Long established as an essential element of executive compensation, the offer of a potential ownership stake to employees at different levels across a business has become a key employer tool in the battle to secure and retain top talent within the Irish market. Effective utilisation of this tool means the equity incentive solution varies from client to client.

The equity incentives team at Arthur Cox is multi-disciplinary, combining expertise in company, securities, tax, employment, contracts and trust law.  Working with a wide range of clients, from multi-national publicly listed companies and their subsidiaries in Ireland to private companies, trustees and individual awardees, it advises on the legal and tax aspects of the design, drafting, localisation, approval, implementation and day-to-day administration of equity incentive arrangements. The equity incentive component of corporate restructurings and transactions forms a key element of its work, as does advising on awardee disputes and on the engagement of third party administrators, trustees and advisers. The team also represents clients in obtaining approvals and guidance, where necessary, from the Revenue Commissioners.

The requirement to obtain approval from the Revenue Commissioners arises principally in the design of certain “all-employee” equity incentive plans intended to meet the criteria enabling employees in Ireland to benefit from favourable tax treatment on their award.  While such benefit for employees is modest in Ireland, given that employers may also obtain a tax credit for associated costs and that employer social insurance charges do not apply to the value of awards under such approved equity incentive plans, they can be an attractive tax-efficient way to remunerate employees and promote retention.  Outside of such “approved” equity incentive plans, Ireland remains an open and flexible jurisdiction within which to establish or extend all manner of equity incentive arrangements (and employers may be able to obtain the benefit of a tax credit for associated costs).

We have highlighted below the key facets of a variety of equity incentive types as they generally apply in Ireland. The position in respect of an individual equity inventive arrangement may, of course, differ. If you would like further information or if Arthur Cox can be of assistance on an equity incentive matter, please contact any of the team members highlighted below or your usual Arthur Cox contact.

Plans requiring the prior approval of the Revenue Commissioners:

Irish tax legislation provides favourable tax treatment for certain forms of pre-approved equity incentive arrangements which are offered on an all-employee basis.

Approved Profit Sharing Plan

Allocation of up to €12,700 in shares to each employee annually (funded via a discretionary bonus payment, which may be supplemented through employee salary foregone), with the value of such shares being free from income tax if subsequently held in trust for a retention period of at least three years. Participation must be open to all employees on an equivalent terms basis.

Tax treatment
On appropriation:	On disposal during retention period:	On disposal post retention period:
Universal social charge and employee pay related social insurance at marginal rates	Income tax and capital gains tax on any gain realised	Capital gains tax on any gain realised

Approved Savings Related (SAYE) Share Option Plan

Grant to an employee of a share option at a discount of up to 25% of market value provided employee commits to regular monthly savings (with an approved savings provider*) of between €12 and €500 over a predetermined period of three, five or seven years, after which the savings may be used to exercise the option free from income tax. Participation must be open to all employees.

Tax treatment
On grant:	On exercise:	On disposal of shares:
None	Universal social charge and employee pay related social insurance at marginal rates on any gain realised	Capital gains tax on any gain realised

(*At the time of publication, a shortage in the number of approved banks or savings institutions willing to engage in the market and act as an approved savings provider is impeding the establishment of new plans.)

Awards and plans where the prior approval of the Revenue Commissioners is not required:

Share Options (capable of exercise for a period of up to seven years)

Grant of a right (without obligation) to purchase shares in the company (or its parent) at a particular price, which may be exercised within a period of up to seven years from the date of grant.

Tax treatment
On grant:	On exercise:	On disposal of shares:
None	Income tax, universal social charge and employee pay related social insurance at marginal rates	Capital gains tax on any gain realised

Share Options (capable of exercise for a period in excess of seven years)

Grant of a right (without obligation) to purchase shares in the company (or its parent) at a particular price, which may be exercised within a period of in excess of seven years from the date of grant.

