519 Employee share ownership trusts

Summary

This section provides a number of tax reliefs for employee share ownership trusts (ESOTs) which have been approved of by the Revenue Commissioners and in respect of which such approval has not been withdrawn.

The reliefs are —

• the company establishing an ESOT may claim a corporation tax deduction for —
  • the costs (legal, etc) of setting up an approved ESOT, and
  • contributions to the trustees of an approved ESOT,
• dividend income accruing to the trustees of an approved ESOT is exempt from the income tax surcharge in respect of the undistributed income of discretionary trusts, and
• the trustees of an approved ESOT are exempt from capital gains tax on any gain arising on the disposal of securities where those securities are transferred to the trustees of an Approved Profit Sharing Scheme (APSS).

Details

Application

(1) This section applies to an employee share ownership trust (ESOT) which the Revenue Commissioners have approved as a qualifying employee share ownership trust and in respect of which such approval has not been withdrawn. The Revenue approval is made in accordance with Schedule 12. Schedule 12 contains the rules governing the approval process, the appointment of trustees, the eligibility of beneficiaries and the functions of trustees.

Deduction for cost of establishing an ESOT

(2) A corporation tax deduction may be claimed by a company in an accounting period for the cost of —

• setting up an approved ESOT,
• contributions to the trustees of the approved ESOT where the company or a company it controls has employees who are beneficiaries under the ESOT and those contributions are expended by the trustees during the expenditure period on one or more of the qualifying purposes.

Where such expenditure is incurred by a company carrying on a trade the deduction is given in computing the profits or gains of the trade carried on by that company.

Where such expenditure is incurred by a management or an assurance company, it is added to the company’s management expenses.

(3) If an approved ESOT is established later than 9 months after the end of the accounting period in which the establishment costs are incurred, then such costs are treated as having been incurred in the accounting period in which the ESOT is established and not in the accounting period in which the establishment costs are actually incurred.

(4) A company controls another company if the company can —

• control the other company’s affairs,
• acquire the greater part of the other company’s share capital or voting power,
• acquire such part of the issued share capital of the other company that would entitle it to the greater part of the distributable income of the company, or
• acquire such rights as would, in the event of a winding up entitle the company to the greater part of the assets on a winding up.

(5)(a) Qualifying purposes in relation to expenditure of contributions by trustees of an ESOT are —

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

(5)(b) The expenditure period in relation to expenditure of contributions by trustees of an ESOT on qualifying activities is the 9 months period starting from the end of the accounting period in which the sum is expended or such longer period as agreed by the Revenue Commissioners.

First-in-first-out basis

(6) For the purposes of this section, the trustee of an ESOT are treated as applying the sums, paid to them by the company, on a first-in-first-out basis, irrespective of the number of companies making the payments.

Exemption from income tax on dividends

(7) The trustees of an approved ESOT are exempt from income tax on dividends received in respect of securities held in the trust if and to the extent that the income is spent by the trustees in an expenditure period on one or more qualifying purposes. (Both the “expenditure period” and “qualifying purposes” are defined in paragraph 13 of Schedule 12).

Exemption from capital gains tax on sale of securities

(7A) The trustees of an ESOT are exempt from capital gains tax on any gains arising from the sale of securities on the open market or the redemption of securities if and to the extent that such proceeds are used—

• to repay monies borrowed by those trustees,
• to pay interest on such borrowings, or
• to pay a sum to the personal representatives of a deceased beneficiary.

Exemption from capital gains tax on transfer of shares

(8) A chargeable gain does not arise on the transfer of securities by the trustees of an approved ESOT to the trustees of an APSS.

(8A) No chargeable gain shall accrue to the trustees of an approved ESOT on the transfer of any securities to the personal representatives of a deceased beneficiary.

(8B) The receipt of any sum of money or securities by the personal representatives of a deceased beneficiary from the trustees of an approved ESOT shall be exempt from income tax.

Withdrawal of reliefs

(9) Where the Revenue Commissioners withdraw approval of an ESOT, the reliefs provided by the section cease to apply in relation to that ESOT from the effective date of the withdrawal.

Definitions

(10) For the purposes of section 519, a “deceased beneficiary” means a person who at the time of his/her death was—

1. eligible to be a participant in an APSS had securities been available to distribute, and
2. was a beneficiary of the ESOT, the trust deed of which provided for the transfer of securities to the APSS referred to in (a).

Relevant Date: Finance Act 2021