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Úna Ryan

Jillian O’Sullivan. Úna Ryan. Partner. Share Options or not, how to motivate my team?. Director. Agenda. Rules around shares Employee share incentives. Share capital.

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Úna Ryan

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  1. Jillian O’Sullivan Úna Ryan Partner Share Options or not, how to motivate my team? Director

  2. Agenda • Rules around shares • Employee share incentives

  3. Share capital Share capital is the money invested in a company by the shareholders. Share capital is a long-term source of finance. In return for their investment, shareholders gain a share of the ownership of the company.

  4. What is a share An intangible accumulation of rights, interests and obligations… Shares represent ownership of a company. When an individual buys shares in your company, they become one of its owners. Shareholders choose who runs a company and are involved in making key decisions, such as whether a business should be sold.

  5. Ownership of a share • legal v beneficial • share certificate • nominee agreement • proxies

  6. Employee shares – things to consider

  7. Úna A. Ryan Tax Director Share Schemes una.ryan@ie.gt.com 01 6805 990

  8. Share awards • Where shareholders dispose of their shares to employees – potential CGT consequences for shareholders – even where receive no consideration for shares – 33% of market value on deemed disposal. • Where employees receive shares without paying for the shares – income tax consequences at marginal rates. • Where, by reason of his or her employment, an employee (including a director) of a company acquires shares at undervalue in any company - 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 interest at 13.5% per year will apply.

  9. Share schemes • share options / KEEP / phantom shares • restricted share schemes / share clogs • flowering shares • Approved Profit Sharing Schemes (APSS)

  10. Practical Conditions for Plan Design

  11. Employer Considerations – Share Schemes

  12. Valuation of company • Key consideration under all share schemes • Recommended to have an independent valuation should Revenue question the valuation being used • Restrictions to rights may effect the MV of the share allotted • Flowering Share: • Market valuation prior to allotment essential as this will 'set the bar' for future growth • Clog Scheme: • Sets the BIK value on which the abatement is first applied

  13. Share Option Scheme (Unapproved) Principal Features • All companies are eligible to issue unapproved options – Revenue approval is not required • Does not have to be offered to all employees • Agreement entitling holder to buy shares in the future at a fixed price • Option must be “exercised” in order for individuals to take beneficial ownership • No upfront charge to tax on grant of an unapproved share option if granted at nominal value (unless it is capable of being exercised later than 7 years after being granted). Employee Taxation • Income tax, USC and employee PRSI is due on difference between market value at date of exercise and option price paid. No tax liability if the option is not exercised • Form RTSO1 must be filed within 30 days of exercise and necessary tax paid to Revenue • Disposal of shares will be subject to CGT at 33% Employer Considerations • No employer PRSI (10.85%) is due • Companies may receive a corporation tax deduction for certain costs incurred • Employer is required to file an annual return with Revenue

  14. Share Option Scheme (Unapproved) Example: Option granted 1 June 2018 Exercise price per share €0.10 Market value at date of grant €0.10 Number of shares 1,000 Option exercised 1 June 2020 Market value at date of exercise €100 Shares sold 14 December 2020 Market value at date of sale €120 Income tax implications at 1 June 2020 Market Value at date of exercise €100,000 Less: Exercise price (100) Total option gain 99,900 Income tax at 52% (current marginal rate) 51,948

  15. KEEP Scheme • Exemption from income tax, USC and PRSI on gain arising on exercise of a qualifying share option by a qualifying individual between 1 January 2018 and 31 December 2023. • For SME companies only - unquoted with fewer than 250 employees, turnover less than €50 million or balance sheet total less than €43 million throughout the period of the option. • Share option must be granted at not less than market value on the date of grant • Held for a minimum period of one year before exercise (with limited exceptions) & exercised within 10 years of grant • Full-time employees and full-time directors of the qualifying company who work at least 30 hours per week for the company are eligible but can’t hold more than 15% of the O.S.C. • The maximum share options that can be granted are €100,000 (or 50% of the annual emoluments of individual) in any tax year and can only have a maximum of €3 million value of share options in issue and unexercised at any one time.

  16. KEEP Scheme – Example • Options provided on 10 April 2018 to purchase €10,000 €1 shares at €1 (current market value at date of grant); • 10 April 2021: shares are worth €3 per share so employee exercises the option and purchases for €10,000, i.e. benefitting from a discount of €20,000; • 10 April2024: shares are worth €4 per share and individual sells for €40,000. The profit made on disposal of the shares is subject to Capital Gains Tax at a rate of 33%.

  17. Phantom Option Schemes • bonus payments "track" the value in the company's shares • no shares are actually issued to employees • income tax payable when the bonus is received (i.e. when the notional shares are "sold") – receive a cash bonus equal to the increase in share value since the date they were granted • Employer and employee PRSI applies • USC is chargeable • Revenue approval is not required

  18. Share Options versus Share Awards • grant of an option which will vest over a period of time – ownership at certain point in future • no tax until exercise the option – difference between MV at date of exercise & option price • income tax, USC & employee PRSI • share option schemes not very tax efficient • shares can be awarded and issued on day on – immediate ownership • tax on the issue of shares will depend on the value of the shares & whether employee pays for them • CGT on future disposal of shares at current rate of 33% - entrepreneur relief?

