KEEP - Share Option Scheme

One of the key announcements on Budget Day was that of the Key Employee Engagement Programme (“KEEP”) share based remuneration incentive for unquoted SME companies. Finance Bill 2017 reaffirms the main outline and objective of the relief which was flagged by the Minister on Budget Day i.e. any qualifying share options under the scheme will be exempt from a charge to Income Tax and rather subject to a charge to Capital Gains Tax (“CGT”) at the rate of 33% which only arise on the future disposal of the shares acquired under such scheme. This is a significant deferral and reduction in overall effective tax rate, which applies to share options compared to the current regime, which triggers a tax event immediately on grant, which is subject to Income Tax based on the value of the benefit provided.

The draft legislation, detailed below, sets out the conditions to be met in order for a qualifying share option to come within the remit of the new incentive. The incentive, which is subject to EU State Aid approval, will be available for qualifying share options granted between 1st January 2018 and 31st December 2023,

Qualifying company

The company granting the share option must be a ‘qualifying company’ for the purpose of the relief. The characteristics of a qualifying company will include the following:

  • The company must have been incorporated and resident in Ireland. The relief can also extend to a company resident in an EEA Member State and carrying on business in Ireland through a branch or agency.
  • The company must wholly or mainly carry out a ‘qualifying trade’. A qualifying trade is effectively any trading activities carried on a commercial basis, which are subject to tax at the standard rate of corporation tax, with the exception of certain excluded activities set out in the legislation. The most notable of these excluded activities include professional services companies, companies dealing or developing land, financial activities and the building and construction industry.
  • The company must be unquoted and remain within the definition of an SME (i.e. a company with fewer than 250 employees and with turnover less than €50 million or balance sheet total less than €43 million) throughout the period of the option. The company must also not be regarded as being in difficulty for the purposes of state aid relief.
  • The company can only have a maximum of €3 million value of share options in issue and unexercised at any one time.

It is worth noting that the legislation also provides for a holding company whose business consists wholly of mainly the holding of shares in a qualifying company to qualify for the relief, however only in circumstances where the shares are directly held in a 100% parent/subsidiary relationship.

Qualifying individual

The qualifying individual who is granted the share option must be:

  • A full time employee/director of the company having to devote at least 30 hours per week to the service of the company
  • The employment/office held must be capable of being held for at least a further 12 months from the date the option is granted
  • The individual must not acquire or be connected to a person who controls more than 15% of the ordinary share capital of the company

There is a cap on the value of the options which can be granted in any year of assessment, being €100k in any one year, €250k in any three consecutive years, or 50% of the employee’s/director’s annual emoluments for the year in which the option is granted.

Qualifying share option

The option will constitute a right granted to the employee/director in a predetermined quantity and price. There must be a written agreement in place setting out the details of the share option scheme.

The key condition is that the option price must not be less than the market value of the share at the date it is granted. The option must be exercised within the period commencing no less than 12 months after it is granted but no more than 10 years from the date of grant. There are certain exceptions to the minimum 12-month holding period in the event of a company share sale and the death of the holder of the option. A provision is also made for the exercise of a share option after an individual will cease to be employed by the company, but only in the case where it is exercised within 90 days of the cessation date.

The scheme is also subject to the overarching provision that it is established for bona fide commercial reasons with a purpose of recruiting or retaining employees.

Reporting requirements

It will be necessary for companies to report the full details of all options granted by 31st March of the year following the year of assessment. The company must also furnish certain information on notice of the Revenue Commissioners within 30 days if requested to do so for the purposes of Revenue’s reporting requirements.

Summary comments

The legislation has been put forward by the Minister as a further step in supporting SME’s and to “underpin the resilience of the SME sector in the face of Brexit related challenges”. While we do commend the KEEP scheme as a very welcome step in assisting employers to offer more tax efficient incentives to its key staff, the relief as currently drafted is somewhat limited in certain areas, particularly in the context of excluded activities and the earnings limit placed on the value of share option, which can be offered. It will remain to be seen as to the level of uptake of the incentive over the next 5 years.

Return to: Budget 2018 Analysis