The Irish Finance Act 2008 contains a number of amendments to tax law that will impact on share incentives. The key changes are set out below.
- Convertible Securities
New income tax charges are being introduced in respect of convertible securities acquired by directors or employees by reason of their employment. An additional income tax charge will arise on the occurrence of a number of events (including, but not limited to, grant, conversion and disposal).
This will affect companies who seek to reward key employees using a separate class of shares from the company’s ordinary share capital. Such shares usually have no voting, dividend or other rights, except the right to convert into ordinary shares on pre-determined events, such as a sale or listing of the company. To date, there was some uncertainty as to the tax treatment of such awards as the legislation did not specifically impose an income tax charge on conversion, and there was scope to take the view that the entire gain realised between the award of a convertible share and disposal of an ordinary share at or after conversion fell into the capital gains tax regime.
Under the new provisions, the means of calculating income tax on the grant of convertible securities to a director/employee will depend upon whether or not the securities are determined to have been granted for tax avoidance purposes. If it is determined that the main purpose of the grant is for tax avoidance, then the convertible securities will be valued as if the conversion had taken place and income tax will be charged on the difference between the converted value and the price paid. If it is determined that the main purpose for the grant is not for tax avoidance purposes then the convertible securities will be valued as if they are not convertible securities and so long as the director/employee pays for them no income tax charge should arise on the grant.
The Finance Bill also introduces a new charge to income tax for a director/employee on the conversion, release or disposal of convertible securities.
The new charges apply to convertible securities acquired on or after 31 January 2008. Therefore it is unlikely that directors and employees who currently hold convertible securities will be subject to the new regime, as they would have acquired their convertible securities before 31 January 2008. However if the convertible securities currently held are converted into further convertible securities after this date, then the latter securities are likely to be subject to the new regime.
New obligations for employers to notify Revenue about convertible securities are also being introduced, for convertible securities acquired after 31 January 2008.
- Approved Save As You Earn Scheme Limits
The maximum monthly savings limit has been increased from € 320 to € 500 in respect of savings contracts entered into on or after 1 February 2008.
Any company that wants to avail of the increased limit in its next SAYE offer should review the scheme rules to see whether any amendment to the rules is required, or whether the change raises any shareholder approval issues. In many cases it should not necessary to amend the rules or obtain shareholder approval. Any existing employee documentation will need to be updated to reflect the new limit.
- Annual Returns
An automatic filing requirement is being introduced in respect of all Revenue approved share schemes, with a uniform deadline of 31 March after the end of the relevant tax year. Previously, filings were only required within 30 days of the date on which a form was issued by Revenue in respect of any approved share scheme.
This change brings the deadline for filings for all approved schemes in line with the existing deadline for Form SO2, the form on which all unapproved share option grants and exercises are reported.
- Salary Sacrifice & APSS
A new statutory definition of salary sacrifice is being introduced, and the circumstances in which such arrangements may apply are outlined in tax law for the first time.
To date, Revenue practice has been to permit salary sacrifice in the context of Revenue approved profit sharing schemes, up to the amount of the employer contribution, such that participants can invest salary on a pre-tax basis to acquire additional shares via APSS (salary foregone shares). This amendment puts the existing practice on a statutory basis.
- ESOT loans
An amendment is being made to legislation governing approved Employee Share Ownership Trusts, to enable the trustees to take out loans for less than 10 years in certain circumstances, while still availing of an increased tax-free limit on the value of shares that can be allocated to a participant.
For further information on any of these matters, or any share incentive queries you may have, please get in touch with one of the team below or your usual A&L Goodbody contact.