Tax treatment
On grant:	On exercise:	On disposal of shares:
Income tax, universal social charge and pay related social insurance at marginal rates	Subject to a credit for tax paid on grant, income tax, universal social charge and employee pay related social insurance at marginal rates	Capital gains tax on any gain realised

Key Employee Engagement Programme (“KEEP”) Qualifying Share Options

Grant by a qualifying small or medium-sized enterprise (“SME”) company to a qualifying individual (employee or director meeting minimum time commitment) of a qualifying share option, whereby the tax liability is deferred until a liquidity event, whereupon the employee is subject to capital gains tax in lieu of income tax on the benefit. KEEP is a targeted programme intended to assist SME companies attract and retain talent in a highly competitive labour market. The total market value of shares the subject of a qualifying share option awarded to a qualifying individual must not exceed the lesser of €100,000 in any one tax year, €300,000 in all years of assessment or the amount of annual emoluments in the year in which the qualifying share option is granted.

Tax treatment
On grant:	On exercise:	On disposal of shares:
None	None	Capital gains tax on any gain realised

Free or Discounted Shares

Award of free or discounted shares under a formal share plan or as a once off award.

Tax treatment
On acquisition:	On disposal:
Income tax, universal social charge and employee pay related social insurance at marginal rates	Capital gains tax on any gain realised

Performance/Conditional Share Award

Prospective award of shares subject to certain company-wide, team or individual performance criteria being achieved, usually measured over a fixed time period (such a three years in the case of a long term incentive plan for a listed public company). Such an award can also be described (principally by US issuers) as the award of “restricted stock units”.

Tax treatment
On grant:	On acquisition of shares:	On disposal of shares:
None	Income tax, universal social charge and employee pay related social insurance at marginal rates	Capital gains tax on any gain realised

Restricted Shares

Award of shares subject to a restriction requiring that the shares be retained for a fixed period by the awardee. Favorable tax treatment may apply if certain conditions are met including there being written agreement in place and the shares are held in held in a trust established by the employer for a specified period of at least one year.

Tax treatment (where conditions met)
On acquisition:	On disposal:
Income tax (subject to abatement dependent on the number of years restricted), universal social charge and employee pay related social insurance at marginal rates	Capital gains tax on any gain (on the abated value) realised

Forfeitable Shares

Award of shares to an employee or director subject to a condition that the employee/director will have to forfeit the shares if the targets are not met or he or she ceases employment.

Tax treatment
On acquisition:	On forfeiture:	On disposal:
Income tax, universal social charge and employee pay related social insurance at marginal rates	Refund of charges imposed in respect of forfeited shares (on foot of a claim from employer/director) and capital gains tax loss equal to the amount of consideration paid less any amount recovered on forfeiture	Capital gains tax on any gain realised (on transfer subsequent to lapse of forfeiture condition)

Growth Shares

Award of a special class of shares to an employee or director that have a low initial value but acquire value once a specified hurdle (e.g. level of company turnover or profit) is achieved. Necessitates amendment to the company’s constitution to create new class. Can be combined with other award mechanics (e.g. as restricted shares).

Tax treatment
On acquisition:	On disposal:
Income tax, universal social charge and employee pay related social insurance at marginal rates, if shares issued free of charge or at discounted value	Capital gains tax on any gain realised

Employee Share Purchase Plan

Plan through which an employee can elect to purchase shares in the employer (or its parent) (via SAYE or otherwise) at a discounted price.

Tax treatment
On acquisition:	On disposal:
Income tax, universal social charge and employee pay related social insurance at marginal rates	Capital gains tax on any gain realised

Phantom Share Plan

Plan through which, in lieu of receiving physical stock, an employee receives a contractual right linked to notional units the value of which follows the price movement of (and benefit from dividend equivalent payments to those of) the company’s actual shares and which results in a cash award for the employee.

Tax treatment
On payment:
Income tax, universal social charge and pay related social insurance at marginal rates

The above table highlights the generally applicable position in Ireland. That position may differ for individual equity inventive arrangements. Always seek advice.