Keeping On Top Of Your KEEP Obligations – Capital Gains Tax

What is KEEP?

The Key Employee Engagement Programme (“KEEP”) is a
tax efficient share option scheme for small and medium-sized
enterprises (“SMEs”) and start-up businesses which is
designed to support SMEs in their efforts to attract and retain key
employees. SMEs can be at a disadvantage when competing with larger
companies and KEEP provides some scope for smaller innovation
driven enterprises to compete for top talent.

In general, where an employee or director exercises a share
option, they are subject to income tax on the difference between
the market value of the shares acquired and any price paid for
those shares. Employees and directors can face difficulties in
funding the tax liability where they do not immediately dispose of
the shares received on exercise of the option.

Under the KEEP scheme, no tax charge arises when the KEEP
compliant share options are exercised by an option holder. A
capital gains tax (“CGT”) liability will arise when the
option holder actually disposes of the shares. This provides the
employee with an advantage in that it taxes all value in the option
at CGT rather than at income tax rates and defers taxation until
the point of share sale at which point the option holder can fund
its tax liability using the proceeds of sale.

KEEP Conditions

KEEP is available for ‘qualifying share options’ granted
by ‘qualifying companies’.

A number of qualifying conditions must be met in order for the
share options to be deemed qualifying share options. For example,
share options cannot be exercised within 12 months of the date of
the grant of the option, and they must be exercised within 10
years. In addition, the value of shares over which KEEP share
options can be granted to any one employee or director is
limited.

Aside from being a SME, a qualifying company must also meet a
number of conditions, such as being an unquoted company
incorporated and resident in Ireland, or resident in another EEA
jurisdiction and it must carry on trading activities which are
taxable in Ireland through a branch or agency.

In order for option holders to qualify for KEEP treatment and
benefit from its significant tax advantages, the share option
granted must continue to be a qualifying share option and the
company granting the options must remain a qualifying company until
such point as the option shares are exercised.

KEEP Obligations

Qualifying companies which grant qualifying share options must
furnish the Revenue Commissioners (“Revenue”) with
relevant details of the grant of the qualifying share options in
the form prescribed by Revenue (KEEP1) no later than 31 March in
the year of assessment following the year the options are
granted.

Once the qualifying company submits the KEEP1 return, it will be
processed by Revenue and, where required, the automatic reporting
of data to the European Commission in accordance with EU State Aid
rules will take place.

Failure to comply with these obligations will result in the
relevant company not being regarded as a “qualifying
company” with consequent implications for the tax treatment of
the relevant options.

What’s Happening in Practice?

We are aware of a number of cases where qualifying companies
(who have diligently adhered to the KEEP conditions) have
erroneously failed to file the relevant Form KEEP1 with Revenue and
as a result, have potentially lost the benefit of KEEP treatment to
the detriment of their employees and directors.

Accordingly, it is essential that companies seeking to qualify
for KEEP treatment, keep accurate records of share option grants
and exercises, and report them to Revenue in a timely manner.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.