Section 128C Tax treatment of directors and employees who acquire convertible securities

(1) In this section—

“chargeable amount” has the same meaning as it has in subsection (6), computed in accordance with subsection (8);

“chargeable event” has the meaning given in subsection (7);

“collective investment scheme” means any scheme or arrangement made for the purpose, or having the effect, of providing facilities for the participation by persons, as beneficiaries, in profits or income arising from the acquisition, holding, management or disposals of assets;

“convertible securities” shall be construed in accordance with subsection (4);

“director” and “employee” have the meanings respectively assigned to them by section 770(1);

“interest”, in relation to securities, includes an interest in securities which is less than full beneficial ownership and an interest in the proceeds of the sale of them, but does not include a right to acquire securities;

“market value” shall be construed in accordance with section 548;

“securities” includes—

(a) shares,

(b) securities within the meaning of section 135,

(c) debentures, debenture stock, loan stock, bonds, certificates of deposit, and other instruments (including certificates and warrants) creating or acknowledging indebtedness, including certificates and other instruments providing for a share in the profits of a company,

(d) options (other than options to acquire securities, except where such options are acquired under arrangements of which the main purpose or one of the main purposes is the avoidance of income tax, corporation tax or capital gains tax) and financial and commodity futures (within the meaning of the Investment Intermediaries Act 1995),

(e) warrants and other instruments entitling their holders to subscribe for securities,

(f) certificates and other instruments conferring rights in respect of securities held by persons other than persons on whom the rights are conferred and the transfer of which may be effected without the consent of those persons, and

(g) units in a collective investment scheme,

but does not include cheques or other bills of exchange, bankers’ drafts or letters of credit, statements showing balances in current, deposit or savings accounts, or leases and other dispositions of property;

“shares” includes securities (within the meaning of section 135) and stock.

(2) References in this section to an employee or director acquiring securities in a company as a director or employee of that company or of another company, includes references to securities acquired by any other person by reason of the director’s or employee’s office or employment, and for this purpose “employment” includes a former or prospective employment, and “office” includes a former or prospective office.

(3) This section applies where—

(a) an employee or director acquires securities in a company as a director or employee of that company or of another company (in this section referred to as “employment-related securities”), and

(b) at the time of acquisition, the securities are convertible securities or an interest in convertible securities.

(4) For the purposes of this section securities are convertible securities if—

(a) they confer on the holder an entitlement (whether immediate or deferred and whether conditional or unconditional) to convert them—

(i) into securities of a different description, or

(ii) into money or money’s worth,

or

(b) a contract, agreement, arrangement or condition—

(i) authorises or requires the grant of such an entitlement as is referred to in paragraph (a) to the holder if certain circumstances arise or do not arise, or

(ii) provides for the conversion of the securities, otherwise than by the holder, into securities of a different description or into money or money’s worth.

(5)(a) For the purposes of—

(i) any charge to income tax under Schedule E and computed in accordance with section 112 or 128 on the acquisition of the employment-related securities, or

(ii) the operation of section 122A,

the market value of the employment-related securities shall be determined as if they were not convertible securities.

(b) Paragraph (a) does not apply if the employment-related securities are acquired under arrangements of which the main purpose or one of the main purposes is the avoidance of income tax, corporation tax or capital gains tax, unless the market value of the employment-related securities determined in accordance with paragraph (a) is greater than that determined under paragraph (c).

(c) Where paragraph (a) does not apply, the market value of the employment-related securities shall be determined—

(i) in the case of securities that fall within subsection (4)(a)(i) and the entitlement to convert is not both immediate and unconditional, as if it were both immediate and unconditional,

(ii) in the case of securities that fall within subsection (4)(b)(i), as if the circumstances are such that an entitlement to convert arises immediately,

(iii) in the case of securities that fall within paragraph (a)(ii) or (b)(ii) of subsection (4), as if provision were made for their immediate conversion,

and in each case, as if they were immediately and fully convertible.

(d) For the purposes of paragraph (c) “immediately and fully convertible” means convertible immediately after the acquisition of the employment-related securities so as to obtain the maximum gain that would be possible on a conversion at such time without giving any consideration for the conversion or incurring any expenses in connection with it.