  19. Restricted Stock Scheme/ Share Clog • A restriction on disposal may reduce the taxable amount on a share award at less than market value/ exercise of a share option/ vesting of an RSU • Used to retain key individuals in a company due to the "clog" period • Participation can be offered on a selective basis / or on company wide • Certain conditions must be met • Formation of a trust/nominee company to hold shares on behalf of the employees • Written contract or agreement required setting out the restriction on the shares • Written contract/agreement must be in place for bona fide commercial reasons • Irish Revenue approval is notrequired Employee Taxation • IT, USC and employee PRSI on receipt of share. • IT liability can be reduced by a % depending on length of restriction; e.g. • 1 year period of restriction would lead to a 10% abatement of IT liability • Any gain on disposal will be subject to CGT at 33%

  20. Restricted Stock Scheme/ Share Clog Example • On 1June 2018, an employer awards 1,000 shares to an employee for consideration of €1,000. • The shares cannot be disposed of for a period of 6 years and are held in a trust established by the employer. • The market value of the shares at the date of the award, ignoring the restriction on the disposal of the shares, is €20,000. • The shares are sold on 14 December 2024 for €42,500.

  21. Restricted Stock Scheme/ Share Clog Income tax implications at 1 June 2018 € MV of shares 20,000 Consideration paid by employee (1,000) Chargeable amount before abatement 19,000 Abatement (60%) (11,400) Net chargeable amount 7,600 IT (including USC and PRSI) @ 52% €3,952 Share disposal on 14 December 2024 € Disposal Proceeds 42,500 Less consideration paid by employee (1,000) Less amount charged to IT (7,600) Chargeable gain 33,900 CGT at 33% 11,187 Total Tax Cost : 15,139

  22. Restricted Stock Scheme/ Share Clog - CGT Total tax cost (IT & CGT) - €14,720

  23. Flowering Shares / Growth Shares • Can be offered to employees on a selective basis • Shares participate in the future value only • Current market valuation of company required • Not good for using more than once due to needing to cap share values each time • Shares acquired at market value (MV) or where the MV of shares is at par value: • no tax charge • gain on disposal subject to CGT at 33% Example • The company is currently valued at €50 million. Shares issued for no consideration. Shares will only participate in the future growth of the business. They do not have any historic value, have no current value and therefore there is no tax liability upon allotment. 3

  24. Flowering Shares • flowering shares can deliver business growth and retain key talent as shares only deliver value if the employees remain with the company and help it achieve its growth target • shares are owned by the participants from day one, which will assist in aligning the participants' interest with those of the owners. There is no limit on the number of shares that can be awarded under the flowering share plan • any proceeds ultimately received by the participants from the sale of the flowering shares should be taxed only at CGT rates (currently at 33%). rather than being subject to income tax (up to 52%) • good and bad "leaver provisions" can be built into the rights attaching to the flowering shares. This will prevent ex-participants retaining an interest in the company • the company should not have any future exposure to employers' PRSI on the aware (currently at 10.75%), as long as the price paid to acquire the shares is not less than the tax market value of those shares (which should be nil as no historic value in the "growth shares")

  25. Approved Profit Sharing Schemes ("APSS") • Both listed and unlisted companies may establish an APSS. • Revenue approval is required prior to implementing the scheme – must be offered to all employees. • An APSS allows an employer to distribute shares to employees, up to a total value of €12,700 per employee per annum. Employees discretionarybonuses or specific percentage of their salaries (known as salary foregone – cannot exceed 7.5% of basic salary or 100% of the employer funded bonus whichever is lower) may be converted into shares. • Shares are received free of income tax at 40% subject to certain conditions being met. In particular, the shares must be held in a Trust for three years. • PRSI (4%) and USC (up to 8%) will be charged on the initial appropriation of the shares i.e. the date the funds are given to the Trustees to purchase the shares. • No employer PRSI will apply under an APSS. Tax saving of 10.75%.

  26. Approved Profit Sharing Schemes ("APSS") • Capital Gains Tax (“CGT”) will apply on any gain on disposal of the shares, e.g. if you decide to sell your shares after 3 years and the proceeds exceed the market value of the shares at date of appropriation. The current rate of CGT is 33%. • All employees must be eligible to participate in the APSS on "similar terms" – cannot participate if own more than 15% of the share capital of the company concerned and it is a "close company". • Company performance targets determine the quantum of the funds to be allocated in any year • APSS helps to attract and retain talent - aligns interest of shareholders, management and employees for an extended period • Trustees of an APSS are obliged to automatically file returns of information each year in respect of the scheme on a Form ESS1.

  27. Approved Profit Sharing Schemes ("APSS")

  28. Approved Profit Sharing Schemes ("APSS")

  29. Irish Tax Treatment of Share Awards

  30. Entrepreneur Relief • Relief is by way of a reduced CGT rate • Reduced rate of 10% on chargeable gains up to a lifetime limit of €1m • Any gains over €1m will be chargeable at the standard rate (33%) • Applies to disposals of “chargeable business assets” • Different definition to that under retirement relief • Includes the disposal of an asset used for a “qualifying business” and the disposal of shares held in a company carrying on a “qualifying business” A “qualifying business” is one other than a business which holds securities or assets as investments, holds development land or develops/lets land

  31. Entrepreneur Relief • The seller must be a “qualifying person” • Spent at least 50% of their working time in the services of that company in a managerial or technical capacity; and • Served in that capacity for 3 of the 5 years prior to the disposal • Must own at least 5% of the ordinary share capital of the company

  32. Questions and feedback

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