Companies all over the world are using the power of employee ownership to grow their businesses and to reward key employees along the way. Here we take a look at the Restricted Share Scheme as one of many options open to firms in order to harness the power of stock compensation.
What is a Restricted Share Scheme?
A Restricted Share Scheme or a Clog Scheme presents an employee with free shares in the company in which they work. However, restrictions are put in place that mean those shares are held by the employee for a fixed period.
Why introduce a Restricted Share Scheme?
The payment of a discretionary bonus in the form of shares affords the employee the opportunity to reduce the tax, PRSI and Universal Social Charge (USC) charges that typically arise when they receive a cash bonus.
How does a Restricted Share Scheme work?
The scheme is established by setting up a trust or other holding mechanism to hold the shares during the restriction (or clog) period. The company makes a formal offer to the employee on the number of shares and the length of the clog and the employee must agree, in writing, to the terms of the clog. During the clog period, the shares may not be sold, transferred or used as a charge.
What are the tax implications for the employee?
Under Irish tax legislation, employees are liable to income tax, PRSI and the USC on the value of any assets passed to them by their employer.
- Acquisition: Under a Restricted Share Scheme, directors and employees can have the tax charge on the acquisition of shares reduced by an amount depending on the period of restriction of the shares.
- Maturity: After the defined time period has arisen there is no income tax, PRSI or USC applied.
- Sale: The participant may, depending on their personal circumstances, be liable to capital gains tax on the subsequent disposal of the shares. Depending on whether the shares are provided by way of market purchase or an issue of shares the base cost for capital gains tax purposes can be either the abated amount or the market value of shares as at the date of acquisition.
How is the income tax, PRSI and USC collected?
Any income tax, PRSI and USC due on awards of restricted shares must be collected by the employer via the PAYE system in the month of the award and remitted with the P30 submission for that month.
What are the taxation implications for the employer?
Any costs associated with establishing and administrating the scheme and any costs associated with the purchase of shares to satisfy the Restricted Share awards are allowable for corporation tax purposes. There is no employer PRSI on the value of any shares awarded under a Restricted Share Scheme.
What are the reporting requirements?
The company, Irish branches and agencies awarding Restricted Shares must complete a return of information (Form RSS1) annually by 31 March following the end of the relevant tax year in which the Restricted Shares were awarded. They must also include details of the Restricted Shares awarded in their corporation tax return (CT1). Form CT1 must be filed within nine months of the company’s corporation tax year.
The employee is required to return details of the receipt of the Restricted Shares and the subsequent disposal of shares on his/her tax return and to pay any capital gains tax due on the disposal of shares.
Are there any implications for pension benefits?
The market value of the shares appropriated under a Restricted Share Scheme can be included when calculating Revenue maximum benefits and the monetary limits for annual voluntary contributions.
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