Tax Benefits of Ireland's Employee Share Schemes Webinar

Tax Benefits of
Ireland's most
popular Employee
Share Schemes
Webinar
Gemma Jacobsen & Michael Rooney
8 June 2016
Slide 1
The Webinar will begin at 12 noon

2© 2016 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity. All rights reserved. Printed in Ireland.
2
Shared
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NCEO.org
Retention
Recruit & Retain key
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National Bureau of
Economic Research 2012
Productivity
UK Employee Owned
Business productivity up
4.5% year on year
(EOA.CO.UK)
Motivation
Forbes: How do you make
employees behave like
owners? Make them
owners.
Employee Share Plans: Benefits
Slide 2

3
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Slide 3

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Irish Employment Tax & Global Mobility
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Irish Employee Share Plan Expertise
APSS
RSS/CLOG Schemes
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4
Slide 4

Tax Benefits of
Ireland's most
popular Employee
Share Schemes
Webinar
Gemma Jacobsen & Michael Rooney
8 June 2016
Slide 5

Employee Equity Participation Plans
Most common in Ireland
• Approved Profit Sharing Scheme/Contributory Scheme
- Revenue approved, tax favoured on “all employee” basis
• Restricted Share Scheme
- “Clog” scheme
• Restricted Stock Units
• Share Options
• SAYE Options
- Revenue approved, tax favoured on “all employee” basis
• Direct Share Award/Performance Shares
Slide 6

Approved Profit Sharing Scheme (“APSS”)
How does an APSS operate?
• Free shares, or more usually conversion of a cash bonus to
APSS shares
- Employee can also forego pre tax salary
• Shares held in an Irish Trust for min 2 – max 3 years
• Employee has beneficial interest in the shares
- Receives the dividend
• Shares transferred into employees own name after 3 years
• Contributory scheme – “BOGOF”
Slide 7

Approved Profit Sharing Scheme
What is the employee taxation treatment?
No income tax on appropriation of the shares to the value of €12,700 P.A.
Value of shares appropriated subject to USC (@ max 8%) and employee PRSI (@ 4%)
Capital Gains Tax (@ 33%) on disposal gain
on appropriation
Example
Employee invests €2,000
Marginal income tax rate
40%
USC rate 8% PRSI rate 4%
€
Value on date of
appropriation
2,000
Taxable amount 2,000
Income tax @ 40% NIL
USC @ 8% 160
PRSI @ 4% 80
Effective tax rate 12%
Trustees must retain shares for first two years
Example
Employee sells shares
for €3,500
CGT rate 33%
€
Sales proceeds 3,500
Less: base cost (2,000)
Gain 1,500
Less small gains
exemption*
(1,270)
Taxable gain 230
Capital Gains Tax@ 33% 75
* Assumes not otherwise used against other gains
Slide 8

Approved Profit Sharing Scheme continued
Employer taxation
• No employer PRSI on value of shares appropriated
- 10.75% saving compared to a cash bonus
- Can help to fund the operation of the APSS
• Cost of establishing and running the APSS deductible for
..corporation tax purposes (@ 12.5%)
APSS has taxation benefits for both the employer and the employee
compared to a taxable cash bonus
Slide 9

APSS – Terms and Conditions
Who can and must participate?
1. All employee basis
- Can limit participation based on service – max 3 years
- Can exclude those on probation
- Part time & temporary employees (where have the service) usually pro-rata basis
2. Employee Participation levels – “similar terms”
- Salary
- Service
- Performance related
- Corporate
- Personal
- Commissions (possible)
- Combination of the above
• 1 & 2 means company must have a broadly based, generally “similar” employee bonus
scheme
• APSS can be the Lowest Common Denominator of an all employee cash bonus
3. Share Types: - Ordinary shares - In top company or quoted company
Slide 10

APSS – Approvals Required & Considerations
Approvals Required & Other Considerations
• Shareholders?
- Private company considerations
• Parent company?
- If using cash bonus no additional cost other than set up and
administration
Vs
- Employer PRSI saving
- Buying shares on the stock market parent need not issue shares
• Irish Revenue Commissioners
• Select a Trustee
Slide 11

APSS – Documentation Required
Documentation Required
• Trust Deed, and
• Rules of Scheme
• Employee communications e.g. Q&A booklet and forms
• Valuation of shares – private company
• Company Secretarial declaration
- compliance of shares with legislation
- group scheme rules
• Memorandum & Articles of Association of company whose shares
being acquired
• Corporation Tax and PAYE reference numbers
Slide 12

