Savings-Related Share Option Schemes

Sections 519A - 519C and Schedules 12A and 12B TCA 1997

Introduction

Section 68 Finance Act 1999 introduced Savings-Related Share Option Schemes. Normally, in accordance with the provisions of section 128 TCA 1997, income tax is chargeable on any gain realised by an individual on the exercise of a share option acquired in the capacity of an employee or director. However, where a share option is exercised in accordance with a Revenue approved Savings-Related Share Option Scheme, no income tax charge will arise except where the option is exercised within 3 years of having been obtained (in certain circumstances, i.e. death, cessation of employment due to ill-health, injury, retirement or redundancy, no income tax charge will arise notwithstanding that the share option is exercised within 3 years of having been obtained).

Under the terms of a Savings-Related Share Option Scheme, employees and directors are granted options to purchase shares at a pre-determined price (which cannot be less than 75% of the market value of the shares at the date of grant). They then make monthly contributions (maximum ₤250 per month and minimum ₤10 per month) to a certified contractual savings scheme with a qualifying institution for a period of three or five years (in the case of five year contracts the savings may be left on deposit for a further two years). The monthly contributions are deducted from the employee’s or director’s net pay through the payroll system and paid over by the employer to the relevant bank. The monthly contributions must be sufficient to secure, as nearly as possible, repayment (savings plus interest or bonus where relevant) of an amount equal to the amount required to pay for the shares the individual has the option to acquire.

At the end of the savings period the employee or director can decide whether or not to exercise his or her option to purchase the shares.

Certified Contractual Savings Scheme

A Contractual Savings Scheme (which can only be used in conjunction with an approved Savings-Related Share Option scheme) will be certified by Revenue having regard to specifications laid down by the Minister for Finance in July 1999. Full details of the specifications are available on the Department of Finance website http//www.irlgov.ie.

The specifications provide that a qualifying institution may pay a bonus on savings held for the full term of the relevant savings period on the following basis;

Period of contract	Maximum Bonus payable
3 year savings contract	Up to 2 monthly contributions
5 year savings contract	Up to 6 monthly contributions
7 year contract*	Up to 12.5 monthly contributions
*(savings for a period of 5 years left on deposit for a further 2 years)

Where an employee or director withdraws early from a savings contract, the qualifying institution may pay interest of up to 2% per annum provided a minimum period of 12 months has elapsed since the starting date of the contract. (The employee or director cannot exercise his or her option in this case).

Any interest or bonus received under a certified contractual savings scheme will be exempt from income tax, and will not be subject to Deposit Interest Retention Tax (DIRT). This remains the case where the employee or director decides at the end of the savings period not to exercise his or her option.

Qualifying Institutions

The following qualifying institutions operate certified contractual savings schemes:

• Agricultural Credit Corporation
• Allied Irish Banks
• Anglo Irish Banks
• Bank of Ireland
• Barclays Bank

Corporation Tax Deduction

Any costs incurred by a company on or after 6 April 1999, in establishing an approved savings-related share option scheme will be allowable as a deduction in computing the company’s profits for corporation tax. purposes. The deduction is allowable for the accounting period in which the expenditure is incurred, except where the scheme is approved more than nine months after the end of that period. In such circumstances the deduction is allowable for the accounting period in which approval is granted.

It is possible for a company to set up a dedicated trust or subsidiary company to purchase sufficient shares to satisfy the options granted under a Savings-Related Share Option Scheme. In such circumstances the company will not be entitled to a corporation tax deduction for any subscription made by it to the trust or subsidiary to acquire the shares.

Group Schemes

Where a company who is establishing a Savings-Related Share Option Scheme has control over another company or companies, the scheme may be extended to include all or any of the companies over which it has control. However such a scheme or any scheme established by a company who is a member of a group of companies must not have the effect of conferring benefits wholly or mainly on directors of companies in the group or on those employees of companies in the group who are in receipt of the higher or highest levels of remuneration.

