As part of its Budget publications, the Department of Finance published the Review of the Taxation of Share-Based Remuneration (the “Review”) conducted by Indecon International Research Economists.
The Review makes a number of recommendations regarding the future of share-based remuneration (“SBR”) in Ireland, building upon the Consultation on Ireland’s Taxation of Share-Based Remuneration conducted by the Department of Finance in December 2023 (the “Consultation”) and the report of the Commission on Tax and Welfare published in 2022.
The six main recommendations of the Review are as follows:
- Restrict the scope of the employer PRSI exemption. The Review notes that the current employer PRSI exemption for SBR in Ireland is generous compared to many competitor countries and acknowledged that many of the stakeholders consulted highlighted the importance of retaining the exemption. However, the Review notes that the advantages of the exemption must be balanced against the tax revenue foregone from the exemption, which was estimated to be €236m in 2022. The Review recommends that consideration should be given to restricting the scope of the exemption, including by potentially limiting it to SMEs or introducing a per-employer cap on the level of the exemption going forward.
- Encourage greater uptake of KEEP. The Review notes that there continues to be a low uptake of the Key Employee Engagement Programme (“KEEP”) among SMEs. One measure that the Review recommends to encourage greater KEEP uptake is the introduction of “safe harbour” principles for the valuation of unlisted shares, whereby Revenue sets out a set of qualifying valuation methods for unlisted shares that, if correctly applied by employers, will result in their valuation of unlisted shares being automatically accepted by Revenue (subject to occasional spot checks). The Review notes that while such “safe harbour” principles would be particularly beneficial in the context of KEEP, they may also be of benefit in respect of other share schemes where unlisted shares are offered to employees.
- Amend the taxation of RSUs for internationally mobile employees. Where an employee receives Restricted Stock Options (“RSUs”) that vest while the employee is tax resident in Ireland, the employee is taxed in full on the value of the RSU notwithstanding that they may not have been tax resident in Ireland for the full duration of the vesting period. This may lead to double taxation if the employee is also taxed on the RSU award in the country in which they were tax resident at an earlier point in the vesting period. To reduce the risk of double taxation for such employees, the Review recommends that Ireland move to an “apportionment” model adopted by many other jurisdictions, whereby the tax liability for RSUs is apportioned pro-rata on the basis of the amount of time spent as a tax resident in Ireland during the vesting period.
- Reduce the administrative burden of share scheme reporting. The Review recommends a number of potential measures to achieve this, including the creation of a dedicated online portal for share scheme reporting and a move to a self-service or pre-notification system for approval of Approved Profit Sharing Schemes.
- Reduce the BIK rate on loans to employees to fund employer share purchases. The Review notes that the interest rate currently applied on such loans for BIK purposes is currently set at 13.5%, a rate that is significantly higher than a number of competitor countries and which may be restricting take-up of employer share schemes. The Review recommends that this rate is reduced to a level which better reflects the cost to employers of providing such loans (e.g. by tying it to prevailing interest rates for non-financial corporations).
- Reform of the tax regime for Employee Ownership Trusts. The Review notes that the UK’s taxation system for Employee Ownership Trusts (“EOTs”) has helped to promote the growth of employee ownership in that jurisdiction, but that the tax regime in Ireland is currently less favourable. The UK EOT regime provides an exemption from income tax, inheritance tax and capital gains tax for owners who sell a controlling stake in a company to an EOT, which then holds the stake on behalf of employees who can receive an annual tax-free bonus of up to £3,600 per year from the profits of the company. The Review suggests that Ireland may wish to consider developing an equivalent of the UK model, either by reforming the existing Employee Share Ownership Trust scheme or adopting an entirely new scheme. However, the Review notes that moving towards the UK EOT model would require potentially significant changes to legislation and Revenue guidance.
The recommendations of the Review will now be considered by the Department of Finance and are likely to play a significant role in shaping the future development of employee share schemes policy and regulation in Ireland.