Revenue Note for Guidance
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.
par 1 A company falls within the founding company’s group at a particular time if —
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”.
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 —
par 3(1) The Revenue Commissioners have the right to withdraw approval in circumstances where —
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.
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.
par 5 The Revenue Commissioners may nominate officers to perform acts and discharge functions authorised by the Schedule on their behalf.
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.
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 —
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 —
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.
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 —
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:
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—
par 11A(6) The trust deed may include a person as a beneficiary if—
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.
par 12 The trust deed must make provision for the functions of trustees and in particular the following general functions —
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 —
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.
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 —
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 —
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.
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 —
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