Revenue Tax Briefing Issue 43, April 2001
Section 15 provides for a new taxation system for share options granted to employees under schemes approved by the Revenue Commissioners.
Current legislation imposes an income tax charge at the time of the exercise of a share option, at a person’s marginal rate of tax, on the difference between the price paid for the shares and the market value at the date of exercise of the option. A charge to capital gains tax arises on any subsequent disposal of the shares on the difference between the market value at the date of exercise of the option and the proceeds of the disposal of the shares.
Section 15 provides that under an approved share option scheme the charge to income tax at the date of exercise of the option will not apply and, instead, the employee will be chargeable to capital gains tax on the full gain (i.e. the difference between the amount paid for the shares and the amount received) on a disposal of the shares. To qualify for this favourable treatment there will be a requirement that the period between the date of the grant of the option and the date of any subsequent sale of the shares must be at least 3 years.
To qualify for approval by the Revenue Commissioners, schemes must be open to all employees and must provide that employees be eligible to participate in the scheme under similar terms. Under the similar terms rule the options may be granted by reference to remuneration, length of service or other similar factors.
In order to assist companies in the retention of those employees who are vital to the companies’ success but who, because of their skills and experience are highly mobile, the scheme may, however, contain a “key employee” element where options can be granted which do not meet the similar terms conditions, provided at least 70 per cent of the total number of shares over which rights are granted under the scheme in any year are made available to all employees on similar terms. Employees cannot participate in both elements of the scheme in the same year. There will be no limit on the number or value of shares that can be covered by tax efficient options.
Shares used in the scheme must form part of the ordinary share capital of the company and, in general, must not be subject to restrictions that do not apply to other shares of the same class.
Where options are exercised on or after 15 February 2001 but before the scheme is approved by the Revenue Commissioners, these will also qualify for the new relief provided the scheme is approved before 31 December 2001 and that at the time of both the grant and exercise (if prior to approval) the scheme would have been capable of being approved had the legislation been in force from 15 February 2001.