Review of practices relating to the Approved Profit Sharing Scheme (APSS)

Introduction

The legislation on the APSS was introduced in the Finance Act 1982. The legislation envisages the sharing of profits of a company with its employees/directors. In its purest form, the legislation would indicate that shares should be given to eligible employees/directors, either by way of a new issue of shares or through the use of existing shares, without any 'quid pro quo', i.e. free of charge to employees/directors. Paragraph 3(3) of Part 2 of Schedule 11 to the Taxes Consolidation Act 1997, for example, refers to the establishment of a body of persons (trustees) who, out of monies paid to them by the company concerned, are required to acquire shares and to appropriate them to eligible employees and directors.

However, Revenue has, by way of administrative practice, allowed companies to fund the acquisition of shares for appropriation to eligible employees/directors through an APSS out of certain bonuses payable to employees/directors.

One of the fundamental principles of the legislation on the APSS is that all eligible employees/directors must be allowed to participate in a scheme on similar terms. A scheme may provide for the appropriation of shares to participants by reference to their levels of remuneration, their length of service or similar factors. Revenue has historically also allowed companies to use certain bonuses payable to employees/directors for the purposes of calculating the employees/directors' entitlement to benefits under an APSS.

Revenue has recently reviewed the position in relation to the use of bonuses and a number of other ancillary issues in relation to the APSS. This article sets out Revenue's current position in relation to these issues.

Use of Bonuses

Revenue will continue its general policy of allowing companies to use certain bonuses for the purposes of an APSS (i.e. to fund the purchase of shares for appropriation to eligible employees/directors through an APSS, and to form the basis of entitlement of benefits of eligible employees/directors under the APSS). The following paragraphs set out the position in relation to each type of bonus.

Fixed bonuses

Revenue regards a fixed bonus as a bonus to which an employee has a contractual entitlement (written or implied), for example, a fixed amount of bonus provided for under an employee's contract of employment. Revenue's position in relation to the use of fixed bonuses for the purposes of an APSS was outlined in an article in Tax Briefing Issue No. 56 (July 2004). In that article, Revenue pointed out that the use of fixed bonuses was not a permitted basis of entitlement to benefits under an APSS. It also stated that in future, Revenue would not approve a new APSS scheme, which had a fixed bonus as a basis of entitlement under a scheme, and would not allow companies to amend existing APSS schemes so as to include a fixed bonus as a basis of entitlement.

Revenue's position outlined in Tax Briefing Issue No. 56 in relation to the use of fixed bonuses has not changed, i.e. fixed bonuses cannot be used to fund the purchase of shares for appropriation through an APSS and cannot form the basis of entitlement for eligible employees/directors under a scheme.

Discretionary bonuses

Revenue regards a discretionary bonus as a bonus where both the payment and the amount are determined at the discretion of the employer and the employee/director does not have a contractual right (written or implied) to the bonus. However, Revenue is prepared to accept that, for this purpose, an employee/director will not be treated as having a contractual right to a bonus solely because the bonus becomes payable on specified performance criteria being met under a company performance scheme/individual performance appraisal scheme.

Revenue is prepared to allow discretionary bonuses to be used by a company for the purposes of an APSS, where they are available to all eligible employees/directors. In the case of discretionary bonuses payable under individual performance appraisal schemes, Revenue must be satisfied that the scheme is objective, non-discriminatory, applicable to all employees/directors and in accordance with the 'similar terms' provisions of the APSS legislation. This can only be determined by reference to the particular facts of each case. Where a company intends using discretionary bonuses for the purposes of an APSS, full particulars (including copies of all appraisal forms used in the case of individual performance appraisal schemes) must be sent to Employee Share Scheme Unit, Income and Capital Taxes Division, Stamping Building, Dublin Castle, when application for approval of the APSS, or application for approval of amendment to an existing APSS, as the case may be, is being made.

Sales commission

Where a company operates a sales commission payment scheme for sales staff and a separate discretionary bonus payment scheme for non-sales staff, Revenue is prepared to allow a company to use sales commission commensurate with the general level of discretionary bonus payable to other employees/directors for the purposes of an APSS.

Example 1

Discretionary bonus payable to non-sales staff under a performance appraisal scheme 0- 5%

Sales Commission payable to sales staff under a performance appraisal scheme 0-20%

Non-sales employee received 5% bonus Sales employee received 20% sales commission

Lowest common percentage is 5%

Maximum amount that can be invested in APSS is to be determined using the formula:

Example 2

Discretionary bonus payable to non-sales staff under a performance appraisal scheme 0- 5%

Sales Commission payable to sales staff under a performance appraisal scheme 0-20%

Non-sales employee received 5% bonus

Sales employee received 10% sales commission

Lowest common percentage is 5%

Maximum amount that can be invested in APSS is to be determined using the formula:

Where a company intends using sales commission for the purposes of an APSS, full particulars must be sent to Employee Share Scheme Unit, Income and Capital Taxes Division, Stamping Building, Dublin Castle, when application for approval of the APSS, or application for approval of an amendment to an existing APSS, as the case may be, is being made.