Restricted Share Scheme – “Clog” Scheme
Executive Summary
• Participation can be on a selective basis
- Most usually limited to senior executives
• Does not require Revenue approval
- Based on specific legislative provisions (Section 128D TCA 1997)
• Share award subject to restrictions on sale or transfer for pre-
determined period
• Restrictions or “Clog” can significantly reduce the taxable value of
the share award
• Shares usually held in European Economic Area (“EEA”) trust
Slide 13

Clog Scheme - Taxation
Employee & Employer Taxation
• Employee subject to income tax, USC and PRSI on share
acquisition less relevant 10% P.A. abatement, to max 60%
• Effective income tax rate can be reduced from 52% to 20.8%
• No tax event on lifting of restrictions
• Capital Gains Tax on ultimate disposal of shares @ 33%
• CGT base cost can be the abated amount or non abated amount
depending on source of shares
• No employer PRSI (@ 10.75% compared to cash bonus)
Slide 14

Restricted Period Abatement
%
1 year 10
2 years 20
3 years 30
4 years 40
5 years 50
5 years+ 60
Clog Scheme - Taxation
Employee & Employer Taxation
Example:
Employee granted ‘Restricted Shares’ worth € 4,000
Marginal income tax rate 40%
USC rate 8% PRSI rate 4%
Subscription Price Nil
Market Value on
Subscription
€ 4,000
Restriction on sale 5 years + 1 month
€
Market Value 4,000
Less Price Paid Nil
Gain 4,000
Abatement (60%) 2,400
Net gain 1,600
Income Tax @ 40% 640
USC @ 8% 128
PRSI @ 4% 64
Slide 15

Clog Schemes: Commercial - Part 1
Commercial Considerations
• Restrictions on sale/transfer can align with shareholder and
regulatory requirements for executive remuneration, e.g.
• Certain proportion of variable remuneration in shares
• Align executive with shareholder
• Deferral period or holding periods
• Forfeiture provisions for leavers, performance conditions and malus and
claw back
• Impose restrictions on
• Share award
• Vesting of a performance share
• Vesting of a RSU
• Exercise of a share option
Slide 16

Clog Schemes: Commercial - Part 2
Commercial Considerations
• By including forfeiture provisions, company can
• Deal with leavers – Good and Bad Leavers
• “Re-engineer” a performance share plan e.g. award shares on day 1 and
forfeit if performance targets are not met
Slide 17

Clog Scheme: Requirements
Requirements & Considerations
1. Shareholder approval?
• Private company considerations
• If quoted company purchase shares on the market
2. Share valuation – self assessment PAYE “best estimate”
3. Leavers
• Memorandum and Articles of Association
• Shareholder Agreements
4. Liquidity in the shares post restricted period
5. Corporate transactions
6. Taking above into account design Plan Rules
7. Choose Trustee and draft Trust Deed
8. No Revenue approval required – must meet legislative conditions
Slide 18

Clog Schemes – International Aspects
International Aspects
• Moving to or leaving Ireland
• Align with global Restricted Share Plan
• Possible mismatch of timing of taxable event
• Non Executive Directors
- Cash fees taxed @ 48% (excl PRSI)
- Clog shares taxed @ 19.2% (5+ year restriction)
• Capital gains tax implications
- Can remain subject to CGT even if left Ireland
- Consider if shares are specified Irish assets if non domiciled
Slide 19

Questions
Slide 20

Thank you
KPMG People Services Practice
KPMG Employee Shares Incentive Schemes Booklet
KPMG Legal Services Practice
Resource links:
Slide 1

Global Shares: Watch Our Videos
EquityGateway:
The Equity
Compensation
Management Solution
Private Equity
Compensation
Software & Services
Global Shares APSS
Software & Services
About Global
Shares
https://www.globalshares.com/apss/
Slide 22

2323Learn More 23
www.globalshares.com/blog
@globalshares
Global Shares
IRL +353 23 88 33 062
www.globalshares.com
sales@globalshares.com
Slide 23

kpmg.ie
© 2016 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Ireland.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.
Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date
it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice
after a thorough examination of the particular situation.
The KPMG name and logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
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Slide 24

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