20% capital gains tax on share options

The tax treatment of share options has been changed in the Finance Bill so that workers will pay capital gains tax of 20 per cent on any gains made rather than income tax.

The measure was welcomed by business groups which said it would help in the recruitment and retention of staff but was criticised by others for opening loopholes in the tax system, while small firms said it discriminated against them.

Under the new treatment, workers will pay capital gains on the difference between the price at which the option is granted and the price received when the shares are eventually sold. Previously, many employees were liable for tax at their marginal rate of 42 per cent. There will be a required retention period of at least three years.

The new scheme will apply to options granted on or after February 15th, 2001 and all share option schemes must first be approved by the Revenue Commissioners. To qualify, at least 70 per cent of share options in a scheme will have to be open to all employees with not more than 30 per cent available for key employees. There will be no limit on the amount of shares that can avail of the tax treatment.

The Irish Software Association (ISA), which represents 300 software firms in the Republic and has lobbied for the change for the last two years, welcomed the move. "This puts the industry on a more level playing pitch in the skills war with our global competitors," ISA chairman Mr Billy Huggard said. "We are hopeful that it will help to dampen wage inflation and reduce staff turnover in the sector in Ireland."

The move was also welcomed by IBEC, which said it would address strategic labour attraction and retention issues for key sectors, and the Institute of Chartered Accountants in Ireland which said the development of wider employee share ownership would take the concept of partnership a step further.

But the Labour Party and the Irish Congress of Trade Unions (ICTU) said the measures would lead to tax avoidance. "It will create a major hole in the tax system for tax consultants to manipulate," said Mr Tom Wall, assistant general secretary of the ICTU. He said that while the move was designed to ease skills shortages in the IT sector, its major impact would be in sectors that are not internationally traded such as partnerships.

Labour spokesman Mr Derek McDowell also said the absence of a limit meant the scheme was "little more than a tax avoidance measure for the better off". He said it could also be used by some employers to avoid the PRSI changes announced in the Budget.

The move also drew flak from both the Small Firms' Association (SFA) and the Irish Small and Medium Enterprises' Association (ISME).

The SFA said the decision not to apply the measure retrospectively could encourage employees to move job before they qualify for share options which will attract the new tax treatment while ISME criticised the lack of movement on gain-sharing and said the measures would add to labour and wage pressures on small firms who could not offer share options.

Mr McCreevy said he had considered proposals for the special tax treatment of payments made under gain-sharing schemes but that he did not consider it possible to deal with the matter in this Finance Bill.

"I will, however, seek to develop a viable option in this area for a future Finance Bill," he said.