Payments under certain agreements

Currently, Revenue does not allow payments made under collective bargaining agreements which relate to cost savings, changes in work practices, transformation, staff reductions; increased productivity, etc, to be used for the purposes of an APSS. It is Revenue's view that, in general, these payments are not in the nature of discretionary bonuses and that an employee is likely to have a legal entitlement to the payments once negotiated and agreed. Notwithstanding this general view, Revenue is prepared to examine each case based on the specific facts of the case.

Team bonuses

Revenue has not in the past allowed team bonuses to be used for the purposes of an APSS. Having reviewed the position, and recognising that team bonuses are becoming more common in practice, Revenue is prepared to allow team bonuses to be used for the purposes of an APSS, where Revenue is satisfied that:

• The team bonus is not a fixed bonus;
• The team performance measures are based on business results or other objective tests;
• Where there are different teams with different targets, the measurement of the achievement of those targets and the ratings applied to the achievements are comparable;
• There are equal opportunities for all teams.

The above guidelines are general. Revenue must be satisfied that the basis of entitlement of benefits under the APSS is in accordance with the 'similar terms' provisions of the APSS legislation. This can only be determined by reference to the particular facts of each case. Where a company intends using team bonuses for the purposes of an APSS, full particulars must be sent to Employee Share Scheme Unit, Income and Capital Taxes Division, Stamping Building, Dublin Castle, when application for approval of the APSS, or application for approval of amendment to an existing APSS, as the case may be, is being made.

Salary forgone and carry forward of contributions

An APSS may include a facility for employees to forgo salary in order to increase their entitlement under the APSS. Each scheme is considered by Revenue by reference to its own particular rules, but the following general guidelines are used:

• Salary forgone must form only a subsidiary element of the overall scheme;
• Salary forgone must be optional for each participant;
• The maximum amount of salary that may be forgone is the lower of the value of the company's contribution and 7.5% of basic salary;
• Where it is intended to include a provision for a minimum amount of salary to be forgone, that minimum amount cannot exceed the lesser of €127 or 1% of basic salary
• Where varying percentages are included in a scheme the same choice must be given to all participants, and
• In respect of each participant there must be at least a 1:1 ratio between the shares appropriated using monies provided by the company and shares appropriated in lieu of salary forgone.

As pointed out in the introduction to this article, one of the fundamental principles of the APSS legislation is that all employees must be allowed to participate in the scheme on similar terms. This means that on each date that a company makes an appropriation of shares all eligible employees/directors must be treated on similar terms. This in turn means that shares appropriated in lieu of salary forgone should be appropriated at the same time as shares funded by other monies provided by the company (e.g. discretionary bonuses).

In exceptional circumstances, where it is not possible to appropriate shares in lieu of salary forgone at the same time as shares funded by monies provided by the company, Revenue allow the following:

• Monies to be used for shares in lieu of salary forgone may be deducted from a participant's salary over a period of time and used to purchase shares at a time after shares funded with monies by the company are appropriated, provided this is done within the same tax year;
• In no circumstances may shares in lieu of salary forgone be appropriated prior to shares funded by monies provided by the company in any tax year;
• The value of shares appropriated in lieu of salary forgone must not exceed the relevant limits.
• The value of shares appropriated in lieu of salary forgone must not exceed the value of shares funded by other monies provided by the company in that tax year.

The following examples illustrate how this works in practice, and that there is no difference in treatment between different bonus payment dates.

Example 1 (Discretionary Bonus payable in March)

A bonus of €2,500 is payable to an employee on 31 March 2009. The employee is forgoing salary of €200 per month. The employee opts to take shares in lieu of his/her bonus.

31 March 2009
Bonus - Shares appropriated to the value of €2,500

31 December 2009
Salary forgone January - December - appropriation of shares to the value of €2,400 can be made.

Total value of shares appropriated in 2009 - €4,900

Example 2 (Discretionary Bonus payable in March)

A bonus of €2,500 is payable to an employee on 31 March 2009. The employee is forgoing salary of €200 per month. The employee opts to take shares in lieu of his/her bonus.

31 March 2009
Bonus - Shares appropriated to the value of €2,500
Salary Forgone Jan - March €600 - Shares appropriated to the value of €600

31 December 2009
Salary forgone April - December - appropriation of shares to the value of €1,800 can be made.

Total value of shares appropriated in 2009 - €4,900

Example 3 (Discretionary Bonus payable in December)

A bonus of €2,500 is payable to an employee on 31 December 2009. The employee is forgoing salary of €200 per month. The employee opts to take shares in lieu of his/her bonus.

31 December 2009
Bonus - Shares appropriated to the value of €2,500
Salary Forgone January - December - Shares appropriated to the value of €2,400 can be made.

