knowledge 9 October 2024 |

Report on the Taxation of Share-based Remuneration in Ireland

Following a government consultation on SBR incentives, Indecon Economic Consultants considered the submissions made and evaluated policy developments in Ireland and internationally. Indecon’s report, published on 1 October 2024, contains six recommendations to the Government on the way forward for Ireland. In this short briefing, we look at the key takeaways from the report and what it might mean for SBR in the future.

SBR schemes in Ireland

There are currently three ‘approved’ schemes operating in Ireland: Approved Profit Sharing Scheme (“APSS”), Employee Share Ownership Trust (“ESOT”), and Save As You Earn (“SAYE”). Approved schemes benefit from favourable tax treatment if established correctly and approved by Revenue. The APSS and SAYE have exemptions from income tax for employees (USC and employee PRSI still apply). An ESOT is a trust that operates like an APSS but with fewer restrictions. Such trusts are not eligible for the income tax exemption unless they are coupled with an APSS.

There are also a number of ‘unapproved’ schemes which do not require approval from Revenue in advance of establishing a scheme. Some unapproved schemes may also attract preferential tax treatment such as the Key Employee Engagement Programme (“KEEP”). This is a targeted scheme that required EU State aid approval and aims to assist start-ups and SMEs through a number of tax advantages. No taxes apply for employees on shares granted under KEEP, although capital gains tax applies on any gains made upon disposal by the employees of the shares. Other popular unapproved schemes include restricted stock units and unapproved share options. Employees are subject to income tax, USC and employee PRSI on awards made pursuant to these schemes as well as capital gains tax on any gains made upon disposal of those shares.

In addition, an employer PRSI exemption applies to both approved and unapproved schemes, provided the awards are settled in shares of the employer company or shares of a company that controls the employer company.

The report notes that there has been significant use of SBR schemes, particularly by large firms. Large firms (250+ employees) accounted for 82-85% of employer PRSI foregone in the period 2020-2023. Micro and small firms use of the schemes is very limited. The ICT sector accounted for the largest value of SBR and the value of shares amounted to €689m in 2022. Manufacturing was the second largest sector utilising these schemes with a value of €268m. In terms of ownership, foreign-owned multinational firms accounted for the largest proportion of the value of SBR. Of these, firms headquartered in the US accounted for €1,248m in 2022.

Recommendations

Indecon’s recommendations are designed to balance the objective of maintaining or improving Ireland’s competitive position while reducing the high and escalating Exchequer costs of share-based schemes. The recommendations are also designed to target the incentives and to monitor their effectiveness.

1. Growth containment measures

Indecon suggests that consideration should be given to introducing measures to contain the growth in the overall exchequer costs of SBR schemes. The Exchequer income tax and PRSI costs are estimated to be  €0.4bn in 2023. Indecon suggests that one option would be to introduce a cap on the level of employer PRSI exemption.

2. Promotion of the KEEP

The report notes that the KEEP is a valuable tool in supporting innovative small and young firms. However, as take up of the scheme continues to be low, Indecon recommends the Department of Finance should consider further measures aimed at removing barriers to entry and maximising the potential benefits of the scheme. While changes to KEEP have been implemented in previous years, Budget 2025 contained no new measures.

3. Changes to RSU tax treatment

The report recommends that the taxation treatment of RSUs for internationally mobile employees should be moved to a sourcing or apportionment method aligned with the approach used internationally and with that used in respect for stock options for internationally mobile employees in Ireland. This change would bring Ireland in line with international best practices.

4. Simplification of administration

Indecon recommends that initiatives to simplify the administrative burden surrounding reporting of SBR schemes should continue with a view to reducing costs for SMEs. While it is acknowledged that reporting obligations for SBR schemes can be burdensome, the collection of information is necessary to assist future evaluations of SBR schemes. The Irish ProShare Association has recommended that before any simplification or self-certification process is agreed, a further consultation process would be welcome to ensure employers are comfortable using an updated reporting system.

5. Reduction of BIK rate on loans for funding purposes

Indecon recommends that the BIK rate on loans offered to employees for the purpose of funding costs associated with the purchase of shares in share-based remuneration plans should be reduced. Indecon suggests that the rate could be linked to market prevailing interest rates for non-financial corporations. This change could increase the ability of SMEs to provide loans to employees and to improve take-up of SBR particularly among SMEs, bringing Ireland in line with other countries.

6. Reforming of Employee Ownership Trusts

Indecon recommends the government reform the taxation of employee ownership trusts (EOTs) in line with the treatment of such arrangements in the UK. The report notes that facilitating employee ownership as an ownership succession option could strengthen the indigenous sector and build a strong cohort of Irish-owned firms, as the alternative is often the sale of the company to a foreign-owned multinational firm. If implemented, this would provide small to medium family owned businesses with a method of ownership transition and succession planning outside a business sale.

How we can help

McCann FitzGerald LLP provides expert advice on the establishment and implementation of share-based remuneration schemes. Please contact the team below or your usual McCann FitzGerald LLP contact for further information.