APPS Profit Sharing

Table of Contents

Approved Profit-Sharing Schemes (APSS)

If an employer operates an APSS, they may allocate Income Tax free shares to an employee provided certain conditions are met. The employer can allocate shares to an employee up to a maximum annual limit of €12,700.

The shares allocated must be held in a trust set up by the employer. The shares must be held in the trust for a specified period of retention (generally two years). If the employee leaves the shares in the trust for three years, he will be exempt from Income Tax.

The employer may allow an employee to use the annual bonus to buy shares under an approved scheme.

Taxation of Employee

The employee must pay Universal Social Charge (USC) and Pay Related Social Insurance (PRSI) on the value of the shares when they are appropriated. The employer makes the necessary deductions through payroll and pays the tax directly to the Collector-General.

If the employee instructs the trustee to sell or transfer the shares after two years but before the end of the three years, there is Income Tax at the standard rate (20%) on the original market value of the shares. This is paid to the trustee before the transfer takes place. The trustee remits this amount to Revenue, and it is set against the employee’s final tax liability on the disposal or transfer of shares.

An employee must pay Income Tax at the marginal rate on the lower of the:

original market value and disposal proceeds or
shares’ market value at the date of transfer (in the case of a transfer).

He does not have to pay additional USC and PRSI, as these will already have been paid at the time the shares were appropriated to the employee. If the final liability is higher than the tax paid to the trustee, then he must pay this additional amount to Revenue under the self-assessment system. They must include details of the transaction in their tax return.

If the employee leaves the shares in the trust for three years, they are exempt from Income Tax. However, they may be liable for Capital Gains Tax (CGT).

If the employees disposes of shares, he may be liable to CGT. He must report this disposal to Revenue even if no tax is due. The employer will not deduct any tax or report the disposa.

APSS Requirements

An approved profit-sharing scheme must be approved by the Revenue Commissioners. It must meet certain criteria. Its rules must be submitted for approval. Subject to being approved, it enjoys favourable tax treatment relative to the general position, whereby employee benefits are subject to income tax, social insurance and levies.

The scheme must be established by a trust deed. Resident trustees must be responsible for administering the scheme. The trustees acquire the shares in the company, and appropriate them for the benefit of eligible participant.

The scheme must financed by the monies provided by the company. It may be provided by an associated or group company.

The shares are usually new shares subscribed for by the company’s trustees. In some cases, existing shares may be included. The trustees must appropriate the shares in accordance with the scheme’s terms.

The value of shares appropriated in a particular year may not exceed €12,700 per employee. There is one-off increase to €38,100, in respect of shares held in employee share ownership scheme for a minimum of 10 years where the shares have been held as security for borrowings by the ESOT for a maximum of five years.

The shares must be retained (by the trustees) for a minimum period, generally two years. Participants (whose interests are held under the trust) must not assign, charge or dispose of any beneficial interest in the shares in this period.

In order to obtain the income tax benefits, the shares should be held in the legal ownership of the trustees until the third anniversary of when they are appropriated, and no beneficial interest can be disposed of in them. The three-year retention period is not applicable where the shares were previously held for at least three years in an ESOT, of which the participant is a beneficiary.

If the shares are disposed of or if any capital benefits are derived from them, the participant is subject to income tax on the benefit received. The percentage subject to tax reduces as the shares are held for longer periods, up to the minimum, at which point the more favourable CGT treatment becomes available.

A charges to tax arises if the shares are transferred or if any beneficial interest in them is transferred. The death of the participant does not trigger a tax charge. Dividends and distributions received with respect to the shares must be paid to the participants as they arise.

Revenue Approval

Revenue must approve the profit-sharing scheme. Every eligible individual must be able to participate on similar terms. Depending on criteria such as remuneration, length of service, etc., there may be differing entitlements to the number of shares appropriated to particular categories of persons.

Revenue takes the view that salary should be met by basic salary only, exclusive of bonuses and overtime. Within limits salary banding may be provided for it. Allocation based on seniority, age or grade are not permitted.

The scheme must be open to all employees and directors. It will not be approved if it is designed to benefit only higher-paid employees and directors.

Employees

Every person participating in the scheme must be obliged

to require that the shares be held by the trustees, and throughout a period of retention
not to assign, dispose of or part with a beneficial interest in the shares
if he directs the trustees to transfer the shares to him/her after the period of retention but before the release date, to first pay to the trustees a sum equal to income tax at the standard rate on the appropriate percentage of the locked-in value of the shares at the time of the direction;
Not to direct the trustees to dispose of shares before the release date other than for a sale for the best price that can reasonably be obtained.

