A new government report has recommended that Ireland reform its tax treatment of Employee Ownership Trusts (EOTs), adopting a similar model to the UK to make them more attractive as an employee share ownership scheme.
The Indecon Review of the Taxation of Share-Based Remuneration found that EOTs were an important valuable tool for promoting the growth of indigenous business, enhancing productivity, recruiting and retaining staff, and providing a business succession solution. However, it said that tax treatment in Ireland currently limits the use of EOTs.
The report said: “The introduction of EOT schemes was believed by stakeholders to increase employee commitment and ownership of companies, particularly in the case where the owner must pass on their company in 5-10 years.”
IPSA has been advocating for changes to Ireland’s EOT regime for several year, and the Indecon Review has been published just a few months after Wolfgang Digital became the first company in Ireland to transition to employee ownership Ireland using an EOT, thereby shining a spotlight on the tax challenges that need to be addressed.
Marie Flynn
IPSA Chair Marie Flynn said: “IPSA has been working closely with various interested parties on EOTs and we’re thrilled they have been given recognition in this report.
“IPSA is thrilled to see that EOTs have been given the recognition in this report and we’re looking forward to seeing how the Government takes this forward in terms of implementation. IPSA has been working closely with various interested parties on EOTs and we believe the Government should treat this as a key focus in the short term so that companies can start availing of EOTs as a genuine succession option for their businesses.”
The Indecon Review incorporates responses from the Government’s public consultation on the taxation of share-based remuneration in Ireland, which ran from December 2023 to January this year. IPSA and its members were among those who responded to the consultation.
The report also makes recommendations on enhancing the attractiveness of KEEP, the tax treatment of RSUs, limiting PRSI exemptions for share schemes, and initiatives to simplify the administrative burden on companies providing share-based remuneration in order to increase participation. The following are the main recommendations:
PRSI
Recommendation – “Consideration should be given to introducing measures to contain the growth in the overallexchequer costs of share-based remuneration schemes. The rationale for this recommendation is the high and growing costs of the schemes noted in our findings and detailed analysis. A significant element of these costs relate to the cost of PRSI exemption. One option would be to introduce a cap on the level of employer PRSI exemption.”
IPSA’s response – IPSA is keen to encourage growth in SBR. Studies have shown the increased productivity which arises as a result of increased participation of employees in the ownership of the companies in which they work. Therefore, it is disappointing to see that Indecon has viewed this growth as a negative in terms of costs to the exchequer in the form of the PRSI exemption.
Often benefits provided to employees in the form of SBR are additional to their existing packages/benefits and therefore increased SBR may not necessarily result in additional costs to the exchequer as these may be incremental benefits provided to employees.
It has been well-flagged in the submissions that the loss of the exemption may result in companies choosing to move away from SBR due to the costs of implementation which is often offset by the PRSI saving. It would be a pity to see SBR reducing and therefore IPSA would not welcome a cap on the PRSI exemption.
KEEP
Recommendation – Measures should be taken in the short term to enhance the attractiveness of the KEEP by providing greater clarity and guidance to SMEs particularly around share valuation, and by more effective promotion of the scheme. Consideration should be also given to wider amendments to, and a redesign of, the KEEP for the post-2025 period having regard to State aid constraints and the need to obtain State aid approval.
IPSA’s response – IPSA welcomes this recommendation and it is in line with our submission to the public consultation.
RSUs
Recommendation – The taxation treatment of RSUs for internationally mobile employees should be moved to a sourcing or apportionment method aligned with the approach used internationally and with that used in respect for stock options for internationally mobile employees in Ireland.
IPSA’s response – IPSA would welcome this change to bring Ireland in line with international best practice.
SBR Administration
Recommendation – Initiatives to simplify the administrative burden surrounding reporting of share-based remuneration schemes should be continued with a view to reducing administrative costs and increasing attractiveness for SMEs. Streamlining reporting could have benefits for both firms and the Revenue. Some additional information is, however, needed to assist future evidence-based evaluation of these schemes and the collection of the necessary data needs to be managed efficiently. As part of this, consideration should be given to moving the approval of APSSs by Revenue to a pre-notification system, but any such change should be signalled well in advance so as to avoid creating uncertainty.
IPSA’s response – Whilst IPSA welcomes any changes which simplify the admin burden for companies providing SBR for their employees, a word of caution should be given if moving to a self-certification system. Some of the rules around APSS schemes can be complex and therefore there needs to a consultation process in advance of any changes to agree on how this works, to ensure that employers gain the level of comfort needed when implementing schemes.”
BIK
Recommendation – The BIK rate on loans offered to employees for the purpose of funding costs associated with the purchase of shares in share-based remuneration plans should be reduced. For instance, the rate could be linked to market prevailing interest rates for non-financial corporations. The BIK rates applied in Ireland are significantly higher than in the UK. The rationale for this change is to improve take-up particularly among SMEs.
IPSA’s response – IPSA is delighted to see this recommendation. This simple change could be beneficial for companies providing SBR and will also bring Ireland in line with other countries.
Report Findings
- Aspects where Ireland’s approach to SBR is out of line with some competitor countries include lower eligibility levels, the treatment of BIK, and the tax treatment of restricted stock units. However, Ireland’s PRSI exemption appears generous compared to many countries where schemes are more focused on SMEs.
- APSS, RSUs and unapproved share options are the most utilised schemes.
- The growth in value of share-based remuneration by micro and small firms is disproportionately low.
- The value of share-based remuneration schemes in Ireland reached over €2.1bn in 2022. Small and micro firms accounted for less than 5% of the value of schemes subject to PAYE (€1.5bn).
- Restrictive qualifying criteria is contributing to very low levels of take-up of KEEP. However, there are also significant constraints on any changes to this scheme without seeking new state aid approval.
- The exchequer costs of the schemes have increased significantly and in 2022 exchequer costs reached over €320m, with the cost of the employer PRSI exemption amounting to €236m. Indecon estimates exchequer costs in 2023 were in the order of €400m.
- Larger firms account for the majority of the cost of PRSI foregone and foreign owned multinationals account for the largest percentage of the value of share-based remuneration schemes. ICT and manufacturing sectors are the main beneficiaries of the scheme, but non-traded sectors are also significant users of these schemes.
The report concludes that SBR schemes are an important part of enterprise policy and that, from a competitiveness perspective, there is a case for enhancing the attractiveness of aspects of the existing schemes while also taking measures to contain the growth in the high level of exchequer costs.
It adds: “There is also a need to put in place mechanisms to obtain more information on the impact of the schemes to enhance evidence-based policy development in this area.”
