For small and medium-sized enterprises (SMEs), competing against large corporates, including Big Tech, is generally very difficult, whether as regards offering competitive employees and director remuneration packages or in developing competitive products.
Tax advantaged share option plans offer a way for SMEs to compete against big corporates. See below on “Drafting a share option plan”.
A share option is a right given to an employee/director to buy an ordinary share in a company or in a group company at a specified price.
For a share option plan to enable SMEs attract, retain and motivate employees, it needs to be tax advantaged, such that there is no tax, universal social charge (USC) or pay related social insurance (PRSI) payable by the employee, on the grant of the share option, on the exercise of the share option and with capital gains tax only being payable on the disposal of the shares, at which time the sales proceeds will be available to discharge the capital gains tax due.
The Key Employee Engagement Programme (KEEP) applicable in respect of share options granted during the period 1st of January 2018 to end of December 2025 (arising from Budget 2023) is such a tax advantaged share option plan. Improvements to KEEP are expected to be incorporated in the 2023 Finance Bill when published.
Where tax relief applies under KEEP for share options, relief cannot also be claimed under the Employment and Investment Incentive (EII).
However CGT “Entrepreneur’s Relief” may be available for the disposal of shares issued by the company on share options acquired under the KEEP where the shareholder (the employee or director) satisfies the requirements for CGT Entrepreneur’s Relief.
In drafting a proposed share options plan, it ought to have been benchmarked against typical plans for the sector in which the company operates. This would include establishing:
In the case of KEEP share option plans, the requirements include:
The employee or director must work full time, which is 30 plus hours per week, and he/she cannot hold a material interest in the qualifying company (in broad terms, more than 15%). More flexibility on these requirements (including for part time employees) from Government, are due to be commenced soon.
The requirements for the company availing of KEEP, include carrying on a qualifying trade, being an SME (as defined), be an unquoted company (Euronext Growth market excepted: and some other exceptions), not a company in difficulty and must not issue qualifying share options with a market value exceeding €3,000,000 (currently).
The share option plan and share option contract, must align with any shareholders agreement proposed or already in place and must fully align with the employment contract.
In a private company, the share options contract, will not be assignable or transferable by an employee/director. Nor will the share options contract allow the employee/director encumber his or her share options.
An employee/director holding share options, in most plans, will not be protected from dilution. So if the company allots more shares to others, between the date of the grant of the options and the date they are exercised, the employee/director’s percentage holding of shares in the company post exercise will be smaller. However the value of the company may well be much greater, hence the value of the shares issued on exercised options will be worth more.
Leaver and lapse proposals are the most difficult areas of a share options plan and accordingly Revenue requirements for (a) unapproved share options plans and (b) for tax advantaged share options plans, should be checked and the plan should also be benchmarked against the market, particularly against the competition, before they are drafted. Amongst the considerations are, the employee/director:
KEEP requirements need to be taken into account in all these circumstances, so that the tax reliefs are not lost or refused.
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