128F Key Employee Engagement Programme

Summary

This section provides for an exemption from income tax, USC and PRSI on any gain realised on the exercise of a qualifying share option under the Key Employee Engagement Programme (KEEP). The gain will however be subject to Capital Gains Tax on a subsequent disposal of the shares. KEEP is available to employees and directors of SME companies and is designed to support SMEs in Ireland in competing with larger enterprises in the recruitment and retention of key employees.

There are a number of conditions that must be satisfied for the relief to apply. For example, the share option must be granted at not less than market value on the date of grant, the share option must be held for a minimum period of one year before exercise (with limited exceptions) and the option must be exercised within ten years of grant. Monetary limits apply at both company and employee level. It applies to qualifying share options granted on or after 1 January 2018 and before 1 January 2024. Subject to the commencement of a Ministerial Order, the KEEP scheme is being extended to 1 January 2026.

Details

Definitions

(1) “connected persons” shall be construed in accordance with section 10;

“control” shall be construed in accordance with section 432;

“EEA state” means a state which is a contracting party to the EEA Agreement, which is the Agreement on the European Economic Area signed at Oporto on 2 May 1992, as adjusted by all subsequent amendments to that Agreement;

“excluded activities” means—

1. adventures or concerns in the nature of trade,
2. dealing in commodities or futures in shares, securities or other financial assets,
3. financial activities (as defined in section 489),
4. professional services companies, which are services of a medical, dental, optical, aural, veterinary, architectural, quantity surveying, or surveying nature and related services, accountancy, auditing, taxation, finance, geological services, and services of a solicitor or barrister and other legal services,
5. dealing in or developing land,
6. building and construction,
7. forestry, and
8. operations carried out in the coal industry or in the steel and shipbuilding sectors.

“qualifying company” means, subject to subsection (10), a company that—

1. is incorporated in the State, or in an EEA state other than the State or in the United Kingdom, and is resident in the State, or is resident in an EEA state other than the State or in the United Kingdom and carries on business in the State through a branch or agency,
2. exists wholly or mainly for the purpose of carrying on a qualifying trade (which are trading activities other than excluded activities) on a commercial basis with a view to the realisation of profit, the profits or gains of which are charged to tax under Case I of Schedule D,
3. throughout the entirety of any relevant period—
   1. is an unquoted company none of whose shares, stock or debentures are listed in the official list of a stock exchange, or quoted on an unlisted securities market of a stock exchange other than—
      1. on the market known as the Euronext Growth market operated by the Irish Stock Exchange plc trading as Euronext Dublin, or
      2. on any similar or corresponding market of the stock exchange—
         1. in a territory with which Ireland has a double tax treaty, or
         2. in an EEA state other than the State or in the United Kingdom,
         and
   2. is not regarded as a company in difficulty for the purposes of the Commission Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty¹
      and
4. at the date of grant of the qualifying share option—
   1. is a micro, small or medium sized enterprise within the meaning of the Annex to Commission Recommendation 2003/361/EC of 6 May 2003² concerning the definition of micro, small and medium sized enterprises. This refers to enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding €50 million and/or an annual balance sheet total not exceeding €43 million, and
   2. the total market value of the issued but unexercised qualifying share options of the company does not exceed €3,000,000;

Subject to the commencement of a Ministerial order, the current definition of a

“qualifying company” is to be replaced with the following:

“qualifying company” means, subject to subsection (10), a company that—

1. is incorporated in the State, or in an EEA state other than the State or in the United Kingdom, and is resident in the State, or is resident in an EEA state other than the State or in the United Kingdom and carries on business in the State through a branch or agency,
2. exists wholly or mainly for the purpose of carrying on a qualifying trade (which are trading activities other than excluded activities) on a commercial basis with a view to the realisation of profit, the profits or gains of which are charged to tax under Case I of Schedule D,
3. throughout the entirety of any relevant period—
   1. is an unquoted company none of whose shares, stock or debentures are listed in the official list of a stock exchange, or quoted on an unlisted securities market of a stock exchange other than—
      1. on the market known as the Euronext Growth market operated by the Irish Stock Exchange plc trading as Euronext Dublin, or
      2. on any similar or corresponding market of the stock exchange—
         1. in a territory with which Ireland has a double tax treaty, or
         2. in an EEA state other than the State or in the United Kingdom,
         and
   2. is not regarded as a company in difficulty for the purposes of the Commission Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty³
      and
4. at the date of grant of the qualifying share option—
   1. is a micro, small or medium sized enterprise within the meaning of the Annex to Commission Recommendation 2003/361/EC of 6 May 2003⁴ concerning the definition of micro, small and medium sized enterprises. This refers to enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding €50 million and/or an annual balance sheet total not exceeding €43 million, and
   2. the total market value of the issued but unexercised qualifying share options of the company does not exceed €6,000,000;

