ESOTs
Overview
Revenue may approve an Employee Share Ownership Trust, which is established for the benefit of all employees and full-time directors. The trustees must acquire shares in the establishing company for the benefit of and ultimate distribution to employee beneficiaries.
The trust may be funded by contributions from the company that establishes the scheme and/or by borrowing. The ESOT trustees become shareholders.
ESOTs facilitate the build-up of an employee stake in a company. They are generally used together with approved profit sharing schemes. ESOTs may be used in public or private companies, but they are more likely to be successful in public companies.
Tax Aspects
Tax legislation facilitates approved ESOTs. Both the company and the employee / shareholders may receive benefit.
A company is allowed a tax deduction for the cost of establishment and for contributions to the ESOT. Employees may be able to take gains, without the application of their marginal rate of income tax ,that apply generally to employee benefits.
A company which establishes an ESOT scheme, may claim a  deduction from corporate tax for the cost of establishment and contribution subject to conditions. There is an exemption from capital gains tax on the transfer of the shares to the trustees in approved profit sharing scheme.
Income arising to the trustees by the way of dividend, is exempt from income tax, provided that it is spent for certain qualifying purposes during certain periods.
The discretionary trust surcharge does not apply to the undistributed income of the discretionary trust  where shares are allocated to beneficiaries. Dividends are the income of the trustees, while the shares remain in the trust. They may be used towards the funding of further acquisitions of shares.
Where the trustees sell shares on the open market, gains are not liable to capital gains tax provided that they are used to repay monies borrowed by the trustees, pay interest on such borrowing or are used to pay a personal representative of a deceased beneficiary.
An ESOT may be established in respect of a group of companies. The trust may extend to companies which are part of the group of the company which establishes the scheme, or which is controlled by it.
The scheme must not be for the purpose of wholly or mainly benefiting directors, or higher paid employees of the group. Revenue can request particulars in relation to the operation of the scheme. It may withdraw approval, if the conditions of approval are breached.
The shares received by the trustees, are not to be treated differently to other shares of the same class.
The ESOT must be established under a trust deed by a founding company.  It must not be under the control of another company at that point. There are three alternative forms, arrangements for trustees.
Under one option, there is majority employee representation. The trust deed must provide for at least three trustees, who are resident, of whom one must be a professional trustee (a trust corporations, solicitor or member of another professional body approved by Revenue). The  majority must
- never have been directors of the founding company;
- must be representatives of the employees of the founding company or a group company and who have never had material interest (more than 5% directly or indirectly held) in the founding company or a group company.
Such trustees must be chosen by a majority of employees of the founding company or the group company.
An alternative arrangement provides for equal company / employer  and employee representation. The initial trustees are appointed by the deed whereby the trust is establised. There must be at least three trustees, who are resident in the State. One must be a professional trustee, who must not be an employer or director of either the founding company or a group company. They must be appointed by the other trustees.
At least two of the trustees must be non-professional trustees, at least half of whom are required to be employees who have never had the material interest in the founding company or group company.
Employee representative trustees are to be selected by a process, insofar as reasonably practicable, by all the employees of the founding or group companies. Those employees are to be afforded an opportunity to put themselves forward for selection and thy may vote in the selections. The third alternative is a single corporate trustee with equal company and employee representation on its board.
Schedule 12 to the Taxes Consolidation Act, prescribes the rules required for employment share option trusts. The trust must be for the benefit of all employees. Most of the provisions which are required, correspond to those for other types of share schemes. All employees and full-time directors of the founding company and group-company who have served a qualifying period of up to three years, must be eligible to participate.
Former employees and directors, may subject to conditions, be members for 15 years after cessation of employees, if the trust deed so provides. They must have been an employee or director of the founding company or a company within its group, within the qualifying period and on the date the trust was established, within nine months prior to that date at all times in the period of five years after the time the trust was established, or for such lesser period as the Minister for Finance may prescribe the trustees.
50% of the shares held by the trustees may be pledged as security for ESOT borrowings. The ESOT must be established for a period of at least 15 years.
Everyone who meets the conditions must be treated as a beneficiary, where the trust rules  apply. An employee or director who has a material interest in the company i.e. more than 5% within the previous 12 months may not be a beneficiary.
Former employees and directors of the founding company or a group company may be beneficiaries where that trust deed so allows, if they have ceased employment within the previous 18 months or if the company has ceased to be a group company.
The trustees must receive monies from the founding companies. They may borrow monies within a limit. They must acquire shares, generally through purchase or may acquire rights to shares, for the benefit of beneficiaries of the trust.
The trustees may transfer securities or sums to persons who are beneficiaries, or to their personal representative in accordance with the term of the trust. They may transfer securities to the trustees of an approved profit sharing scheme. They may pending transfer, retain and manage the securities by exercising voting rights attaching to the shares.
Trustees must spend sums received from the founding or group company within certain periods. This is generally a nine month period from the end of the accounting period of the company,  and in other cases, when received. It must spend money only for the purpose of acquiring shares in the company that established that trust, repaying borrowings, or paying sums to the beneficiaries or meeting the expenses of the trust. Sums received must, while retained by the trustees, be kept in cash or with certain categories of financial institutions.
The amounts to which the beneficiaries may be entitled may vary depending on the length of service, remuneration and other factors. The conditions applicable to the shares are broadly similar to those applicable to profit-sharing schemes and employment share option schemes. The shares must be part of the ordinary shares of the capital of the company. It must not be redeemable. They must not be subject to restrictions, other than those which attach to shares of the same class and certain conditions which are permitted on termination of employment.
The following restrictions are permitted, provided that disposal is by way of sale for money under the terms of the company’s constitution
- restrictions requiring directors or employees to dispose of the shares when they so cease to be directors or employees,
- restrictions which require persons who are not, or who have ceased to be directors, to dispose of their shares.
Trustees are not allowed to pay in excess of market value for shares. Shares may not be acquired when the company, the founding company is controlled by another company.
Shares must be transferred to beneficiaries within 20 years after acquisition. There are provisions for acquisition of shares in other companies, as a result of an exchange or reorganisation.
There is provision for an automatic return and a prescribed form to be made annually to be made to the Revenue Commissioners. This is to certify compliance with the terms of the scheme.