122A Notional loans relating to shares, etc

Summary

This section is designed to counter a tax avoidance device whereby directors and employees, by reason of their employment, acquire shares in a company without having to pay the entire amount due on the allotment of such shares. This unpaid balance, known as a “call”, amounts to what is essentially an interest-free loan in the hands of the directors and employees. The section accordingly provides that:

• the “call” is deemed to be an interest free preferential loan (called a “notional loan”) for benefit-in-kind purposes,
• where the “call” (notional loan) is written off by the company in favour of the director or employee, the amount outstanding on the “call” is deemed to be an emolument of the director/employee, and
• where the shares are sold at above market value, the difference between the market value and the sale price is deemed to be an emolument of the director/employee.

The Revenue Commissioners are prepared to accept that where shares are acquired under —

• rights acquired between 6 April, 1986 and 28 January, 1992 under a share option scheme approved by them for the purposes of section 10 of the Finance Act, 1986, or
• a share option scheme approved of in accordance with Part 2 of Schedule 11,

the provisions of the section relating to a charge in respect of a notional loan or in respect of the deemed write off of a notional loan will not apply to such shares. However, the section will apply where such shares are disposed of at an over-value.

Details

(2) Where, by reason of his or her employment, an employee (including a director) of a company acquires shares at undervalue in any company (whether the employer company or not), he or she is deemed to have the use of an interest-free loan (called a “notional loan”) and this loan is deemed to be a preferential loan to which the provisions of section 122 apply.

(3) The section applies for any year in which an individual has a notional loan. Shares are acquired at undervalue where they are acquired without payment or for an amount which is less than the market value of fully paid up shares of the same class. The undervalue is the difference between market value of the shares and any payment made for them.

(4) The initial amount of the notional loan is the amount of the undervalue which is not chargeable to tax as an emolument. The loan remains outstanding until terminated. Subsequent payments in respect of the shares reduce the amount of the loan.

(5) A notional loan is terminated when:

1. the amount of the call outstanding is fully paid,
2. the employee is no longer bound to account for the call,
3. the employee ceases to have a beneficial interest in the shares, or
4. the employee dies.

(6) Where the employee ceases to have a beneficial interest in the shares or dies, section 122(3) is to apply as if an amount equal to the then outstanding amount of the notional loan had been released or written off from a loan within that section.

(7) Where shares are disposed of by an employee at above market value, the difference between the sale price and market value is deemed to be an emolument of the employee’s employment.

(8) & (9) Any charge to tax in respect of the release or writing off of a loan applies notwithstanding that the employment may have ceased. However, no such charge will arise after the death of the employee.

(10) Subject to specified modifications, the section applies where an individual acquires or disposes of an interest in shares which is less than the full beneficial ownership of those shares.

(11) A payment for shares includes giving any consideration or making any subscription for the shares.

Commencement of section 122A

The section applies generally as on and from 4 March, 1998. Where shares were acquired before that date, a notional loan is deemed to have been made on that date in an amount equal to the amount of the loan then outstanding. [Section 15(2), Finance Act, 1998.]

Relevant Date: Finance Act 2019