“qualifying group” means, subject to subsection (2A), a group of companies that consists of the following (and no other companies):

1. a qualifying holding company,
2. its qualifying subsidiary or subsidiaries, and
3. as the case may be, its relevant subsidiary or subsidiaries;

“qualifying holding company” means a company—

1. which is not controlled either directly or indirectly by another company,
2. which does not carry on a trade or trades, and
3. whose business consists wholly or mainly of the holding of shares only in the following (and no other companies), namely, its qualifying subsidiary or subsidiaries and where it has a relevant subsidiary or subsidiaries, in that subsidiary or in each of them;

“qualifying subsidiary”, in relation to a qualifying holding company, means a company in respect of which more than 50 per cent of its ordinary share capital is owned directly by the qualifying holding company;

“relevant subsidiary”, in relation to the qualifying holding company, means a company in respect of which more than 50 per cent of its ordinary share capital is owned indirectly by the qualifying holding company, but for the purposes of this section a relevant subsidiary in relation to a qualifying holding company shall not be regarded as a qualifying company

“qualifying individual”, in relation to a qualifying share option, means an individual who throughout the entirety of the relevant period is—

1. in the case of a qualifying group, an employee or director of a qualifying company within the group, and who is required to work at least 20 hours per week for such a qualifying company or to devote not less than 75 per cent of his or her working time to such a qualifying company, and
2. in the case of a qualifying company not being a member of a qualifying group, an employee or director of the qualifying company, and who is required to work at least 20 hours per week for the qualifying company or to devote not less than 75 per cent of his or her working time to the qualifying company;

Up to 10 November 2022, an individual was required to be a full-time employee or director of the qualifying company and to devote substantially the whole of his or her time to the service of the company, with a minimum requirement for the individual to work at least 30 hours per week for the qualifying company.

“qualifying share option” means a right granted to an employee or director of a qualifying company to purchase a predetermined number of shares at a predetermined price, by reason of the individual’s employment or office in the qualifying company, where—

1. the shares which may be acquired by the exercise of the share option are new ordinary fully paid up shares in a qualifying company, which carry no present or future preferential right to dividends or to a company’s assets on its winding up and no present or future preferential right to be redeemed. ‘Ordinary shares’ are shares forming part of a company’s ordinary share capital,
2. the option price (which is a predetermined price at which an employee or director can purchase a share at some time in the future) at date of grant is not less than the market value of the same class of shares at that time,
3. there is a written contract or agreement in place specifying—
   1. the number and description of the shares which may be acquired by the exercise of the share option,
   2. the option price, and
   3. the period during which the share options may be exercised,
4. the total market value of all shares, in respect of which qualifying share options have been granted by the qualifying company to an employee or director, does not exceed—
   1. €100,000 in any one year of assessment,
   2. €300,000 in all years of assessment, or
   3. the amount of annual emoluments (which includes anything assessable to income tax under Schedule E) of the qualifying individual in the year of assessment in which the qualifying share option is granted.
5. the share option is exercised by the qualifying individual in the relevant period,
6. the shares are in a qualifying company, and
7. the share option can not be exercised more than 10 years from the date of grant;

Up to 31 December 2018, the total market value of all shares, in respect of which qualifying share options have been granted by the qualifying company to an employee or director, could not exceed—

1. €100,000 in any one year of assessment,
2. €250,000 in any 3 consecutive years of assessment, or
3. 50 per cent of the annual emoluments (which includes anything assessable to income tax under Schedule E) of the qualifying individual in the year of assessment in which the qualifying share option is granted.

Subject to the commencement of a Ministerial Order, the current definition of a “qualifying share option” is to be replaced with the following:

‘qualifying share option’ means a right granted to an employee or director of a qualifying company to purchase a predetermined number of shares in the qualifying company or, in the case of a qualifying group, in the qualifying holding company of the qualifying group, at a predetermined price, by reason of the individual’s employment or office in the qualifying company, where—

1. the shares which may be acquired by the exercise of the share option are ordinary fully paid up shares in the qualifying company or, in the case of a qualifying group, in the qualifying holding company,
2. the option price at date of grant is not less than the market value of the same class of shares at that time,
3. there is a written contract or agreement in place specifying—
   1. the number and description of the shares which may be acquired by the exercise of the share option,
   2. the option price, and
   3. the period during which the share options may be exercised,
4. the total market value of all shares, in respect of which qualifying share options have been granted in the qualifying company or, in the qualifying holding company, to an employee or director does not exceed—
   1. €100,000 in any year of assessment,
   2. €300,000 in all years of assessment, or
   3. the amount of annual emoluments (which includes anything assessable to income tax under Schedule E) of the qualifying individual in the year of assessment in which the qualifying share option is granted,
5. the share option is exercised by the qualifying individual in the relevant period,
6. the shares are in a qualifying company or, in the case of a qualifying group, in the qualifying holding company, and
7. the share option cannot be exercised more than 10 years from the date of grant of that option;

