Revenue Note for Guidance
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 full time 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.
The commencement of this section is subject to a Ministerial Order.
(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—
(a) adventures or concerns in the nature of trade,
(b) dealing in commodities or futures in shares, securities or other financial assets,
(c) financial activities (as defined in section 489),
(d) 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,
(e) dealing in or developing land,
(f) building and construction,
(g) forestry, and
(h) operations carried out in the coal industry or in the steel and shipbuilding sectors.
“qualifying company” means, subject to subsection (10), a company that—
(a) is incorporated in the State, or in an EEA state other than the State, and is resident in the State, or is resident in an EEA state other than the State and carries on business in the State through a branch or agency,
(b) 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,
(c) throughout the entirety of any relevant period—
(d) at the date of grant of the qualifying share option—
Subject to the commencement of a Ministerial Order, the following definitions are to be inserted:
“qualifying group” means, subject to subsection (2A), a group of companies that consists of the following (and no other companies):
“qualifying holding company” means a company—
“qualifying individual”, in respect of a qualifying share option, means an individual who throughout the entirety of the relevant period—
(a) is a full time employee or full time director of the qualifying company, and
(b) is required 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;
Subject to the commencement of a Ministerial Order, the definition of a “qualifying individual” is to be substituted with the following:
“qualifying individual”, in relation to a qualifying share option, means an individual who throughout the entirety of the relevant period is—
“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—
(a) 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,
(b) 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,
(c) there is a written contract or agreement in place specifying—
(d) 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, up to 31 December 2018, does not exceed—
With effect from 01 January 2019, the restrictions imposed on the total market value of shares which can be granted by the qualifying company to a qualifying employee were amended as follows:
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—
(e) the share option is exercised by the qualifying individual in the relevant period,
(f) the shares are in a qualifying company, and
(g) the share option can not be exercised more than 10 years from the date of grant;
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—
Subject to the commencement of a Ministerial Order, the following definition will be inserted:
“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 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;
Subject to the commencement of a Ministerial Order, the following definition will be inserted:
“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.
(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.
Following the commencement of a Ministerial Order, this threshold will be applied to a shareholding in a qualifying group. In such cases, an individual will cease to be a qualifying individual if he or she (together with any connected person) acquires more than 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.
(2A) Following, commencement by Ministerial Order, a new subsection (2A) sets out the required conditions for the qualifying group.
In this regard, 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.
(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.
(4) The definition of a qualifying company is extended to include an immediate parent company of a qualifying company, where the business of the parent company consists wholly of holding of shares in the qualifying subsidiary company.
Subject to the commencement of a Ministerial Order, the definition of holding company is deleted as the KEEP relief is extended to group scenarios.
(5) An exemption from the 12 month holding period applies in the case of a company reorganisation or sale, or on the death of the option holder, in certain circumstances.
Subject to the commencement of a Ministerial Order, the definition existing provisions contained within subsection 5 are extended to a qualifying group.
(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.
(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) Subject to commencement by Ministerial Order, a new subsection is inserted which provides for filing in a group scenario. In such cases, 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 annual return.
Subject to commencement by Ministerial Order, this subsection is amended to provide for State Aid reporting in the case of a group scenario. Revenue may publish information in relation to all entities (as appropriate) in the qualifying group for example the qualifying company, or in the case of a qualifying group, 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 does not comply with the reporting requirements set out in subsections (7) and (8), it will not be regarded as a qualifying company.
Subject to commencement by Ministerial Order, this subsection is extended to provide for group scenarios. Where a designated qualifying company fails to make the return of information required by this section, the group will no longer be considered qualifying for the purposes of this section.
(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 2019