Revenue Note for Guidance

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Revenue Note for Guidance

Schedule 12

[Section 519]

Employee Share Ownership Trusts

Overview

This Schedule contains the rules governing the constitution of an employee share ownership trust (ESOT) which the Revenue Commissioners may approve for the purposes of the reliefs outlined in section 519. These rules govern the approval process, the appointment of trustees, the eligibility of beneficiaries and the functions of trustees.

Interpretation

par 1 A company falls within the founding company’s group at a particular time if —

  • it is the founding company, or
  • at that time, it is controlled by the founding company and is included as a group company covered by the trust.

This also applies where the founding company is a relevant company.

The paragraph also provides for meanings of “ordinary share capital”, “relevant company”, “securities”, “associate”, “control” and “material interest”.

Approval of qualifying trusts

par 2(1) Subject to the conditions set out in paragraphs 6 to 18 being satisfied, the Revenue Commissioners are to approve a trust as a qualifying ESOT where a “founding company” has established an ESOT.

par 2(2)(a) Where the “founding company” seeking approval is a member of a group of companies, the Revenue Commissioners will not approve such a trust unless they are satisfied that the trust does not and would not have the effect of conferring benefits wholly or mainly on the directors or higher or highest paid employees of a group of companies.

par 2(2)(b) A “group of companies” is defined for this purposes as a company and any company over which it has control or with which it is associated.

A company is treated as associated with another company where it could reasonably be considered that —

  • both companies act in pursuit of a common purpose,
  • any person or group(s) of persons, having a reasonable commonality of identity, have or had the means or power, either directly or indirectly, to determine the trading operations carried on or to be carried on by both companies, or
  • both companies are under the control of any person or group(s) of persons having a reasonable commonality of identity.

Withdrawal of approval

par 3(1) The Revenue Commissioners have the right to withdraw approval in circumstances where —

  • one or more of the conditions in paragraphs 6 to 18 are contravened, or
  • shares acquired by trustees receive different treatment from other shares of the same class (in particular, they must not receive different treatment in respect of dividend rights, repayment rights, restrictions attaching to the shares and bonus or rights issues), or
  • the trustees fail, on or after 24 December 2008, to provide information requested under paragraph 3(4) or information required to be delivered under paragraph 3(5).

Withdrawal of approval may be effective on the first occurrence of such circumstance or such later time as the Revenue Commissioners may specify.

par 3(2) An approval automatically ceases where there is an unapproved alteration to the terms of the trust.

par 3(3) While shares acquired by the trust are to be accorded the same treatment in the matter of dividend rights as other shares of the same class, this is not to be taken as meaning that there are grounds for withdrawal of approval if newly issued shares do not rank for the next dividend on the same basis as shares of the same class already in issue.

par 3(4) The Revenue Commissioners may request from any person such information as they think necessary to enable them determine whether to approve or withdraw approval of an ESOT and to determine a beneficiary’s tax liability under an ESOT.

par 3(5) With effect from 2009 onwards, the trustees of a trust are obliged to automatically furnish the same information referred to in the above paragraph to the Revenue Commissioners in respect of each calendar year. This return of information is required by 31 March in the year following the year in question. Failure to do so will result in penalties as set out in sections 1052 and 1054, as appropriate.

Appeals

par 4(1) A company has a right of appeal to the Appeal Commissioners where the Revenue Commissioners do not approve an ESOT or an alteration to the terms of the trust or where they withdraw approval of the ESOT. The appeal is made by notice in writing to the Appeal Commissioners. The appeal must be made within 30 days after the date the notice of the decision in relation to the ESOT. The appeal is heard and determined in the manner provided for in Part 40A of the Tax Acts.

Delegation of functions

par 5 The Revenue Commissioners may nominate officers to perform acts and discharge functions authorised by the Schedule on their behalf.

General

par 6 The trust must be established under a deed known as the trust deed by the “founding company” which at the time the trust is established is not under the control of another company. The timing of the establishment of the ESOT in the case of the TSB required a moderation of the rule in those particular circumstances.