“relevant period” means a period of not less than 12 months beginning on the date a qualifying share option is granted to an employee or director of the qualifying company and ending on the date the share option is exercised by the qualifying individual;

Qualifying individual

(2)(a) In addition to the requirements of subsection (1), an individual shall not be a qualifying individual if his or her employment or office is not capable of lasting at least 12 months from the date on which the qualifying share option is granted.

(2)(b) An individual shall cease to be a qualifying individual if he or she (together with any connected person) acquires 15% of the ordinary share capital of the qualifying company or in the case of a qualifying group, of the qualifying holding company.

(2)(c) Where the scheme rules permit, on the cessation of an office or employment an individual may avail of the preferential tax treatment of the section, provided the exercise of the share options occurs within 90 days of leaving the office or employment.

Qualifying group

(2A) At least one qualifying subsidiary must be considered a qualifying company for the entirety of the relevant period.

The activities of the qualifying group (excluding the qualifying holding company) must consist wholly or mainly for the purposes of carrying on a qualifying trade throughout the entirety of the relevant period.

Each company in the qualifying group must meet the existing conditions as regards being an unquoted company and not being a company in difficulty for the purposes of the State Aid rules.

At the date of grant of the qualifying option, the group must be considered an SME within the meaning of the Annex to Commission Recommendation 2003/361/EC of 6 May 2003 and the total market value of the issued but unexercised qualifying share options of the qualified holding company must not exceed €3m.

Subject to the commencement of a Ministerial Order, this subsection is amended to increase the total market value of the issued but unexercised qualifying share options of the qualified holding company so that it must not exceed €6m.

Relief

(3) An exemption from income tax, USC and PRSI will apply to any gain realised on the exercise of a qualifying share option granted on or after 1 January 2018 and before 1 January 2024.

Subject to the commencement of a Ministerial Order, this subsection is amended to extend the relief to share options granted on or after 1 January 2018 and before 1 January 2026.

Relevant period

(5) An exemption from the 12 month holding period applies in the case of a company which, throughout the relevant period is a qualifying company or, in the case of a qualifying group, the holding company is a qualifying holding company, on the reorganisation or sale, or on the death of the option holder, in certain circumstances.

Capital Gains Tax

(6) For capital gains tax purposes, the base cost of the shares (acquired by the exercise of the share option) on a subsequent disposal will be the price paid for the shares.

(6A) Subject to the commencement of a Ministerial Order, a new subsection is inserted which provides for Capital Gains treatment to apply where the employing company, purchases, repays or redeems shares that were qualifying share options on acquisition. The payment may be treated as a capital gain rather than income, so long as the conditions set out in section 176 TCA are satisfied. Section 176(1) TCA requires the redemption, repayment or purchase to be made wholly or mainly for the benefit of a trade carried on by the company. This provision deems that condition to be met for the purposes of a buy back of shares acquired under the KEEP scheme.

Returns of information

(7) A company will have an annual reporting requirement in respect of the share option scheme. The due date will be 31 March in the following year of assessment.

(7A) In the case of a group scenario, the holding company may not be registered for Irish tax and may wish to designate a qualifying company within the group who will undertake to file the relevant return on behalf of the group.

(8) The information required for State Aid publication purposes will be collected via the qualifying company’s or the qualifying groups, as the case may be, annual return.

Revenue may publish information in relation to all qualifying companies, or in the case of a group scenario, to all entities (as appropriate) in the qualifying group for example the qualifying company, the qualifying holding company, qualifying subsidiary or relevant subsidiary.

(9) No obligation as to secrecy imposed by section 851A shall preclude the Revenue Commissioners from publishing information obtained by them in accordance with this section.

(10) If a company, or in the case of a group, the designated company, does not comply with the reporting requirements set out in subsections (7) or (7A) as the case may be, the company or group will no longer be considered qualifying for the purposes of this section.

Other

(11) Subsection (11) includes a bona fide commercial test, which requires that the main purpose of granting the share option must be to recruit or retain employees.

(12) Where relief under this section applies, no relief will be given in respect of the Employment and Investment Incentive (Part 16).

Relevant Date: Finance Act 2024