Revenue Note for Guidance

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Revenue Note for Guidance

128D Tax treatment of directors of companies and employees who acquire restricted shares

Summary

This section sets out the tax treatment of shares acquired by directors and employees (other than shares acquired under an approved profit sharing scheme) where there is a restriction on the disposal of the shares for a specified period, and such a restriction is imposed under the terms of a written contract or agreement which is in place for bona fide commercial reasons. The shares must be shares in the company in which the director or employee holds his or her office or employment, or in a company that controls that company. The section provides for an abatement of the amount chargeable to income tax on the acquisition of the shares. The rate of abatement (from 10% to 60%) depends on the number of years for which the restriction on the disposal of the shares is in place. It applies to shares acquired on or after 20 November 2008.

Details

Definitions

(1)director” and “employee” have the meanings respectively assigned to them by section 770(1);

EEA Agreement” means the Agreement on the European Economic Area signed at Oporto on 2 May 1992, as adjusted by all subsequent amendments to that Agreement;

EEA State” means a State, other than the State, which is a contracting party to the EEA Agreement;

employer” means the company in which the director or employee holds his or her office or employment;

market value” has the same meaning as it has for Capital Gains Tax purposes in section 548;

restricted shares” is to be construed in accordance with subsection (3); “shares” includes stock.

trust” means a trust established in the State or in an EEA State or in the United Kingdom and the trustees of which are resident in the State or in an EEA State or in the United Kingdom. (Applies to shares acquired on or after 4 February 2010 in relation to a restriction in the type of trust that can be used.)

Scope

(2) The section applies where a director or employee acquires shares (including shares acquired on the exercise of a share option) in a company as a director or employee of that company or of another company, and—

  • the shares are shares in the company in which the director or employee holds his or her office or employment or in a company which has control (within the meaning of section 432) of that company, and
  • at the time of acquisition, the shares are restricted shares.

Restricted shares

(3) To come within the section, the shares must be “restricted shares”. Shares are “restricted shares” if—

  • there is a bona fide 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, transfer or otherwise dispose of the shares for a specified period of not less than one year,
  • the shares cannot be assigned, charged, transferred or otherwise disposed of in any circumstances during that specified period, except in limited circumstances (on the death of the director or employee or change in control of the company in which the shares are held), and
  • the shares are held in a trust established by the employer or held under such other arrangements as the Revenue Commissioners may allow (e.g. secure stockbroker account).

Abatement of income tax charge

(4)(a) The formula for calculating the reduction in the amount chargeable to income tax on acquisition of the shares is:

A ×

B

100

where—

A is the amount of the income chargeable to income tax under Schedule E or Schedule D (as the case may be), and

B is the specified period. Where the specified period is—

1 year, the amount chargeable will be reduced by 10%,

2 years, the amount chargeable will be reduced by 20%,

3 years, the amount chargeable will be reduced by 30%,

4 years, the amount chargeable will be reduced by 40%,

5 years, the amount chargeable will be reduced by 50%,

More than 5 years, the amount chargeable will be reduced by 60%.

(4)(b) The amount chargeable to income tax on the acquisition of the shares (under Schedule E or Schedule D) is to be calculated by reference to the market value of the shares at that time ignoring the restriction on the disposal of the shares.

Example

On 1 January 2019, an employer awards 1,000 shares to an employee for nil consideration. Under a bona-fide written contract, the shares cannot be disposed of for a period of 4 years, and during this period the shares are held in a trust established by the employer. The market value of the shares at the date of the award, ignoring the restriction on the disposal of the shares, is €1,000.

Income Tax charge on acquisition

Market value of the shares ignoring the restriction on the disposal of the shares

€1,000

Consideration paid by the employee

0

Chargeable amount before abatement

€1,000

Abatement 40%

€ 400

Net chargeable amount

€ 600

Variation or removal of restriction

(5) Where the restriction on the disposal of the shares is removed or varied or the shares are disposed of in the limited permitted circumstances (on the death of the employee or in the event of a change in control in the company in which the shares are held) before the expiry of the specified period, the amount chargeable to income tax on the acquisition of the shares is to be adjusted to take account of the actual period for which there was a restriction on the disposal of the shares, and all necessary assessments may be made at any time to collect any additional income tax due, notwithstanding the general 4 year time limit in the Act for making assessments.

Example

On 1 January 2018, an employer awards 1,000 shares to an employee for nil consideration. Under a bona-fide written contract, the shares cannot be disposed of for a period of 4 years, and during this period will be held in a trust established by the employer. The market value of the shares at the date of the award, ignoring the restriction on the disposal of the shares, is €1,000. On 1 January 2020 the restriction on the disposal of the shares is lifted.

Income Tax charge on acquisition

Market value of the shares ignoring the restriction on the disposal of the shares

€1,000

Consideration paid by the employee

0

Chargeable amount before abatement

€1,000

Abatement 40%

€ 400

Net chargeable amount

€ 600

Lifting of restriction – Revision of tax charge on acquisition

Market value of the shares ignoring the restriction on

€1,000

the disposal of the shares

Consideration paid by the employee

0

Chargeable amount before abatement

€1,000

Abatement 20%

€ 200

Net chargeable amount

€ 800

Amount previously charged

€ 600

Additional amount chargeable

€ 200

Capital Gains Tax

(6) Where an amount chargeable to income tax on the acquisition of shares by a director or employee is to be treated under section 552 as forming part of the acquisition costs of the shares for Capital Gains Tax purposes, then the amount to be so treated is the actual amount chargeable to income tax (i.e. the amount of the reduced amount chargeable to income tax on the acquisition of the shares plus any additional amount chargeable as a consequence of the lifting or variation of the restrictions or in the event of a permitted disposal).

Non-application to shares acquired approved employee share schemes scheme

(7) The section does not apply to shares acquired by a director or employee under an employee share scheme approved under Schedule 11 (profit sharing scheme), Schedule 12 (employee share ownership trust), Schedule 12A (share option scheme), or Schedule 12C (savings-related share option scheme).

Information

(8) & (9) Companies must provide details of all awards of restricted shares made to employees and directors (including details of restricted shares acquired on the exercise of rights to which section 128 applies) together with details of any variations and removals of restrictions to the Revenue Commissioners in an electronic format approved by them not later than 31 March in the tax year following the year in which the awards are made or the variation or removal occur, as the case may be.

Relevant Date: Finance Act 2020