Requirements for approval

A number of conditions must be satisfied before a Savings-Related Share Option Scheme will receive Revenue approval.

The conditions can be classified as follows:

• General
• Relating to the participants
• Relating to the shares
• Relating to the exercise of options.

General conditions

The scheme must be open to all employees on similar terms and must allow employees to obtain options to acquire ‘qualifying shares’. The fact that the options to be obtained by the persons participating in a scheme vary according to the levels of their remuneration, the length of their service or similar factors will not be regarded as meaning that they are not eligible to participate in the scheme on similar terms. The options must not be transferable, except in the case of death, when the options can pass into the estate of the deceased.

The scheme must not contain features which are neither essential nor reasonably incidental to the purpose of providing for employees’ and directors’ benefits in the nature of options to acquire shares. It must not contain any features which would have the effect of discouraging employees from participating in the scheme.

Shares must be paid for with monies not exceeding the amount of the repayments paid to an employee or director under a certified contractual savings scheme. An employee or director cannot use funds from any other source to purchase the shares.

Repayments under the certified contractual savings scheme may be taken as including or not including a bonus, but the question of what is to be included must be determined at the time the options under the scheme are obtained.

Conditions relating to participants

Participation in the scheme must be open at any time to every person who is then:

• an employee or a full-time director (a director who is required to devote substantially the whole of his time to the service of the company) of the company which has established the scheme or, in the case of a group scheme, a participating company, and
• has been such an employee or director at all times during a qualifying period not exceeding three years ending at that time, and is chargeable to tax under Schedule E in respect of his/her office or employment.

Other employees or directors may be nominated by the company to participate in the scheme.

While all qualifying directors and employees must be eligible to participate in the scheme, participation is voluntary and there is nothing to prevent such persons choosing not to participate.

The scheme must not allow an employee or director to participate, if at that time, or at any time within the previous twelve months such individual had a material interest (owns 15% or more of the ordinary share capital) in a close company which is either the company whose shares may be acquired pursuant to the exercise of the options, or a company having control of that company, or a company which is a member of a consortium which owns that company.

Conditions relating to shares

• The shares being used for the purposes of the scheme must form part of the ordinary share capital of:
  1. the company which established the scheme, or
  2. a company which has control of the company establishing the scheme, or
  3. a company which either is, or has control of, a company which is a member of a consortium which owns either the company which established the scheme or a company having control of that company, and beneficially owns not less than 15 per cent of the ordinary share capital of the company so owned.
• The shares must be:
  1. shares of a class quoted on a recognised stock exchange, or
  2. shares in a company not under the control of another company, or
  3. shares in a company which is under the control of a company (other than a close company or a company which would be a close company if resident in the state) whose shares are quoted on a recognised stock exchange.
• In addition, the shares must be fully paid up, not redeemable, and not subject to any restriction other than restrictions which attach to all shares of the same class. The only exception is that shares may be subject to a restriction imposed by the company’s Articles of Association requiring all shares held by directors or employees of the company or of any other company of which it has control to dispose of their shares when they cease to be directors or employees or subsequently when shares are acquired as a result of options exercised after employees and directors have left the company or by personal representatives.

Where such a restriction applies, the disposal must be by way of sale for money and on terms specified in the Articles of Association. The same terms for disposal must apply to all shares of the same class.

