THE NEW MINISTER for Finance’s announcement in the Summer Economic Statement that he will follow through on introducing share award tax incentives for the Irish SME sector is welcome.
To date, share awards for all employees, regardless of sector or employer have been treated similarly in Ireland.
The state offers certain Revenue-approved share incentive plans, including the ‘approved profit-share scheme’ and ‘save-as-you-earn scheme’, however our overall regime doesn’t compare favourably to competitor countries like the UK, US and, most recently, Sweden.
A general tax-efficient share award regime will be imperative to ensure Ireland’s competitiveness to attract and retain key personnel and support our future labour demands.
The SME sector plays a vital role in the Irish economy and is the main creator of jobs. Providing support to, and facilitating the growth of, these businesses is vital for Ireland to achieve increased employment in towns and cities across the country.
Share award incentives can be an important tool in aligning the interests of employees and their employer companies, and giving employees a stake in the future profitability and success of the company.
Share-based remuneration can offer tax advantages to individuals with the potential for large gains to be made by individuals acquiring shares under share schemes at low values.
An unfavourable regime
However for unapproved share schemes, at present, income taxes are due on the award of the shares or on a share option being exercised. Capital gains tax is typically due on sale of the share.
The income tax liability must be funded by the employee on the award of the share or the exercise of the option – at a time when the individual may not have sold the share and therefore may not have readily accessible cash to fund the tax payment.
Employees in listed companies typically have the option built into their share scheme of selling a proportion of the shares in order to discharge this tax liability. However, this is not an option in private companies as there may be no ready market for the shares.
As noted, income taxes are typically due on the award of a share or on the exercise of a share option.
Favourable tax regimes in other countries have either waived or deferred the income tax charge or only subjected the gains to capital gains tax, which generally have lower tax rates.
The benefit of this type of regime is that taxes are only payable when the share is sold and when the individual has the cash to meet the tax liability. If the transaction is only subject to capital gains tax it may also mean a reduced liability.
Recruiting, motivating and retaining talent is critical to business and economic growth. Workers are increasingly more mobile and Irish companies are competing in a global marketplace for the most skilled.
In order to enhance Ireland’s competitiveness – certainly post-Brexit – and to continue to allow Irish employers remain competitive in attracting global talent, a favourable share incentive tax regime is imperative to the future success of businesses here.
Sarah Connellan is a tax partner at EY Ireland.
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