SHARE SCHEMES - BDO

tax
SHARE SCHEMES
Revenue approved
and unapproved

Share schemes 1
Introduction
Over the years many companies
based in Ireland have implemented,
and continue to operate, a variety
of different employee share schemes.
However, given the current economic climate, companies
which have not previously considered these schemes
are now looking at the possibilities of using equity
remuneration as a potential cost saving strategy.
There are many advantages to operating share schemes for both
employer and employee – not only do they allow the employee to
participate and share financially in the growth of the company, thereby
retaining and motivating employees, but they can also be a tax efficient
way of rewarding employees.
Based on our experience in working with domestic and foreign corporate
entities in this area we have set out below some of the key reasons
clients look to implement a share scheme:
–– Motivates and incentivises the existing workforce
–– Operates as an effective recruitment and retention tool
–– Provides a tax efficient method of rewarding employees for their
work
–– Employer PRSI savings on all share schemes
–– Encourages unity of thinking between shareholders, management
and employees
–– Employees adopt a shareholder focused approach
–– Assists in succession planning in an owner managed business
–– Can facilitate a management buy-out.
In this booklet we have outlined the key aspects of the following
schemes:
Revenue approved schemes
–– Save As You Earn (SAYE) share option scheme
–– Approved profit sharing scheme.
Unapproved schemes
–– Share option scheme
–– Restricted share scheme
–– Forfeitable share scheme.
BDO can assist you with the implementation of these share schemes.
We can offer a comprehensive list of services such as advising on the
appropriate scheme to use, advising on, and reviewing, the relevant
scheme rules and supporting documentation. We can also liaise with
Revenue in relation to getting approval, as necessary, for certain
schemes. Finally, we can provide advice on the filing obligations for the
company and for the participants of the schemes.

2
Share schemes
revenue APPROVED SCHEMES
Save As You Earn (saye) share option schemes
Key features
––All employees who have been employed for a minimum period of
three years must be entitled to participate in the scheme
––Generally, similar terms must be offered to all relevant employees but
there is scope to offer differing terms to employees by reference to
length of service or salary
––Employees save a fixed sum to a maximum amount of €500 per
month out of their net salary for a pre-determined period (generally
three or five years)
––The employee is granted options based on the level of their agreed
monthly savings
––The SAYE scheme must use a qualified savings contract which enables
the employee to qualify for a tax-free bonus on these savings.
––At the end of the savings period, the employee has the following
choices:
––The share options are exercised and the accumulated savings are
used to fund the share acquisition
––Take the accumulated savings (including interest and bonus
payment) as a tax free lump sum
––Continue to invest the savings with the designated financial
institution.
––The employer can grant options to buy the shares at a price that is up
to 25% less than the market value at grant date
––Revenue approval is required.
Taxation
––The gain realised at exercise (the difference between the value of the
shares and the price paid) is exempt from income tax. However, a
charge to USC and Employee PRSI applies
––The income tax exemption does not apply if options are exercised
within three years of the date of grant. However, there are limited
exceptions
––The exercise of the options is not subject to Employer PRSI.
––A subsequent disposal of the shares will only be subject to Capital
Gains Tax.
Reporting requirements
––Employers are obliged to collect any income tax (if applicable), USC
and Employee PRSI through payroll in the month in which the options
are exercised
––The employer must complete and file a Form SRSO1 with Revenue for
each relevant tax year. The due date for this form is 31st March of the
following year
––Employees will be obliged to return details of the exercise of options,
the option gain and details of any subsequent disposal of the shares
on their annual tax return.
Corporate tax deduction
––The costs a company incurs in establishing a scheme which is
approved by the Revenue Commissioners are allowable as a deduction
in computing the company’s profits for corporation tax
––Where the scheme is not approved within 9 months of the period
end in which the expenditure is incurred then the deduction must be
deferred until the period in which approval is obtained
––However, any payment provided by the company, either directly or
indirectly, to acquire shares for the purposes of an approved scheme is
specifically disallowed.
Example
Employee saves €200 per month for three years and then disposes
of his shares in year five
Market Value of shares €4
Option price (25% discount) €3
Accumulated savings at end of year five €7,500
(including interest and bonus)
Employee purchases 2,250 shares
Market value in year five (per share) €5
Market value of the shares €12,500
Less cost of shares €7,500
Notional pay €5,000
Taxes deductible through payroll
Employee PRSI at 4% €200
Universal Social Charge at 7% €350
Market value in year five (per share) €7
Sales Proceeds €17,500
Less cost of shares €7,500
Chargeable Gain €10,000
Less Annual Exemption €1,270
Taxable Gain €8,730
Capital Gains Tax at 30% €2,619
Overall Net Gain for the Employee €6,831