Trustees

par 7 The trust deed must provide for the establishment of a body of trustees which must be one of 3 possible trust structures which comply with paragraph 8, 9 or 10.

par 7A In the case of an ESOT established by a relevant company any reference in paragraph 8, 9 or 10 to an employee or director means one who was so employed on the day the ESOT was established and is, at that time an employee or director of a company referred to in paragraph 11A(3)(b).

par 8(1) The first trust structure may provide for the majority of trustees to be employee representatives. In such circumstances, the trust deed appoints the initial trustees, and contain rules for the retirement, removal, appointment of replacement and additional trustees.

par 8(2) The trust deed must provide that at any time during which the trust subsists that there must be at least 3 trustees who are resident in the State and of whom —

  • one trustee must be a professional trustee (a trust corporation, a solicitor or member of another professional body approved by the Revenue Commissioners),
  • a majority of the trustees must not be, or ever have been, directors of the founding company or of a group company,
  • a majority of the trustees must be representatives of the employees of the founding company or a group company and who have or have never had a material interest in any such company. Such trustees must be selected by a majority of employees of the founding company or a group company at the time of selection.

par 9(1) The second trust structure provides for equal employee/company representation in addition to an outside trustee) must provide that the trust deed appoints the initial trustees and contain rules for retirement, removal, appointment of replacement and additional trustees.

par 9(2) to (7) There must be at least 3 trustees who are resident in the State and of whom —

  • at least one trustee must be a professional trustee (that is, a trust corporation, solicitor, or member of another professional body approved by the Revenue Commissioners) who must not be an employee or director of the founding company or of a group company, and who —
    • when appointed as an initial trustee was selected by persons who were later appointed as the initial non-professional trustees, or
    • when appointed as a replacement or additional trustee was selected by persons who at the time of selection were the non-professional trustees,
  • at least 2 trustees must be non-professional trustees at least half of whom must be employees of the founding company or of a company who have never had a material interest in any such company, and who must be selected either by a process under which all the employees of that company or those companies are (in so far as is reasonably practicable) given the opportunity to stand for selection and to vote for those standing or by persons elected to represent those persons.

par 10(1) & (2) The third trust structure is a single trustee. This single trustee must be a company (called “the trust company”) resident in the State, controlled by the founding company and must provide for the appointment of the initial trustee and contain rules for the removal and appointment of a replacement trustee.

par 10(3) to (8) Such a trust company must have a board of directors composed in the same manner as the trustees of the trust structure described in paragraph 9.

Beneficiaries

par 11(1) The trust deed must contain provisions as to the beneficiaries under the trust in accordance with the rules set out in subparagraphs (2) to (9).

par 11(2) to (10) These rules provide that —

  • all employees and full-time directors of the founding company or a group company, who have been such for a qualifying period of not more than 3 years and who are chargeable to income tax under Schedule E must be eligible to be beneficiaries under the ESOT (a “full-time director” is a director who has worked for the company concerned for at least 20 hours a week ignoring holidays and sick leave),
  • former employees and directors of the founding company or a group company may be beneficiaries (for up to 20 years from the time they have ceased employment or the company has ceased to be a group company) where the following conditions are satisfied —
    • the person must have been an employee or director of the founding company which established the ESOT or a company within the founding company’s group —
      • during a qualifying period, and
      • on the date the ESOT was established, within 9 months prior to that date or at any time in the 5 years beginning with that date,
    • at all times in the 5 years (or such lesser period as allowed by the Minister for Finance) since the ESOT was established, 50 per cent (or such lesser percentage as allowed by the Minister for Finance) of the securities held by the trustees were pledged as security for borrowings, and
    • the ESOT has been established for more than 20 years,
  • former employees and directors of the founding company or a group company (where within the previous 18 months they have ceased employment or the company has ceased to be a group company) may also be beneficiaries,
  • employees and directors cannot be, beneficiaries if they have, or had within the previous 12 months, a material interest in the company,
  • provision may be made for a “charity” to be a beneficiary in the absence such other eligible beneficiaries in circumstances where the trust is being wound up,
  • apart from such beneficiaries no other person may be a beneficiary,
  • any Ministerial Order proposed to be made under subparagraph (2B)(d) requires the prior approval of Dáil Éireann.

par 11A Where an ESOT has been established by a relevant company the provisions of paragraph 11A apply as regards the beneficiaries. These alternative paragraphs are concerned with who may be a beneficiary of the ESOT.

par 11A(2) Where an ESOT is established by a relevant company, this paragraph and not paragraph 11 applies.

