The European Commission ("EC") has approved under EU state aid rules a Swedish scheme (the "Swedish Scheme") which eliminates income tax on employee stock options in small start-up companies. In order to avail of the tax relief under the Swedish Scheme, companies must be less than ten years old, have fewer than 50 employees and have revenue of less than 80 million kronor (€8.3 million).
In a press release on 26 June 2017, the EC stated in respect of its approval of the Swedish Scheme that "by decreasing the overall employment costs for young and small companies that award employee share options, the measure aims to reduce the financial risks linked to hiring new employees and to encourage employees to continue working in smaller companies."
A similar employee share option scheme exists for small companies in the UK, known as the Enterprise Management Incentive (the "EMI"). The EMI provides relief from capital gains tax ("CGT") on the disposal of the employees' shares and relief from income tax where the company's share price increases between the time of the grant and the exercise of the share option. The EMI applies to companies that have fewer than 250 employees and gross assets not exceeding £30 million.
Ireland's existing share-based remuneration schemes have been criticised for their failure to incentivise share ownership by employees in start-up companies and SMEs. The two categories of employee share schemes currently available in Ireland are:
- Revenue approved schemes, which require all employees to participate on equal terms and
- unapproved share schemes, which afford greater flexibility but which are generally subject to income tax, employee PRSI and USC on the exercise of the share option and CGT on their disposal.
As Revenue approved schemes do not allow companies to reward key staff on a selective basis, they are not frequently used by start-ups or SMEs. Due to the high taxes which apply in respect of shares granted under unapproved schemes, participation may be less attractive to employees. An inability to offer a competitive remuneration package can make it difficult for smaller companies to attract and retain key talent and compete against their larger rivals.
While the Department of Finance received a number of submissions which called for the abolition of income tax on the grant of employee share options and the removal or reduction of CGT on the disposal of such shares as part of its Tax and Entrepreneurship Review in October 2015, these proposals were not implemented. However, in light of the approval by the EC of the Swedish Scheme under EU state aid rules, the Irish government may now be encouraged to review its existing schemes in order to ensure the competitiveness of start-ups and SMEs in Ireland.