The Gazette 1986

g a z e t t e

j u l y / a u g u s t 1986

Profit Sharing

by Frances Me enan, B . C omm . , M . B . S . ( N . U . L ), So l i c i t or .*

Share Options Prior to the 1986 Finance Act, Ireland, unlike the U.K., had no special legislation governing the taxation of share options granted to employees. The Revenue relied on general tax and case law. Income tax was charged at the date the option was granted on the difference between the market value of the shares on that date and the price at which the employee could take up the shares under the scheme. However, there was a variation of this rule where the employee was granted an option but was prevented from exercising it for some time, e.g. 2 years. This prevention is called a 'clog'; in such situation the tax liability was computed using the market value on the date the prevention was lifted. If the shares were sold at a profit, capital gains tax was also imposed. The Finance Act, 1986 introduced special legislation for income tax and capital gains tax to regularise the taxation of share options. The new rules only relate to share options granted on or after 6th April, 1986 (s.9 1986 Act). The old rules (as above) continue for share options granted up to that date. Generally, a charge to income tax is imposed under the new rules on the date the option is exercised to the extent that the price payable for the share is below their then market value. Approved Share Option Schemes The 1982 Finance Act provided for share option schemes to be approved by the Revenue Commissioners (s.10 and Second Schedule). Under such scheme there is no charge to income tax on any benefit arising to them from the granting or exercising of the option. The following are the main requirements for such scheme:— application must be made in writing to the Revenue and all information applicable to each scheme must be available. - All participants in the scheme must be employees who work at least 20 hours per week, or are full time directors of the company (rights may be exercised even though he has ceased to be a full time director or qualifying employee). - The shares must be part of the ordinary share capital of the grantor company or a company which has control of the grantor (other than a close company). - The shares must be quoted on a recognised stock exchange. - The shares must be fully paid up and not redeemable and subject to no restrictions other

uilding on Reality', the National Plan, 1984-1987 D endorsed the Government's approval of the concept of profit sharing. That document states, 'if, through profit sharing or employee shareholding, employees share in profits, or own part of their company, they have a strong incentive to take a more enlightened attitude to industrial change. By having a stake in the business in which they work, employees have a greater incentive to promote increased efficiency and profitability in their companies'. 1 In promoting the concept, particular reference was made to the special tax advantages for both employer and employee under certain profit sharing schemes approved by the Revenue commissioners, as outlined in the Finance Act, 1982 (the 1982 Act) (As amended by the Finance Acts, 1983, 1984 and 1986 (the 1983, 1984 and 1986 Acts, respectively)). The Government further promoted this concept by introducing in the 1986 Finance Act legislation (which became law on 28th May, 1986) for approved share option schemes and relief for new shares purchased on issue by employees. Details of tax treatment for directors and employees who have been granted rights to acquire shares or other assets are also included. The main purpose of this article is to examine these approved profit sharing schemes with their accompanying tax advantages. First, however, one must generally define profit sharing. It may be defined as a share : of the profit or wealth by an enterprise, distributed by employers in addition to wages and direct incentives. Such schemes provide a number of different features:— - the scheme may cover all or a group of employees in an enterprise - the profit may be distributed in cash, shares or both, either on an immediate or deferred basis - the actual amount of shares or cash may be specified or discretionary. Concept of Profit Sharing The concept of profit sharing is well established in many countries. In the U.S. it has been estimated that around 14 million employees may own shares; in the U.K. the estimate figure is that by the end of 1985 aboi t 700,000 employees will own shares under 700 approved schemes (see below). 2 Indeed in the U.K. a recent survey reports that the proportion of individual shareholders in the adult population has more than doubled in the last 2 years to about 16%. 3 The main changes in the 1986 Act will now be generally considered:—

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