Share schemes 3
Approved Profit Sharing Schemes
Key features
–– An employee can be allocated up to a maximum of €12,700 worth
of shares tax free in any one year. In certain circumstances this limit
may be increased to €38,100 for year one only where the shares are
appropriated to the APSS from an Employee Share Ownership Trust
(ESOT)
–– Participants are given the right to convert a profit sharing bonus into
shares in their employing company or its parent
–– An element of salary sacrifice towards the purchase of the shares is
allowed. The salary sacrifice is limited to 7.5% of basic salary or the
amount of the employer funded bonus, whichever is lower
–– All employees who have been employed for a minimum period of
three years must be entitled to participate in the scheme
–– Generally, similar terms must be offered to all relevant employees
but scope to offer differing terms to employees by reference to
length of service or salary
–– An employee trust must be established and shares must be held in
trust for a minimum of two years
–– Revenue approval is required.
Taxation
–– No income tax charge arises on appropriation. However, a charge to
USC and Employee PRSI arises
–– Shares may be sold or held personally after two years but income tax
and employee PRSI apply
–– No income tax, USC or employee PRSI on the transfer of ownership
from the trust to the employee at the end of three years
–– No employer PRSI applies under either of the above scenarios
–– The subsequent disposal of the shares will be subject to Capital Gains
Tax.
Reporting requirements
–– The trustees must complete and file a Form ESS1 with Revenue for
each relevant tax year. The due date for filing is 31st March of the
following year
–– Employers are obliged to collect any income tax (if applicable), USC
and Employee PRSI through payroll in the month in which the shares
are appropriated
Employees will be obliged to return details of the acquisition of the
––
shares and details of any subsequent disposal on their annual tax
return.
Corporate tax deduction
–– The costs a company incurs in establishing a scheme which is
approved by the Revenue Commissioners are allowable as a
deduction in computing the company’s profits for corporation tax
–– Where the scheme is not approved within 9 months of the period
end in which the expenditure is incurred then the deduction must be
deferred until the period in which approval is obtained
–– In addition, subject to certain conditions, funds given by the
company to the trustees to acquire shares will also qualify for a
corporate tax deduction.
Example
Employee agrees to invest €7,000 of a profit share bonus in an
Approved Profit Sharing Scheme. Shares in the company to the value
of €7,000 are allocated to the employee but held in a trust entity.
Tax position on appropriation:
Value on date of appropriation €7,000
Taxable amount €7,000
USC (7%), PRSI (4%) €770
If the employee has the shares transferred to them personally within
three years of the share allocation then the employees tax position
will be as follows:
Proceeds €7,000
Taxable amount €7,000
Income Tax (41%), PRSI (4%) €3,150
If the employee has the shares transferred to them personally after
three years of the share allocation then the employees tax position
will be as follows:
Proceeds €7,000
Taxable amount
€NIL
“An employee can be allocated up
to a maximum of €12,700 worth of
shares tax free in any one year.”

