Key Employee Engagement Programme (KEEP)

Back to Atlas

The Key Employee Engagement Programme (KEEP) is an Irish incentive scheme designed to support small and medium-sized enterprises (SMEs) in attracting and retaining key employees.
What are the main aims and objectives?

The Key Employee Engagement Programme (KEEP) in Ireland was established with the intent to provide small and medium-sized enterprises (SMEs) with a mechanism to attract and retain key talent. This is particularly crucial in a competitive business environment where SMEs may struggle to offer salaries and benefits that rival those provided by larger corporations. By allowing these businesses to offer share options to employees under favorable tax conditions, KEEP sets out to create a more level playing field in the labor market.

One of the core objectives of KEEP is to foster a sense of partnership between employees and employers. By giving employees a stake in the company's future through share options, they become part owners, effectively aligning their personal success with the company's prosperity. An overarching goal of the program is to support the growth and sustainability of SMEs within Ireland's dynamic economy. By empowering these businesses to recruit and maintain a skilled workforce, KEEP aims to contribute to the development of a robust and innovative SME sector.

How does the program work?

KEEP is structured to provide tax benefits to employees of qualifying companies who receive share options. The program works by allowing these companies to issue share options to their employees without triggering an immediate tax liability. Typically, when share options are granted to employees, they might be required to pay Income Tax, Universal Social Charge (USC), or Pay Related Social Insurance (PRSI) upon receiving or exercising the options. However, under KEEP, these taxes are deferred.

Employees who are granted share options through KEEP do not have to pay any taxes at the time of the grant or even when they exercise their options, which is the point at which they can buy shares at the price initially set. Instead, they only become liable for tax when they eventually sell the shares. At that stage, the profit realized from the sale of the shares is subject to Capital Gains Tax (CGT) at a rate of 33% which is lower than the 52% combined rates of Income Tax, USC, and PRSI.

KEEP is available for qualifying share options granted between 1 January 2018 and 31 December 2025. Generally, the options cannot be exercised within 12 months of the date of grant of the option, and they must be exercised within 10 years.

The value of shares over which KEEP share options can be granted to any one employee or director is limited to:

  • €100,000 in any year of assessment;
  • €300,000 in all years of assessment; or
  • 100% of the annual emoluments of the individual in the year in which the qualifying option is granted.

To qualify for KEEP, both the company and the employees must meet specific criteria set out by the Irish Revenue Commissioners. As of the last update, these criteria include:

 

  1. Company Criteria: The company must be a qualifying company, which generally means it is an SME engaged in a trade in Ireland. Certain financial services, professional services, and activities like property development may be excluded. The company must be incorporated and tax resident in Ireland or within the European Economic Area (EEA) and controlled by Irish residents. The company’s shares must not be listed on any stock exchange. The company must not have assets exceeding €100 million or gross revenues exceeding €50 million.

 

  1. Employee Criteria: The employee must be a full-time employee or director working for the company for at least 30 hours per week in a role that is not of a promotional or advisory nature. The employee must not control more than 15% of the company’s share capital. The employee must not hold options that would exceed €100,000 in any one tax year, €250,000 over three consecutive years, or 50% of their annual emoluments.

 

  1. Share Options Criteria: The share options must be granted for bona fide commercial reasons to recruit or retain employees in the company, and not as part of a tax-avoidance scheme. The options must be exercised within a period of 10 years from the date of the grant. The price paid for the shares under the option cannot be less than the market value of the shares at the time the option is granted.

 

  1. Reporting Requirements: Companies must notify the Revenue Commissioners when options are granted, exercised, assigned, or released.
What is the overall cost?

KEEP was expected to cost €10 million per annum when it was introduced.  However, due to low uptake of the scheme, the cost to the Exchequer of KEEP for 2019 was €78,000, €186,000 for 2020 and €600,000 for 2021.

How was it implemented?

KEEP was introduced in the Finance Bill 2017 and came into effect on 1 January 2018. The creation and development of KEEP can be traced back to a consultation on “Taxation of Share Based Renumeration” launched by the Department of Finance in 2016. In response to the consultation, Minister for Finance, Pascal Donohoe TD announced the launch of KEEP in his budget speech on 10 October 2017.

The program was amended in 2019 to:

  • Extend relief under KEEP to certain companies operating as a group
  • Allowing individuals who work part-time or have flexible working arrangements to benefit from the scheme
  • Extend relief to existing shares as well as newly issued shares

Prior to KEEP, any gains made from employee share options were subject to income tax, Universal Social Charge (USC), and Pay Related Social Insurance (PRSI) at the time of exercise, which could be prohibitively expensive for employees and act as a disincentive to participate in share option schemes.

The creation and development of KEEP can be attributed to several factors, events, and stakeholders that recognized the need to enhance the competitiveness of small and medium-sized enterprises (SMEs) in Ireland, particularly in the context of attracting and retaining high-quality employees. Additionally, this policy was created in the context of Irelands recovery from the financial crisis as the government looked for ways to foster this growth, particularly through the development of the indigenous business sector.

Stakeholders Involved:

  • Irish Government: Specifically, the Department of Finance, which is responsible for implementing fiscal policies and taxation measures, played a crucial role.
  • Revenue Commissioners: The body that administers the tax system in Ireland, they were involved in the practicalities of implementing and overseeing the scheme.
  • SMEs and Startups: Businesses that stood to gain from the program were key proponents, often through representative bodies and industry groups.
  • Employees and Potential Recruits: Individuals who would be directly affected by the policy also had an interest in the development of KEEP.
  • Industry Experts and Tax Specialists: Consultation with experts helped shape the program to ensure it was fit for purpose and competitive.
What impact has been measured?

In 2021, it was reported in response to a Parliamentary Question that there had been low take up of the scheme with only 10 employees exercising shares in 2019. Additionally, in July 2019 it was confirmed that just 10 companies had granted qualifying share options to 87 key employees during the first year of the scheme.

There is currently no further available information on the impact of KEEP, however, there is currently (January 2024) a consultation process taking place on share-based renumeration which may yield more information. As part of this process, the Irish Tax Institute has submitted evidence.

What lessons can be learned?

Ireland ranks relatively highly in the international ranking of stock options in 11th place with the fifth highest score.

In 2022, the Irish Tax Institute suggested extending the 2019 reforms of the program to allow all companies that operate through a group structure to qualify for the scheme, citing polling of their members that showed 70% believed this would increase the uptake of the scheme.

In addition to this they offered a series of recommendations:

  1. Develop an agreed ‘safe harbor’ approach to share valuation and impose sanctions when there is an undervalue
  2. Allow companies to buy-back KEEP shares to ensure liquidity
  3. Allow the continuing of the relief in instances where SMEs undergo a corporate reorganization
  4. Simplify the qualifying share option limits by removing the annual emoluments cap
  5. Provide for ‘roll over relief’ which would apply in instances where companies are acquired

CURATED BY

Tom Hancock

Research Associate
Global Entrepreneurship Network
United Kingdom