The beneficiaries of the ESOT must be set out in the trust deed.

par 11A(3) To be a beneficiary of such an ESOT a person must be one of the following:

  1. employees and directors of a company within the relevant company’s group on the day of establishment of the trust,
  2. an employee or director at the relevant time of—
    1. a company which, at any time since the establishment of the trust, was within the founding company’s group. In this case the parent company of a group will, after it has taken over a relevant company, become the founding company,
    2. any company within a group of companies which has acquired control of the company referred to in subclause (i),
    3. a company to which an employee or director referred to in clause (a) has been transferred along with a transfer of business, and
    4. a company in a group of companies into which a transfer of business referred to in subclause (iii) has taken place.
    (The purpose of these categories of employee or director is to allow the person to continue to be a beneficiary of the ESOT where that person has moved “involuntarily” as part of various take-over arrangements.)
  3. such an employee for a qualifying period,
  4. in the case of a director, employed for more than 20 hours per week, and
  5. chargeable to tax under Schedule E.

par 11A(4) The trust deed may include persons as beneficiaries who would qualify under subparagraph (3) but for clause (e).

par 11A(5) The trust deed may include certain other persons as beneficiaries of the trust provided—

  1. they were employees or directors of a company within the relevant company’s group on the day the trust was established or at any time within 9 months prior to that day, in the case of former employees of the Irish National Petroleum Corporation Limited.
  2. the person was for a qualifying period an employee or director in accordance with subparagraph (3)(b),
  3. they have left such a company,
  4. at least 50% of the securities in the trust have been pledged as security for a loan for at least the 5 years since the trust was established.
    [The Minister for Finance may, by order, reduce the 5 years or 50%.], and
  5. a period of not more than 15 years has elapsed since the trust was established.

par 11A(6) The trust deed may include a person as a beneficiary if—

  1. the person was an employee or director of a company in the relevant company’s group on the day the trust was established or at any time within 9 months prior to that day, in the case of former employees of the Irish National Petroleum Corporation Limited.
  2. the person was an employee or director in accordance with subparagraph (3)(b) for a qualifying period,
  3. the person has ceased to be such an employee or director, and
  4. a period of not more than 18 months has elapsed since the person left such a company.

par 11A(7) Subparagraph (5) or (6) must apply to everyone who qualifies under it.

par 11A(8) A charity may be a beneficiary if no other person qualifies under subparagraph (3), (4), (5) or (6).

par 11A(9) A qualifying period is defined for the purpose of subparagraph (3) as the period of less than 3 years, which must be stated in the trust deed and which ends at the time in question.

par 11A(10) A qualifying period is defined for the purpose of subparagraph (5) or (6) as the same period as applicable to subparagraph (3) and which ends when the person ceased the respective employment or directorship.

par 11A(11) Anyone who does not conform to subparagraph (3), (4), (5), (6) or (8) is excluded from being a beneficiary.

Anyone who has, at that time or at any time within the previous year had a material interest in a company referred to in subparagraph (3)(b), and in the appropriate case this also includes a material interest in TSB Bank, is also excluded from being a beneficiary.

par 11A(13) Any period which a person spends as an employee or director of TSB Bank will also be taken into account in determining whether the qualifying period requirement has been satisfied since TSB Bank itself is not included in the definition of relevant company or relevant company’s group.

par 11A(14) A charity is defined as a body established for charitable purposes only.

par 11A(15) Any order reducing the 5 year period or 50% of shares encumbered referred to in subparagraph (5)(d) must be laid before Dáil Éireann and cannot come into effect until a resolution to that effect has been passed.

Trustees’ functions

par 12 The trust deed must make provision for the functions of trustees and in particular the following general functions —

  • to receive sums from the founding company and other sums, by way of loan or otherwise,
  • to acquire securities,
  • to grant rights to acquire shares to beneficiaries under the ESOT,
  • to transfer securities or sums (or both) to beneficiaries under the ESOT,
  • to pay sums or transfer securities to the personal representatives of deceased beneficiaries,
  • to transfer securities to the trustees of profit sharing schemes approved under Part 2 of Schedule 11,
  • pending transfer, to retain and manage the securities by exercising voting rights or otherwise.