4
Share schemes
UNAPPROVED SCHEMES
Share Option Schemes
Key features
–– More flexible than approved schemes in that there is no obligatory
time restriction imposed on the subsequent sale of the shares and
participation in a share option scheme can be offered on a selective
basis.
Taxation
–– Employees will be subject to income tax, USC and employee PRSI
on the actual exercise of the options irrespective of whether the
employee retains or sells the shares
–– The exercise of the options is not subject to employer PRSI
–– The employee must pay the income tax, USC and PRSI liability within
30 days of the date of exercise of the options. A Form RTSO1 must
be filed with the payment
–– If the shares acquired on exercise are not sold immediately then a
Capital Gains Tax liability may arise on disposal.
Reporting requirements
–– The employer must complete and file a Form RSS1 with Revenue for
each relevant tax year. The due date for filing is 31st March of the
following year
–– Employees will be obliged to return details of the exercise of options,
the option gain and details of any subsequent disposal of the shares
on their annual tax return.
Example
Employee is granted 2,000 share options at €2 per share. The
market value on the date of exercise is €3.50 per share. Employee
decides to dispose of shares after three years for €5 per share.
Gain on exercise of options
Share value €7,000
Option Price €4,000
Gain €3,000
Income Tax (41%), USC (7%), PRSI (4%) €1,560
Net gain €1,440
Employee disposes of shares after three years
Sales proceeds €10,000
Cost €7,000
Chargeable Gain €3,000
Annual Exemption €1,270
Taxable Gain €1,730
CGT @ 30% €519
Overall net proceeds for the
employee, after exercise and sale, is €3,921

Share schemes 5
Restricted Share Schemes
Key features
–– Participation in a restricted share scheme can be offered on a
selective basis
–– Employees will be subject to income tax, USC and employee PRSI on
receipt of the shares. However, the initial liability can be reduced by
imposing restrictions on the shares acquired
–– The level of the reduction is dependent on the length of time the
restrictions are in place. The abatement is 10% for restrictions
imposed for one year and rising incrementally to 60% for restrictions
imposed for more than five years
–– For shares to be treated as restricted shares, the following conditions
must be met:
–– There must be a written contract or agreement in place under
the terms of which there is a restriction on the freedom of the
director or employee by whom the shares are held to assign,
charge, pledge as security for a loan or other debt, transfer, or
otherwise dispose of the shares for a set period
–– The agreement must be in place for bone fide commercial
purposes
–– Shares can only be assigned, charged, pledged, transferred or
disposed of during the restricted period on the death of the
shareholder or certain takeover situations
–– Share must be held in a trust established by the employer for the
benefit of the employees or held under such other arrangements
as the Revenue may allow.
–– If restrictions are varied after the share issue or a specific event
arises (death of the shareholder or certain takeover situations) then
the charge to income tax is adjusted to take account of the actual
restriction.
Taxation
–– The receipt of the restricted shares will not be subject to employer
PRSI
–– If the shares are issued to the employee for no consideration then
income tax, USC and employee PRSI will apply on the restricted
valuation
–– The employer is obliged to withhold the income tax, USC and
employee PRSI through payroll
–– A subsequent disposal of the shares after the restriction period has
lapsed will only be subject to Capital Gains Tax.
Reporting requirements
–– The employer must complete and file a Form RSS1 with Revenue for
each relevant tax year. The due date for filing is 31st March of the
following year
–– Employees will be obliged to return details of the receipt of the
restricted shares on their annual tax return together with details of any
subsequent disposal of the shares.
Corporate tax deduction
–– The set up and administration costs of the scheme are allowed for
corporate tax purposes
–– The cost of a share purchase for the purposes of this scheme is also
allowable for corporate tax purposes.
Example
Employee is granted shares with a market value of €10,000 but with a five year and one month restriction imposed on the sale of the shares.
Income tax on subscription
Market Value €10,000
Price paid by employee
NIL
Gain €10,000
Abatement (60%) (€6,000)
Net Gain €4,000
Income Tax (41%), USC (7%), PRSI (4%) €2,080
Employee disposes of shares
Sales proceeds €15,000
Cost €4,000
Chargeable Gain €11,000
Less Annual Exemption €1,270
Taxable Gain €9,730
CGT @ 30% €2,919
Overall net proceeds for the employee is €10,001
Employees will be subject to income tax,
USC and employee PRSI on receipt of the
shares. However, the initial liability can be
reduced by imposing restrictions on the
shares acquired