There are exceptions. Trustees may be permitted to accept shares that are part of a general offer for all of the shares of a company, such as in the context of a takeover. Similarly, exchanges in the contexts of corporate reconstructions, amalgamations and reorganisations are permissible subject to conditions.

Salary Sacrifice

Revenue will allow salary sacrifice arrangements in the schemes, subject to conditions. The salary sacrifice must be a subsidiary element of the scheme. It should be offered to each participant. The maximum amount that may be forgone is 7.5 per cent of the basic salary. Where it is intended to include a provision for a minimum amount of salary to be forgone, it may not be more than €127 or one per cent of the basic salary.

Where varying percentages are included, the same choice must be given to all participants; there must be at least a 1:1 ratio between shares appropriated in lieu of salary forgone and shares funded by other monies provided by the company.

A contributory element may be included in the scheme. Participants may be required to purchase shares out of net salary in order to receive free shares. The contributory element must be a subsidiary part of the scheme only. The maximum amount purchased out of net salary may not be more than 7.5 percent of basic salary.

Service Company

The shares must not be shares in a service company, or in a company that has control of a service company, where the company (the company that has control of the service company) is under the control of the same person(s) as that of the service company. A service company is a company whose business is the provision of the services of persons employed by it, and the majority of those services are provided to:

a person or two or more persons who together control the company
an associated company, or
an associated partnership.

Share Conditions

Shares in approved schemes must be

quoted in recognised stock exchange
shares in the company that are not under the control of another company or
shares that are under the control of a company whose shares are quoted in the stock exchange. The controlling quoted company must not be a close company or a company that would be a close company, if it was resident in the state.

The shares must be fully paid up and not redeemable. They must not be subject to restrictions, which are not applicable generally. Certain permitted restrictions are permissible.

If the company in which the shares are held as more than one class, the majority of the issued shares of ordinary shares of which the scheme forms part, must be held by

persons who acquired their shares in pursuance of a right conferred on them or an opportunity afforded to them as a director or employee of the company concerned, or any other company and not in pursuance of an offer to the public
trustees holding shares on behalf of persons who acquired their beneficial interests in the shares in pursuance of such a right or opportunity as is mentioned above, or
companies which have control of the company whose shares are in question or of which that company is an associated company, where the shares are not quoted on a recognised stock exchange but are shares in a company which is under the control of a company whose shares are quoted on a recognised stock exchange.

Permitted / authorised restrictions include a requirement that shares be disposed of when the person ceases to be a director or employee or to be disposed of by the persons who acquire them, who are not and never have been employees, such as personal representatives or trustees in bankruptcy. The restrictions must be such that the disposal required is by way of ordinary sale for money and the articles must require that all shares of the same class, be sold on the same terms.

Companies establishing the scheme or companies controlled by it, may be participants in a group scheme. The scheme shares may be in the parent of the company concerned or in the parent of all the participating companies.

The scheme shares may be in a non-resident company, provided that conditions are met.

Trust Deed

The trust deed must be constituted under Irish law. It must require the trustees to notify participants as soon as practicable after shares are appropriated. They must specify the number, type of shares and initial market value.

The trustees must be prohibited from disposing of shares appropriated until the end of the retention period (except in the exceptional limited cases mentioned above).

The trustees must be prevented from disposing of shares until the end of the retention period except under a direction by the participant or any person who is a beneficial owner and by a transaction which does not constitute breach of the participant’s required contractual obligations mentioned above.

The trust deed must require the trustees to pay dividends and other payments received in respect of the shares to the participants.

Retention Period

The appropriation of shares is tax exempt. Provided that he retains them for their requisite period, the employee may become legal owner without tax liability. However, if he does certain things within the retention period, a charge to tax arises.

Sale, gift assignment charge and other bonus of the beneficial interest in the shares;
Directing the trustees to transfer the ownership of the shares,
disposal of any shares by the trustees
market value of shares appropriated in a year exceeds the maximum permitted limit for that year
Appropriation of shares while the participant is not eligible

The retention period applies to each appropriation separately. It applies for the period of two years after appropriation unless the participant ceases to be an employee or a director reaches the age of [60 or] 66 or dies. If this event occurs, it ends the period of retention.

Disposal Issues

The release date is the third anniversary of appropriation. The charge to taxes applies if any of the above events occur prior to the release date. There is an exception is where the participant dies. The relevant market value is the value at the day of appropriation. With Revenue’s agreement, an earlier date may be agreed.

The shares disposed of shares are treated as those first appropriated. A first-in and first-out basis applies. There is no charge to tax if the disposal happens in the context of reconstruction or reorganisation.

