Introduction

Minister for Finance Paschal O’Donohoe announced the introduction of the Key Employee Engagement Programme (“KEEP”) which is a new tax advantageous share option incentive arrangement for small and medium sized enterprises (“SMEs”) in Budget 2018.

The objective of KEEP is to support SME’s in their efforts to attract and retain key employees in a competitive international labour market by providing key employees with financial incentives linked to the success of the company.

This announcement is a very welcome development as to date the share-based remuneration tax system imposed considerable restrictions on SMEs.

Background to KEEP

The introduction of KEEP follows the previous announcement in Budget 2017 of a proposed new SME share-based incentive scheme in Budget 2018 and an earlier public consultation process on the tax treatment of share-based remuneration.

The current Irish tax system for share-based remuneration imposes considerable restrictions on SMEs in attracting and retaining highly skilled workers, including the following:

  • Tax becomes payable shortly after the exercise of share options, but generally employees do not have the resources to fund the tax and exercise price, as there is no market for the shares in an unquoted company;
  • Capital Gains Tax (“CGT”) at the rate of 33% may apply on the disposal of shares;
  • The application of employee PRSI and USC on share-based remuneration; and
  • The current Revenue approved share scheme arrangements are inflexible as these schemes must be made available to all employees on similar terms rather than to key employees only.

What do we know about KEEP so far?

KEEP provides that the value of the benefit to the employee on exercise of a qualifying option will be subject to tax when the employee disposes of the shares as at that stage the employee will be able to use the sale proceeds to fund the tax liability. This tax treatment is a significant advantage to the current regime where income tax, employee PRSI and USC arise on the exercise of a share option.

The tax payable under KEEP will be CGT (currently at the rate of 33%) rather than Income Tax, USC and employee PRSI.

It is understood that KEEP will be available for qualifying share options granted between 1 January 2018 and 31 December 2023.

KEEP will be available to qualifying companies but as yet we do not have a definition of what constitutes a qualifying company. It may be that normal SME limits will apply as to whether a particular SME will be a qualifying company.

Main differences in the current share option tax regime and KEEP

Current Tax Treatment

Grant of Option Excercise of Option Sale of Shares
No Income Tax on the grant of an option (assuming that the option is a “short” option – i.e. capable of being exercised within 7 years). Income tax, USC and employee PRSI on the exercise of an option CGT at 33%

KEEP Tax Treatment

Grant of Option Excercise of Option Sale of Shares
No Tax No Tax CGT at 33%

Conclusion

Whilst the commencement of KEEP is subject to State Aid approval, it appears that consultation with the European Commission is expected to conclude shortly.

We will be providing further details of this new exciting development for SMEs once these details emerge.