It is recognised that one of the challenges that start-up companies face is competition from large multinationals when it comes to the acquisition and retention of talent. The Finance Bill 2017 announced the introduction of a revamped tax incentive scheme (“Key Employee Engagement Programme” or “KEEP”) designed to help small and medium sized enterprises to retain and motivate key employees through the use of share options.

The current Irish tax regime for share-based remuneration has been criticised as not being sufficiently competitive with other jurisdictions. The main disadvantages of the existing tax treatment in Ireland are:

  • tax becomes payable soon after the exercise of the share options;
  • a charge to income tax, universal social charge (“USC”) and pay related social insurance (“PRSI”) arises on the exercise of the option.
  • Capital Gains Tax (“CGT”) at the rate of 33% may apply on the disposal of the shares;

In order to avail of the new tax incentive scheme, certain keys conditions must be met, the main ones being as follows:

  1. the company must be a qualifying company;
  2. the employee or director must be a qualifying individual; and
  3. the option scheme must be a qualifying option scheme.

A company is a qualifying company if:

  • it is incorporated and resident in Ireland or in an EEA State and carries on business in the Ireland through a branch or agency;
  • it carries on a qualifying trade i.e. not an excluded activity (e.g. financial activities, building and construction, professional activities such as engineering, accountancy, services of pharmaceutical nature, etc.);
  • it is a micro, small or medium sized enterprise;
  • it is an unquoted company;
  • it is not regarded as a company in difficulty;
  • the total market value of the issued but unexercised qualifying share options does not exceed €3m.

A qualifying individual:

  • is a full time employee or director of the company, and
  • is required to devote substantially the whole of his or her time but no less than 30 hours a week to the service of the company;
  • has an office or employment which can last for at least 12 months;
  • cannot own or control (directly or indirectly) more than 15% of the qualifying company.

A qualifying option:

  • grants rights to an employee or director of a qualifying company to purchase a predetermined number of shares at a predetermined price by reason of the individual’s employment or office;
  • The shares must be new ordinary shares and cannot attract any preference;
  • The option price must be the market value of the shares;
  • There are limits on the amount of share options which can be granted to an employee or director;
  • The options cannot be exercised less than 1 year or more than 10 years after grant.

The main benefits of KEEP are that qualifying individuals will only pay capital gains tax at a rate of 33% on disposal of the shares as opposed to income tax, USC and employee PRSI on the exercise of the option and CGT on disposal under the current regime.

It is envisaged that KEEP will be available for options granted between 1 January 2018 and 31 December 2023. However, the commencement of the scheme is subject to State Aid approval and it is possible for amendments to the scheme to be made prior to the enactment of the Finance Bill 2017. For that reason, start-ups wishing to put an option scheme in place should consider awaiting the enactment of the Finance Bill.

This Document is for general information purposes only and does not constitute legal or other professional advice. Specific legal advice should be sought on any particular matter.