Total value of shares appropriated in 2009 - €4,900

Example 4 (Discretionary Bonus payable in March - Decrease in Share Price)

A bonus of €1,000 is payable to an employee on 31 March 2009. The employee is forgoing salary of €100 per month. The employee opts to take shares in lieu of his/her bonus. The market value of the shares at 31 March 2009 is €2.00 per share. The market value of the shares at 31 December 2009 is €1.00 per share.

31 March 2009
Bonus - Shares appropriated to the value of €1,000 (500 shares with market value of €2.00 each). Salary Forgone Jan - March €300 - 150 shares appropriated (market value €300).

31 December 2009
Salary forgone April - December is €900. The maximum number of shares that can be appropriated is 350 (market value €350). The balance of the salary forgone €550 must be repaid to the employee after making appropriate PAYE/PRSI/Levies deductions.

Contributory Schemes - carry forward of contributions

Under the rules of an APSS a company may require employees/directors to buy shares out of their own resources (out of net after tax salary) in order to receive free shares under a scheme. This is usually called a contributory scheme. Each scheme is considered by Revenue by reference to its own particular rules, but the following general guidelines are used:

• The contributory amount must form only a subsidiary element of the overall scheme;
• The maximum amount of shares purchased by the participant out of his/her own resources cannot exceed 7.5% of basic salary;
• Where a company intends to include a minimum amount in respect of a participant's contribution that minimum amount cannot exceed the lesser of €127 or 1% of basic salary;
• Each participant must receive at least 1 free share for each share purchased, and
• While the 'purchased' shares do not form part of an APSS, they must be retained for the employee by the trustees of the APSS for a minimum period of two years.

Where a contributory scheme operates, the employee/director's contribution is generally deducted from his or her net salary on a monthly basis. Under current practice, where the amount of the employee/director's contributions (against which the company will give matching shares) is not sufficient to purchase a number of whole shares, the surplus amount must be paid back to the employee/director.

Having reviewed the position, Revenue is prepared to allow the carrying forward of surplus amounts within the same tax year where the aggregate contributions are insufficient to purchase a whole number of shares on a particular appropriation date. The following conditions will apply:

• The surplus contributions carried forward when added to the normal monthly contribution cannot exceed the maximum allowable monthly contribution (the maximum allowable contribution will be specified in the rules of the APSS, but, bearing in mind that there must be at least a 1:1 ratio between the number of free shares appropriated under the APSS and the number of shares purchased by the employee/director, the maximum monthly contribution cannot in any event exceed €529.16).
• The monthly contributions must be fixed at the beginning of the year and cannot be varied from month to month.
• The employee/director must agree to the carrying forward of the contributions.

Different bonus dates

In accordance with APSS legislation, the Revenue Commissioners must be satisfied that at any time (i.e. at each appropriation date) every eligible employee must be allowed to participate in the scheme on similar terms.

Under current practice, where a company operates different bonus dates for different groups of employees/directors and where the bonus is used as a basis of entitlement under an APSS, all appropriations for all employees must take place on the same date. This is to ensure that the similar terms rule is complied with. There is no change in this practice.

Where an employee opts to take cash instead of shares, the payment of the cash bonus must, under current practice, be deferred until such time as the appropriation of shares for those employees who opted to take shares takes place. Revenue is aware that the deferral of the payment of the bonus until such time as the appropriation of shares to those employees/directors who opted to take shares takes place is causing difficulties for some companies.

Revenue is prepared to allow for a change in the existing practice in this area where, under the rules of the APSS, there is provision in the contract of participation/form of election/acceptance completed by the employee/director for the employee to elect not to participate in the APSS (opts to take the bonus in cash instead of shares). In such circumstances the payment of the cash bonus would not need to be deferred.

Use of Electronic Communications

Where a company is operating an APSS, the trustees of the APSS will have to communicate with the participants of the APSS on several occasions, for example, issuing invitations to employees/directors to participate in the scheme; requesting and receiving completed forms of acceptance of terms and conditions (contracts of participation); issuing notification of details of each appropriation (specifying number and description of shares and their initial market value); and, issuing notification of payment of dividends and income tax deducted (payment advice and tax vouchers).

The question of whether companies may use electronic communications in these instances has been raised with Revenue. Revenue has no objection to the Trustees of an APSS using electronic communications in the operation of APSS schemes, provided there are no legal restrictions. To ensure compliance with Section 12(2)(c) of the Electronic Commerce Act 2000, the employee/director must consent to the issue of the information by electronic means. Retrievable electronic records must be maintained and made available for inspection by Revenue when required. Records should be retained for 6 years.

APSS and Sister Companies

The question has arisen as to whether an APSS established by a company, which is under the control of another company ('parent company') can be extended to a 'sister company' i.e. another subsidiary of the parent company. Paragraph 3(2) of Schedule 11 to the Taxes Consolidation Act 1997 allows for the establishment of a group APSS scheme by a company which has control of another company or companies. It does not allow for an APSS established by a subsidiary to be extended to its sister companies. Accordingly, Revenue would not be in a position to approve such a scheme.