all employee” basis

• Restricted Share Scheme

- “Clog” scheme

• Restricted Stock Units

• Share Options

• SAYE Options

- Revenue approved, tax favoured on “all employee” basis

• Direct Share Award/Performance Shares

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Approved Profit Sharing Scheme (“APSS”)How does an APSS operate?• Free shares, or more usually conversion of a cash bonus to

APSS shares

- Employee can also forego pre tax salary

• Shares held in an Irish Trust for min 2 – max 3 years

• Employee has beneficial interest in the shares

- Receives the dividend

• Shares transferred into employees own name after 3 years

• Contributory scheme – “BOGOF”

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Approved Profit Sharing Scheme

What is the employee taxation treatment?No income tax on appropriation of the shares to the value of €12,700 P.A.Value of shares appropriated subject to USC (@ max 8%) and employee PRSI (@ 4%)Capital Gains Tax (@ 33%) on disposal gain

on appropriation

Example

Employee invests €2,000Marginal income tax rate

40%USC rate 8% PRSI rate 4%

€Value on date of appropriation 2,000

Taxable amount 2,000Income tax @ 40% NILUSC @ 8% 160PRSI @ 4% 80Effective tax rate 12%Trustees must retain shares for first two years

ExampleEmployee sells shares

for €3,500 CGT rate 33%

€Sales proceeds 3,500Less: base cost (2,000)Gain 1,500Less small gains exemption* (1,270)

Taxable gain 230

Capital Gains Tax@ 33% 75

* Assumes not otherwise used against other gains

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Approved Profit Sharing Scheme continued

Employer taxation• No employer PRSI on value of shares appropriated

- 10.75% saving compared to a cash bonus

- Can help to fund the operation of the APSS

• Cost of establishing and running the APSS deductible for ..corporation tax purposes (@ 12.5%)

APSS has taxation benefits for both the employer and the employee compared to a taxable cash bonus

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APSS – Terms and ConditionsWho can and must participate?

1. All employee basis- Can limit participation based on service – max 3 years- Can exclude those on probation- Part time & temporary employees (where have the service) usually pro-rata basis

2. Employee Participation levels – “similar terms”- Salary - Service - Performance related

- Corporate - Personal

- Commissions (possible)

- Combination of the above• 1 & 2 means company must have a broadly based, generally “similar” employee bonus

scheme• APSS can be the Lowest Common Denominator of an all employee cash bonus

3. Share Types: - Ordinary shares - In top company or quoted company

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APSS – Approvals Required & Considerations

Approvals Required & Other Considerations• Shareholders?

- Private company considerations• Parent company?

- If using cash bonus no additional cost other than set up and administration

Vs- Employer PRSI saving- Buying shares on the stock market parent need not issue shares

• Irish Revenue Commissioners• Select a Trustee

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APSS – Documentation Required

Documentation Required • Trust Deed, and• Rules of Scheme• Employee communications e.g. Q&A booklet and forms• Valuation of shares – private company• Company Secretarial declaration

- compliance of shares with legislation- group scheme rules

• Memorandum & Articles of Association of company whose shares being acquired

• Corporation Tax and PAYE reference numbers

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Restricted Share Scheme – “Clog” SchemeExecutive Summary• Participation can be on a selective basis

- Most usually limited to senior executives

• Does not require Revenue approval

- Based on specific legislative provisions (Section 128D TCA 1997)

• Share award subject to restrictions on sale or transfer for pre-determined period

• Restrictions or “Clog” can significantly reduce the taxable value of the share award

• Shares usually held in European Economic Area (“EEA”) trust

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Clog Scheme - Taxation

Employee & Employer Taxation• Employee subject to income tax, USC and PRSI on share

acquisition less relevant 10% P.A. abatement, to max 60%

• Effective income tax rate can be reduced from 52% to 20.8%

• No tax event on lifting of restrictions

• Capital Gains Tax on ultimate disposal of shares @ 33%

• CGT base cost can be the abated amount or non abated amount depending on source of shares

• No employer PRSI (@ 10.75% compared to cash bonus)

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Restricted Period

Abatement

%

1 year 10

2 years 20

3 years 30

4 years 40

5 years 50

5 years+ 60

Clog Scheme - Taxation

Employee & Employer TaxationExample:

Employee granted ‘Restricted Shares’ worth € 4,000Marginal income tax rate 40%

USC rate 8% PRSI rate 4%Subscription Price Nil

Market Value on Subscription € 4,000

Restriction on sale 5 years + 1 month €

Market Value 4,000Less Price Paid Nil

Gain 4,000Abatement (60%) 2,400

Net gain 1,600Income Tax @ 40% 640

USC @ 8% 128PRSI @ 4% 64

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Clog Schemes: Commercial - Part 1

Commercial Considerations • Restrictions on sale/transfer can align with shareholder and

regulatory requirements for executive remuneration, e.g.• Certain proportion of variable remuneration in shares• Align executive with shareholder• Deferral period or holding periods• Forfeiture provisions for leavers, performance conditions and malus and

claw back

• Impose restrictions on• Share award• Vesting of a performance share• Vesting of a RSU• Exercise of a share option

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Clog Schemes: Commercial - Part 2

Commercial Considerations • By including forfeiture provisions, company can

• Deal with leavers – Good and Bad Leavers• “Re-engineer” a performance share plan e.g. award shares on day 1 and

forfeit if performance targets are not met

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Clog Scheme: Requirements

Requirements & Considerations1. Shareholder approval?

• Private company considerations• If quoted company purchase shares on the market

2. Share valuation – self assessment PAYE “best estimate”3. Leavers

• Memorandum and Articles of Association • Shareholder Agreements

4. Liquidity in the shares post restricted period5. Corporate transactions6. Taking above into account design Plan Rules7. Choose Trustee and draft Trust Deed8. No Revenue approval required – must meet legislative conditions

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Clog Schemes – International AspectsInternational Aspects• Moving to or leaving Ireland• Align with global Restricted Share Plan• Possible mismatch of timing of taxable event• Non Executive Directors

- Cash fees taxed @ 48% (excl PRSI)- Clog shares taxed @ 19.2% (5+ year restriction)

• Capital gains tax implications- Can remain subject to CGT even if left Ireland- Consider if shares are specified Irish assets if non domiciled

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Questions

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Thank you

KPMG People Services PracticeKPMG Employee Shares Incentive Schemes BookletKPMG Legal Services Practice

Resource links:

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https://home.kpmg.com/ie/en/home/services/tax/people-service-practice.html

https://home.kpmg.com/ie/en/home/services/tax/people-service-practice.html

https://assets.kpmg.com/content/dam/kpmg/pdf/2016/04/employee-share-incentives-schemes-april-2016.pdf

https://assets.kpmg.com/content/dam/kpmg/pdf/2016/04/employee-share-incentives-schemes-april-2016.pdf

https://home.kpmg.com/ie/en/home/services/tax/legal-services.html


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About Global Shares

https://www.globalshares.com/apss/

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