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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 .*
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:—
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
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