A disposal of a beneficial interest in the shares triggers a tax charge under general employee benefit rules.

If the beneficial interest is sold in an arms-length transaction after the retention period, the tax charge on a net taxable amount equal to the appropriate percentage of the locked-in value of the shares or the proceeds of sale is lower.

If a gift is made or there is a non-arms length, the appropriate percentage applies to the lower of the locked-in value or the market value of the shares, at the time of transfer. If the beneficial interest is disposed of after the release date or after the participant’s death, there is no charge to tax.

After the period of retention, the participant may request the transfer of legal title of the shares to him. If this takes place before the release date, tax arises as employment income. If he directs, he must pay the trustees a sum equal to the standard rate income tax on the appropriate percentage of the locked-in value of the shares. As above, this not apply to the personal representative of the deceased participant.

Tax

The trustees are liable to income tax at the standard rate on the sum payable by the participant to them. This effectively requires them to account for tax to Revenue. The amount that the participant is liable to pay is treated as if it is an amount from which income tax was deducted, thereby giving him a credit against the income tax chargeable. T

This should wipe out the tax liability unless the market value of the shares is less than the initial/locked-in value. In the latter event, an adjustment is made for the taxes payable on the market value in this latter case.

A charge of tax arises, if any capital sum is realised before the release date. The tax is on the appropriate percentage, normally 100 percentage of the capital receipt.

A capital sum is any sum or monies worth to which the trustees or participants become entitled, by reference to the share, save those subject to income tax in the hands of the recipient and shares and securities arising in consequence of reorganisation, amalgamation, et cetera. However, a preferential right to new shares, which are capable of sale, constitutes a capital receipt with respect to the shares.

There are provisions which remove from the discretionary trust charge on undistributed trust income provided the above three conditions are met.

Dividends received after appropriation of the shares, belongs to the participant. In the usual way, trustees are liable to income tax on distributions received at the standard rate. Shares are not appropriated within the 18-month period or if they are sold within this period, the exemption ceases to apply.

Reorganisation

Where a company reorganises its share so that new shares in the company or in a successor company, in the context of an amalgamation or reconstruction, are issued, the arrangement may be treated in a tax-neutral manner, provided that there is no receipt. There is relief from a charge, where the scheme shares held by he trustees as subject to a reconstruction, amalgamation, et cetera. by which there is a new holding.

The new holding, subject to compliance with the conditions, are deemed to constitute the old holding and are deemed to be held since the original acquisition. The conditions applicable must however continue to apply.

Where any participant must pay additional monies as a condition of obtaining to the shares, account is taken of this in the participant’s favour. The proceeds of disposal are deemed reduced by the relevant part of the payment.

If the shares appropriated have an initial value of more than €12,700 (or €38,100 if the upper limit applies) then there is a charge to tax. This may arise unintentionally, due to changes in valuation or by reason of the fact that the participant is a member of a number of the schemes. A person may unknowingly cross the threshold or be deemed be treated as a proprietary employee or director, so that the shares are deemed unauthorised for the purpose of the scheme.

Unless the unapproved or excess shares have been previously taxed by reason of a disposal, a charge to tax is made on the market value at the release date.

ESOT

The upper limit of €38,100 can be applied only in the first year after an unencumbered period in respect of shares, which have been allocated after that period has elapsed, to whom it is available on at one basis for shares allotted by the trustees of an approved employment share option trust at the time of the transfer, a period of at least 10 years of such lesser period as the Revenue may allow, commencing with the date the ESOT was established and ending at the time when all the shares became unencumbered has passed.

In all times in the five years or such lesser period since the ESOT has established, 50 percent of the securities, or such lesser amounts may be allowed which were pledged as security for sums borrowed by the ESOT and none of shares pledged have been transferred to the trustees of the ESOT to an approved profit sharing scheme because they had been pledged for the period of 10 years referred to above.

Revenue has the power to require any person to furnish information and particulars in relation to the profit sharing scheme. It may require information necessary to determine the compliance by the scheme with conditions. Failure to comply may be the subject of penalty.

Withdrawal of Approval

Revenue may withdraw approval previously given

if the participants or participant breaches his contractual obligations in respect of disposal of the shares,
if there is contravention of any of the conditions,
if there is different treatment in respect of shares of the same class
if Revenue is not satisfied that the scheme remains open to every eligible employee and director.

There is provision for appeal to the Appeal Commissioners. They hear the matters if it was an appeal against an income tax assessment. General income taxes provisions apply. There is a provision for a rehearing in the Circuit Court with a further appeal on a point of law to the High Court.