EU Approves Share Option Scheme For SMEs

19 Dec 2017 | 04.42 pm

EU Approves Share Option Scheme For SMEs

Key Employee Engagement Programme gets go-ahead

19 Dec 2017 | 04.42 pm

The EU has approved an Irish scheme to reduce the taxation of employee share options for SMEs, which will assist small and medium-sized companies to recruit and retain employees without unduly distorting competition in the single market.

The scheme is the Key Employee Engagement Programme (KEEP), which aims to support SMEs in attracting and retaining key talent by effectively deferring the taxation of gains on employee shares until the sale of the shares. 

At present, where an employee exercises a share option under a share option scheme, a liability to income tax, USC and employee PRSI generally arises at the date of exercise of the option, on the difference between the market value of the share option and the price paid to exercise the option.

The timing of this tax liability places most SMEs at a disadvantage to listed companies and multinationals because, unlike their larger competitors, SMEs are generally unable to offer their employees a ready market in their shares which would allow the employee to sell some of the shares to fund the tax liability.

This problem will resolved by deferring the tax due until the shares are sold, once the KEEP scheme goes into operation. The incentive will be available for qualifying share options granted between 1 January 2018 and 31 December 2023.

Eric Wallace  (pictured) in KPMG commented: “The effect of this new incentive will be to allow qualifying companies to remunerate key employees in a manner which is tax-efficient and is linked to the future success of the company, provided certain qualifying requirements are met throughout the option-holding period.

“Broadly, in the case of share options granted and exercised under the KEEP, the tax liability for the employees would only arise at the date of disposal of the relevant shares, and would be subject to capital gains tax instead of income tax, USC and employee PRSI.

“Therefore, the incentive also provides for a differential of between 15.75% and 19%, based on current tax rates, in the rate of tax payable by an employee on the gain as compared to standard share option gains.”

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