At J McEvoy we believe that attracting and keeping the right people is one of the biggest challenges facing growing Irish SMEs. Competing with large multinationals on salary alone is often impossible, particularly for younger businesses with limited cash. Offering employees a share in the future success of the company can be a powerful alternative. The Key Employee Engagement Programme, known as KEEP, was designed to make this more attractive by providing favourable tax treatment on share options granted by qualifying SMEs.

Why Equity Can Be So Effective

Giving key employees a stake in the business aligns their interests with yours. When the company grows in value, they share in that success, which encourages loyalty, commitment and a long-term focus. For businesses that cannot match the salaries offered by larger competitors, equity can bridge the gap and help secure talent that might otherwise be out of reach.

Share options are a common way to do this. They give an employee the right to buy shares in the company at a fixed price at some point in the future. If the company grows, the shares may be worth considerably more than the price the employee pays.

How Share Options Are Normally Taxed

Without a special scheme, the tax treatment of share options can be unattractive. When an employee exercises an option, the difference between the market value of the shares and the price paid is generally treated as income and is subject to income tax, USC and PRSI. Since 2024, employers have been responsible for operating these deductions through payroll.

The difficulty is that this tax arises when the option is exercised, even though the employee may not have sold any shares and may have no cash to pay the bill. In a private company where there is no ready market for shares, this can make share options far less appealing.

What KEEP Offers

KEEP changes this treatment for qualifying share options. Instead of income tax, USC and PRSI arising when the option is exercised, no tax is payable at that point. The employee is instead liable to Capital Gains Tax on the gain when they eventually sell the shares.

This has two significant advantages. The tax is deferred until the employee actually realises value from the shares, and the gain is taxed at the Capital Gains Tax rate rather than at higher combined income tax, USC and PRSI rates. For employees, this can make share options far more valuable and easier to understand.

The Main Conditions

To benefit from KEEP, a number of conditions must be met. The company must be an unquoted SME carrying on a qualifying trade, and certain activities are excluded. The employee must work for the company for a minimum number of hours each week, or devote most of their working time to it.

The options must generally be granted at an exercise price that is not less than the market value of the shares at the date of grant. There is also a minimum period that must pass before options can be exercised, and a maximum period within which they must be exercised. Limits apply to the total value of shares over which an individual employee can hold options and to the overall value of options a company can grant under the scheme. These rules have been relaxed in recent years, making the scheme more flexible for growing companies.

Practical Points to Consider

Setting up a KEEP scheme requires careful planning. A reliable valuation of the company’s shares at the date of grant is essential, as the exercise price depends on it. The company must also meet annual reporting obligations to Revenue.

It is equally important to consider the commercial terms. What happens if an employee leaves the business? Will shares be bought back, and at what price? How will employee shareholders fit into your existing shareholders’ agreement? Recent changes have made it easier for companies to buy back shares from employees, which can help provide a route to realise value in a private company. Clear leaver provisions and a well-drafted agreement protect both the business and the employee.

Other Options Worth Considering

KEEP is not the only way to share equity with employees. Approved profit sharing schemes allow companies to give shares to employees tax free up to an annual limit, provided they are held in trust for a minimum period. Restricted shares, where employees cannot sell for a set period, can attract a reduction in their taxable value. Some businesses also use cash-based bonus schemes linked to company performance as a simpler alternative.

The right approach depends on your goals, the stage of your business and the employees you want to reward.

Is Equity Right for Your Business?

Sharing ownership is a significant decision. It can be a highly effective way to attract and retain talent, but it also involves dilution, ongoing administration and important legal and tax considerations. Taking advice at the outset helps ensure your scheme is structured correctly, meets the conditions for any relief and delivers the benefits you intend.

At J McEvoy, we help growing businesses design employee share schemes, assess eligibility for KEEP and manage the ongoing reporting and compliance requirements.

If you would like to discuss your business, contact us on or email info@mcevoy.ie or visit mcevoy.ie.

Disclaimer: This article is based on publicly available information and is intended for general guidance only. While every effort has been made to ensure accuracy at the time of publication, details may change and errors may occur. This content does not constitute financial, legal or professional advice. Readers should seek appropriate professional guidance before making decisions. Neither the publisher nor the authors accept liability for any loss arising from reliance on this material.