6
Share schemes
Companies which have not previously
considered these share schemes are
now looking at the possibilities of using
equity remuneration as a potential cost
saving strategy
IDA Ireland (Industrial Development Agency)
FORFEITABLE SHARE SCHEME
Key Criteria
Where shares are subject to a risk of forfeiture, any tax imposed on
acquisition will be reduced.
To qualify for this treatment, the shares must be:
–– shares in the company in which the employee/director is employed or
in a company that controls that company, and
–– forfeitable shares.
Shares are forfeitable shares if there is a bona fide written agreement in
place under the terms of which:
–– there will be a forfeiture of the shares if certain circumstances arise or do
not arise (e.g. if an employee ceases to be employed by a certain date)
–– as a result of the forfeiture the employee/director will cease to have
any beneficial interest in the shares, and
–– the employee/director, on forfeiture, will not have any entitlement
to receive consideration for the shares in excess of the consideration
given by the employee/director to acquire the shares.
Taxation
–– Income Tax, Employee PRSI and Universal Social Charge is payable on
the discount received on acquisition
–– Employers’ PRSI is not applicable
–– Where forfeiture occurs, the taxes imposed on acquisition are reduced
–– Any loss arising on the forfeiture of shares is restricted to the amount
of consideration given by the employee/director for the shares less
any amount subsequently recovered on forfeiture.
Reporting requirements
–– The employer must complete and file a Form RSS1 with Revenue for
each relevant tax year. The due date for filing is 31st March of the
following year
–– Employees will be obliged to return details of the receipt of the
forfeited shares on their annual tax return together with details of any
subsequent disposal of the shares.
Example 1
On 1 January 2012, an employer awards 2,000 shares to an employee
for €1,200. Under a bona-fide written contract, the shares are
subject to forfeiture if the employee ceases with the employer
before 1 June 2013. The market value of the shares at the date of
the award is €2,000. The employee ceases with the company on 1
September 2012 and the shares are forfeited. The employer refunds
the employee the €1,200 paid for the shares.
Tax Payable on Acquisition
Market Value €2,000
Consideration Paid €1,200
Amount Chargeable as Notional Pay €800
Tax (41%), PRSI (4%), USC (7%) €416
Forfeiture of Shares
Revised Tax Charge
Tax Refundable €416
No gain/loss arises on the disposal.
Example 2
As above, but the employee remains with the company and disposes
the shares on 1 February 2015 for €10,000.
Tax Payable on Acquisition
Disposal of Shares
Nil
€416 (as noted above)
Proceeds €10,000
Less Cost €2,000
Chargeable Gain €8,000
Less Annual Exemption €1,270
Taxable Gain €6,730
CGT at 30% €2,019
Corporate tax deduction
–– The set up and administration costs of the scheme are allowed for
corporate tax purposes
–– The cost of a share purchase for the purposes of this scheme is also
allowable for corporate tax purposes.

Share schemes 7
contacts
CiarÁn Medlar
Partner,
cmedlar@bdo.ie
+353 1 470 0280
Mark Hynes
Director,
mhynes@bdo.ie
+353 1 470 0283
Richard Marshall
Assistant Manager,
rmarshall@bdo.ie
+353 1 470 0285
NOTES

For further information
please contact:
CiarÁn Medlar, Partner,
at cmedlar@bdo.ie or
+353 1 470 0280
Mark Hynes, Director,
at mhynes@bdo.ie or
+353 1 470 0283
Richard Marshall, Assistant Manager,
at rmarshall@bdo.ie or
+353 1 470 0285
This publication has been carefully prepared, but it has been written
in general terms and should be seen as broad guidance only. The
publication cannot be relied upon to cover specific situations and
you should not act, or refrain from acting, upon the information
contained therein without obtaining specific professional advice. Please
contact BDO to discuss these matters in the context of your particular
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© BDO 2012
v1.1.20130110