Marie Brennan ACCA, 8th January 2019
Key Employee Engagement Programme or “KEEP” for short was introduced as part of Budget 2018 by Minister Paschal O’Donoghue. The programme is intended to assist SME companies to retain key staff through the award of share options, which don’t create a burdensome tax liability for the employee.
This employee retention scheme came into effect in January 2018, however, it has not been adopted by SMEs as readily as expected which is likely due to some of the restrictive conditions. The Finance Bill 2018 has introduced the following changes for the KEEP incentive this year which intend to make the scheme more attractive:
- When the scheme was introduced the total market value of shares over which options could be granted could not exceed 50% of an employee’s annual emoluments in the year. The Finance Bill 2018 proposes to increase this limit to 100% of an employee’s annual emoluments
- Originally the limit on grant options over shares could not have a market value in excess of €250,000 in any three consecutive years. The Bill would replace this with a life-time limit of €300,000.
These changes can only be implemented after a commencement order by the Minister for Finance.
How does KEEP work?
Under the scheme, any gains on qualifying share options arising on the exercise of share will be liable to Capital Gains Tax (CGT) rather than Income Tax, USC and PRSI. The benefit of this is that the current CGT rate is 33% as opposed to a possible marginal rate of personal taxes of 52%. This employee retention scheme applies to share options granted on or after 1st January 2018 and 1st of January 2024.
To be considered a ‘qualifying company’ to grant share options under the Key Employee Engagement Programme the following must be met:
- The company must be incorporated and resident in the Republic of Ireland. This relief can be extended to a company that is resident in an EEA Member State if it carries on business in Ireland through a branch or agency.
- The company must mainly carry out a ‘qualifying trade’, this trade includes activities of a commercial basis, which are subject to the standard corporation tax rate. There are some exceptions for companies who operate in certain activities set out in the legislation such as professional services, financial activities, and companies dealing or developing land, including building and construction.
- The company must be private and within the definition of an SME (less than 250 employees and with turnover under €50 million or a balance sheet total of less than €43 million). The company must also be independent of state aid relief.
- The company’s share options can only have a maximum value of €3 million in issue and unexercised at any time.
Please Note: Irish Holding Companies can qualify for the relief if the business consists of mainly holding of shares of a qualifying company and only in circumstances where the 100% of the shares are directly held in a parent/subsidiary relationship.
For an individual to be granted the share option the following criteria must be met:
- A full-time employee or director of a company who works at least 30 hours per week for the company
- The employment position must be held for at least 12 months from the date the option is granted
- The individual cannot acquire or be connected to a person who controls more than 15% of the ordinary share capital of the company
Qualifying share option
There must be a written agreement that sets out the details of the share option scheme where shares are to be awarded to an employee/director at a predetermined quantity and price.
The share option price cannot be less than the market value of the share on the date it is granted.
The shares must be new, ordinary fully paid up with no preferential, current or future rights to dividends or assets on a winding up or redemption
The share option can only be exercised after 12 months from the date it is granted and within no more than 10 years. If the employment relationship is to cease, the share must be exercised within 90 days of the cessation date.
The Key Employee Engagement Programme is to be used for bona fide commercial reasons with the purpose of recruiting or retaining employees.
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