In deciding if scheme shares which are acquired by any participant are subject to any restriction, any contract, agreement, arrangement or condition (with the exception of any provision in such contract etc., which is similar in purpose and effect to the Model Code set out in the Listing Rules of the Irish Stock Exchange) will be regarded as a restriction, if it:

1. restricts freedom to dispose of
   • the shares
   • any interest in the shares, or
   • the proceeds from the sale of the shares
2. restricts freedom to exercise any right conferred by the shares
3. would cause any disadvantage to the participant, or any ‘connected person’, (as defined in Section 10 TCA 1997) if shares were disposed of or any option conferred by them was exercised.
   Except where the shares are in a company whose ordinary share capital consists of one class only, the majority of the issued shares of the same class must be held by persons other than:
   1. persons who acquired their shares in pursuance of an option conferred on them or an opportunity afforded to them as a director or employee of the company setting up the scheme, or any other company, and not as a result of an offer to the public, or
   2. trustees holding shares on behalf of persons who acquired their beneficial interests in the shares in pursuance of such an option or opportunity as is mentioned above, or
   3. in the case where the shares are unquoted but are shares of a company which is under the control of a company (other than a close company) whose own shares are quoted, persons other than companies which have control of the first-mentioned company or companies of which the first-mentioned company is an associated company.

Conditions relating to exercise of rights

A scheme must provide for the shares to be paid for with moneys not exceeding the amount of repayments made (savings plus bonus) and any interest paid under a certified contractual savings scheme.

Subject to the exceptions in the following paragraphs, the options obtained under the scheme must not be capable of being exercised before the bonus date, (i.e. the date on which repayments under the certified contractual savings scheme are due to be paid - end of 3 years, 5 years or 7 years as appropriate) and not later than 6 months after the bonus date. At the time the options are obtained, the employee or director must decide whether or not repayments to be used to buy the shares will include any bonus payable on his or her savings. No other funds from any other source can be used to purchase the shares.

Exceptions

• Where an employee or director who obtained options to acquire shares dies before the bonus date, the scheme must provide for the exercise of such options within the twelve months following the date of death. If the death occurs within the six months after the bonus date, the scheme must provide for the exercise of such options within the twelve months following the bonus date.
• Where an employee or director who has obtained options to acquire shares ceases to hold the office or employment due to:
  • injury
  • disability
  • redundancy (within the meaning of Redundancy Payments Act, 1967 to 1991)
  • retirement on reaching the ‘specified age’ (an age between 60 and 66 years of age)
  the scheme must provide for the exercise of such options within six months following the date of cessation.
• Where an employee or director who has obtained options to acquire shares ceases to hold the office or employment in circumstances other than those listed above and the options have been held for more than 3 years prior to the date of cessation, the rules of the scheme may allow them to be exercised within the six months following that date. If the options have been held for less than 3 years the scheme must provide for the options to lapse.
• Where an employee or director continues to work after reaching the ‘specified age’ he or she may exercise his/her options within six months of reaching the ‘specified age’. [The ‘specified age’ must be stated on the rules of the scheme. Where there is more than one retirement age in operation in a company it may be appropriate to state the lowest age (cannot be less than 60 years) at which an employee or director may retire].
• If any person obtains control of a company, whose shares include scheme shares, as a result of making:
  • a general offer to acquire the whole of the issued ordinary share capital of the company, or
  • a general offer to acquire all the shares in the company which are the same class as the scheme shares,
  then options obtained under the scheme to acquire shares in the company may be exercised within six months of the time when the person making the offer has obtained control of the company, and any condition subject to which the offer is made, has been satisfied.
• If, under section 201 Companies Act 1963, the court sanctions a compromise or arrangement proposed for the purposes of, or in connection with, a plan for reconstructing a company whose shares are scheme shares, or its amalgamation with any other company or companies, options obtained under the Savings-Related Share Option Scheme to acquire shares in the company may be exercised within six months of the court sanctioning the compromise or arrangement.
• If any person becomes bound or entitled under section 204 Companies Act 1963, to acquire shares in a company whose shares are scheme shares, options obtained under the scheme to acquire shares in the company may be exercised at any time that person remains so bound or entitled.
• If a company whose shares are scheme shares passes a resolution for voluntary winding up, options obtained under a scheme to acquire shares in the company may be exercised within six months of the passing of the resolution.
• If an employee or director ceases to hold his or her office or employment because:
  • that office or employment is in a company of which the company which established the Savings-Related Share Option Scheme ceases to have control, or
  • that office or employment relates to a business or part of a business which is transferred to a person who is neither an ‘associated company’ (as defined in paragraph 1(1) of Schedule 12A TCA 1997) of the company which established the scheme nor a company of which the company which established the scheme has control, then options obtained under the scheme may be exercised within six months of cessation.
• If at the bonus date, an employee or director who has obtained options under the scheme ceases employment with the company who granted the share option but continues to be employed by:
  • an ‘associated company’ of that company, or
  • a company of which that company has control,
  then those options may be exercised within six months of the bonus date.