Sums

par 13(1) to (3) The trust deed must require that money received by the trustees must be expended within the “expenditure period” only for one or more “qualifying purposes” and must, while it is retained by them, be kept as cash or in an account with a relevant deposit taker (within the meaning of section 256).

“expenditure period” is the 9 month period starting, where the sum is received from the founding company or a group company, from the end of the accounting period in which the sum was expended by the company, and in any other case, the day the sum is received.

“qualifying purposes” are —

  • acquiring shares in the company which established the trust or specified securities using dividends on other specified securities,
  • repaying borrowings,
  • paying —
    • interest on borrowings,
    • a sum to a beneficiary of the ESOT,
    • a sum to the personal representatives of a deceased beneficiary,
    • expenses of running the ESOT.

par 13(4) The trust deed must provide that for the purpose of deciding whether a sum has been expended the trustees are to be treated as having expended money (paid to them) in the order in which that money is received by them.

par 13(5) & (6) The trust deed must provide that where trustees pay sums to beneficiaries at the same time all sums must be paid on similar terms and that similar terms may include terms which vary in relation to beneficiaries according to their levels of remuneration, length of service or similar factors.

Securities

par 14(1) to (3) The trust deed must provide that the securities acquired by the trustees must be shares in the founding company which are fully paid up, not redeemable and not subject to any restrictions other than restrictions which attach to all shares of the same class or an authorised restriction (in connection with cessation of employment). A restriction on shares imposed by a company’s articles of association which —

  • requires directors or employees of a company or a company controlled by that company to dispose of their shares when they cease to be directors or employees, and
  • requires persons who are not, or have ceased to be, such directors or employees to dispose of, on acquisition, shares which they have acquired in pursuance of rights or interests obtained by such directors or employees,

is an authorised restriction provided the disposal is by way of sale for money on terms specified in the articles of association, and the articles also contain general provisions whereby any person disposing of shares of the same class (whether or not held or acquired in the manner outlined above) may be required to dispose of them by way of sale for money on terms specified in the articles of association.

par 14(4) & (5) The trust deed must provide that the shares in the founding company may not be acquired by the trustees at more than market value or at a time when the company is controlled by another company other than where the founding company is a company into which a trustee savings bank has been reorganised.

par 15 The trustees may acquire securities other than shares in the founding company, if —

  • they are securities acquired by the trustees as a result of a reorganisation or reduction of share capital in accordance with section 584, or
  • they are securities issued to the trustees on an exchange basis in circumstances as outlined in section 586 (that is, company amalgamations).

par 16(1) & (3) The trust deed must provide that securities are transferred to beneficiaries on qualifying terms and that the transfer must take place within 20 years of their acquisition by the trustees.

The qualifying terms are that securities must be offered to all persons who are beneficiaries under the ESOT at the time of transfer and that the transfer must be made on similar terms to all persons who have accepted the offer. Similar terms may include terms which vary in relation to beneficiaries according to their levels of remuneration, length of service or similar factors.

par 16(4) The trust deed must provide that for the purposes of deciding whether particular securities are transferred are treated as having transferred securities acquired by them earlier before securities acquired by them later.

Other features

par 17 The trust shall not contain features which are not essential or reasonably incidental to the purpose of acquiring or transferring sums and securities to employees and directors and transferring securities to the trustees of profit sharing schemes approved under Part 2 of Schedule 11.

par 18(1) The trust deed must provide that the trustees acquire, transfer or retain securities when, in relation to those securities, respectively —

  • they become entitled to them,
  • another person becomes entitled to them, or
  • they remain entitled to them.

par 18(2) If the trust deed provides that the trustees may acquire securities other than shares in the founding company in a case of amalgamation or of reorganisation or reduction of share capital then it must provide for an exception to the rule that the trustees acquire securities when they become entitled to them. Instead, the deed must provide that the trustees be treated as acquiring the securities at the same time as they acquired the exchanged shares or the original shares, as may be the case.

par 18(3)(a) The trust deed must provide that where the trustees agree to acquire securities then the trustees, in the case of acquisition, become entitled to them when the agreement is made or if the agreement is conditional when the condition(s) is/ are satisfied and not on a later acquisition.

par 18(3)(b) The trust deed must provide that where trustees agree to transfer securities then the person receiving them becomes entitled to them when the agreement is made and not on a later transfer.

Relevant Date: Finance Act 2021