Approved Schemes KEEP
Share Options Schemes
A share option is a right granted to an employee, director, or executive to subscribe for shares at some point in the future at a price specified or to be defined. The option must be exercised in accordance with the terms for the purchase of the shares to proceed. If the option is not exercised, it will expire.
Generally, share options are designed so that the employee has the right to purchase shares at less than the market value. The objective is that the interests of the employee and employer are aligned. This may give the employee an incentive to stay with the employer.
Generally, the options provide the good leaver and bad leaver. For a bad leaver, there may be a high percentage reduction in the value of the share options.
The employee is to file a tax return and pay tax on the benefits. There is no employer PRSI on the grant of options. The employee’s earnings should qualify for capital gains tax treatment rather than income tax.
An option is said to vest when the employee has an unconditional right to exercise it. Exercise implies the taking up of the option such that there is an agreement to purchase or a direct purchase in return for consideration.
Tax
Approved share options schemes were discontinued in November 2010.
There is no charge to tax on the grant of a share option provided that it is not capable of being exercised later than seven years from the date of grant. If it is so capable of being exercised, the employee is subject to income tax in the year of grant on the value of the option. This is determined by the underlying shares’ value at the date of grant less the price at which the option may be exercised.
The gain upon exercising the share option is subject to income tax under standards provisions, in the absence of relief. The tax is the difference between the price paid and the market value on that date. Any price paid for the option grant may be deducted.
Where income tax was chargeable on the grant of the option (more than seven years), credit may be taken for it against the tax due on the exercise of the option.
PAYE does not apply to a gain arising on the exercise of a share option. The tax, USC and PRSI are subject to self-assessment in the hands of the employee, irrespective of who realises the gain. This applies irrespective of whether the option has been assigned and the gain is realised by a third party.
A payment for the release of the option is a benefit or perquisite and subject to income tax.  USC applies to share option gains. The 11% rate does not apply. Employee but not employer PRSI applies to share option gains.
A person is liable to may be liable to capital gains tax on the disposal of shares acquired under an option. The base price is the exercise price plus the amount paid for the grant of the option and the amount of share option gain subject to income tax on the grant of the option.
In an employee assigns or releases an unexercise share option right the gain is  subject to income tax. Where rights are swapped for shares in another company there is no charge to tax. Payments for assignment or the release of share options are subject to income tax PRSI and USC.
PAYE Applied 2024
Finance Act 2023 amends sections 128, 128B, 531AO, 959AB and 985A of the TCA 1997 so that the taxation of a gain realised on the exercise, assignment or release of a right to acquire shares or other assets is moved from self-assessment to the Pay As You Earn (PAYE) system. This treatment will apply to gains realised on or after 1 January 2024.
As a result, the employer will be responsible for accounting for the income tax, Universal Social Charge and employee’s PRSI to the Revenue Commissioners as part of their payroll process. Gains realised on or before 31 December 2023 will remain taxable under self-assessment.
KEEP for SMEs
Finance Act 2017 introduces key employee engagement program for qualifying share options granted to employees of qualifying small to medium enterprises. The options must be granted at not less market value as of the date of grant.
KEEP is designed to support small to medium enterprises in keeping and retaining key employees. It applies to share options granted between 1 January 2018 and 1 January 2024. It was extended to 1 January 2026
Keep shares are exempt from income tax employer PRSI employee PRSI and USC on both grant and exercise. They are subject only to capital gains tax for employees at their ultimate disposal.
Development of Terms
Gains realised on the exercise of the option by employees of qualifying small to medium enterprises is not subject to income tax, PRSI or  universal social charge at the date of exercise. It is subject to capital gains tax of a subsequent disposal of shares.
The share options must be held for a minimum of one year before exercise. It must be exercised within 10 years of grant in order to avail a relief. The provisions are available in respect of share options granted to employees of qualifying unquoted companies between 1st January 2018 and 31 December 2023. The provision is subject to EU state aid approval.
The ceiling of the maximum annual market value of share options that may be granted to employees is increased to 100% of employees’ income and 50% subject to a lifetime
The first amendment, subject to a commencement order changes the restrictions applied at employee level by which the limit of €250,000 in any three consecutive years is a place by a lifetime limit of €300,000. The limit of 50% of the annual emoluments in the year of assessment is increased to 100% of the annual emoluments.
Finance Act 2022 made the following amendments
- the maximum value of share options in issue but on exercise €6 million instead of €3 million
- KEEP shares need no longer be new and could fully pay ordinary shares subject to existing rules
- a buyback of keep shares could be undertaken subject to normal buyback rules. The trade benefit test is not required to be satisfied.
Company Conditions
The employer must be a qualifying company. This is a company incorporated and resident in Ireland or a branch of an EU/EEA resident company carrying on a business in Ireland to a branch or agency. The company must be a micro, small to medium-sized enterprise effectively satisfying two out of three tests of
- fewer than 250 employees
- turnover of less than €50 million
- balance sheet of less than €43 million.
The maximum value of share options is €3,000,000 in existence and unexercised at any time.
The business must carry on a qualifying trade. A qualifying company may issue the options to a qualifying individual employed or a director of the qualifying company. Group companies qualify.
The qualifying group must comprise only a qualifying holding company not controlled directly or indirectly by another that does not carry on trade or trades and whose business consists wholly or mainly of shares in its qualifying subsidiaries. A qualifying subsidiary is one whose share capital is held more than 50% by the qualifying holding company.
A relevant subsidiary is one whose shares are more than 50% held directly or indirectly by a qualifying holding company. The group must have at least one qualifying company that is also a qualifying subsidiary. The activities of the group other than the qualifying holding company must consist of carrying on a qualifying trade wholly or mainly.
The company and each company in the qualifying group must be an unquoted company and none of the shares, stocks, or debenture can be listed on an official stock exchange and an unlisted securities market of a stocky change other than the Irish stock exchange are similar to EEA stock exchange or of a country with which Ireland has a double taxation agreement.
The group must be a micro, medium, small, and medium-size enterprise. A qualifying trade is a trading activity carried out on a commercial basis. There are excluded activities, including
- professional service companies
- building and construction
- dealing in and developing land
Employee Conditions
The employee must be a qualifying individual. He or she must be, throughout the relevant period, an employee or director of a qualifying company or
The employee must be required to work at least 20 hours per week for the qualifying company or not less than 75% of his or her work time for the qualifying company or group companies
The employment must be capable of lasting at least a further 12 months from when the option is granted. The individual own and must not e connected with the person who controls more than 15% of the share capital of the company
Option Conditions
There is a cap on the value of options to any employee
- €100,000 in any year
- €300,000 in all years or
- the amount of annual emoluments of the qualifying individual in the year of assessment in which the option is gran
There must be a written contract agreement setting out the share option scheme. The shares must be for a new ordinary shares fully paid up with no preferential present or future rights to a dividend or assets on winding  or redemption
- the option price must be at least the market value at the date of the grant
- the option must be exercised within a period of 12 months after grant and ending 10 years later
- the scheme must be established for bona fide er commercial reasons for the purpose of recruiting and retaining employees
- the company must make a return to revenue in any year in which it grants an option and any year in which an option is exercised, transferred, or released.
There is a unique form of return required annually before 31st March.