Take-Overs and Mergers

A scheme may contain provisions to permit an option holder to exchange options in circumstances where another company obtains control of the company whose shares are being used in the approved scheme, or the company becomes bound or entitled under section 204 Companies Act 1963, to acquire such shares, or the company obtains control of a company whose shares are scheme shares in pursuance of a compromise or arrangement sanctioned by the court under section 201 Companies Act 1963.

The new options, relating to shares in the new controlling company, (which satisfy the requirements of paragraphs 11 to 15, Schedule 12A TCA 1997), must be capable of being exercised in the same manner as the old options. The value and aggregate subscription price of the new options on acquisition must be exactly the same as the value and aggregate subscription price of the old option on disposal. The new options will be regarded as having been granted at the time the old options were granted.

Application for Approval

A company proposing to establish a Savings-Related Share Option Scheme may wish to obtain an opinion on a scheme in advance of a formal application for approval. The Revenue Commissioners will comment on draft documents and, if necessary, discuss points of difficulty.

The following information should be provided in relation to an application for approval of a scheme:

• A copy of the rules of the scheme (a certified copy of the rules will be required for formal approval)
• A copy of the Memorandum and Articles of Association of the company whose shares are being used for the purposes of the scheme
• A declaration that the shares to be used in the scheme satisfy the requirements of paragraphs 11 - 15 of Schedule 12A TCA 1997, with a statement as to how the requirements of how paragraphs 11 and 12 are met. The declaration should be on company headed paper and be signed by the Company Secretary of the company whose shares are to be used
• Where the company applying for approval is a member of a group of companies, confirmation will be required that the scheme does not and would not have the effect of conferring benefits wholly or mainly on directors of companies in the group or on those employees of companies in the group who are in receipt of higher or the highest levels of remuneration
• Copies of all documents that will be issued to participants in the scheme i.e. Letter of Invitation, Application Form, Option Certificate, Notice of Exercise of Option, Employee Booklet etc.
• A copy of the Certified Contractual Savings Scheme application form together with a copy of the letter of certification issued by the Revenue Commissioners approving the savings institutions product (obtainable from the relevant bank)
• A copy of the company resolution establishing the scheme
• In the case of a group scheme, a copy of the company resolution nominating the participating companies
• The name and address of the person to whom the annual Return of Information issued by Revenue should be addressed
• The income tax and corporation tax reference numbers for the company and any participating companies
• Where a trust or a subsidiary company is to be used to purchase and retain the shares for the scheme, a copy of the Trust document or Memorandum and Articles of the company as appropriate.

If a company’s application for approval is refused, there is a right of appeal to the Appeal Commissioners. Notice of appeal must be given in writing to the Revenue Commissioners, within thirty days of the date on which the company is notified of the Revenue Commissioners decision.

All applications for approval of Savings-Related Share Option Schemes should be sent to:

Office of the Chief Inspector of Taxes
Employee Share Scheme Section
Setanta Centre
Nassau Street
Dublin 2

Telephone: 01 - 671 6777

A copy of specimen scheme rules are also available on request from the above Section or from our website at www.revenue.ie

Capital Gains Tax (CGT)

The normal CGT rules will apply to the disposal of shares acquired by an employee or director under an approved Savings-Related Share Option Scheme. The base cost will be the price paid by the employee or director for the shares.