(6) Subject to subsection (11), where, at a time when an employee or director (or any other person who acquired the employment-related securities by reason of the director’s or employee’s office or employment) has a beneficial interest in employment-related securities, a chargeable event occurs, then the employee or director shall be chargeable to income tax under Schedule E, in the year in which the chargeable event occurs, on an amount (referred to in this section as the“chargeable amount”) computed in accordance with subsection (8).

(7) A “chargeable event” means—

(a) the conversion of the employment-related securities (or the securities in which they are an interest) into securities of a different description in circumstances in which the employee or director (or any other person who acquired the employment-related securities by reason of the director’s or employee’s office or employment) is beneficially entitled to the securities into which the employment-related securities are converted,

(b) the release for consideration of the entitlement to convert the employment-related securities (or the securities in which they are an interest) into securities of a different description,

(c) the disposal for consideration of the employment-related securities or any interest in them by the director or employee (or by any other person who acquired the employment-related securities by reason of the director’s or employee’s office or employment), at a time when such securities are still convertible securities, or

(d) the receipt by the employee or director (or by any other person who acquired the employment-related securities by reason of the director’s or employee’s office or employment) of a benefit in money or money’s worth in connection with the entitlement to convert (other than securities acquired on the conversion of the employment-related securities or consideration referred to in paragraphs (b) and (c)).

(8)(a) For the purposes of subsection (6), the chargeable amount is to be determined by the formula—

A – B

where—

A is the amount of any gain realised on the occurrence of a chargeable event, and

B is the total of any consideration given for the entitlement to convert the employment-related securities and the amount of any expenditure incurred by the holder of the employment-related securities in connection with the conversion, disposal, release of the entitlement to convert, or receipt of a benefit in connection with the entitlement to convert the employment-related securities, as the case may be.

(b) The amount of the gain realised on the occurrence of a chargeable event is—

(i) in the case of an event to which subsection (7)(a) applies, to be determined by the formula—

C – (D + E)

where—

C is the market value at the time of the chargeable event of the securities into which the employment-related securities are converted and where those securities are themselves convertible, the market value is to be determined as if they were not convertible; and where the employment-related securities are an interest in securities, then C is the same proportion of that market value as the market value of the interest in the securities in which the employment-related securities are an interest bears to the market value of those securities,

D is the market value of the employment-related securities at the time of the chargeable event, determined as if they were not convertible securities or an interest in convertible securities, and

E is the amount of the consideration given for the conversion of the employment-related securities,

(ii) in the case of a chargeable event to which subsection (7)(b) applies, the amount of the consideration received in respect of the release,

(iii) in the case of a chargeable event to which subsection (7)(c) applies, to be determined by the formula—

F – G

where—

F is the amount of consideration given on disposal of the employment-related securities, and

G is the market value of the employment-related securities at the time of the chargeable event, determined as if they were not convertible securities or an interest in convertible shares,

(iv) in the case of an event to which subsection (7)(d) applies, the amount or market value of the benefit received, as the case may be.

(c) If, because of paragraph (b) of subsection (5), paragraph (a) of that subsection did not apply in relation to employment-related securities, the chargeable amount is to be reduced by the amount determined by the formula—

H – I

where—

H is the amount by which the market value of the employment-related securities for the purposes specified in paragraph (a) of subsection (5), exceeded what it would have been had that paragraph applied, and

I is the aggregate of any amount by which the chargeable amount on any previous chargeable event relating to the employment-related securities has been reduced under this subsection.

(9)(a) For the purposes of calculating B in the formula in subsection (8)(a), consideration is to be treated as given for the entitlement to convert the employment-related securities only if the amount of any consideration given for the acquisition of the employment-related securities exceeds the market value of such securities (determined as if the employment- related securities were not convertible securities) at the time of their acquisition.

(b) Where the consideration is in excess of the market value, the amount of such excess shall be treated as the amount of consideration given for the entitlement to convert the employment-related securities.

(10) For the purposes of this section, any consideration given for the acquisition of employment-related securities and any consideration given for the entitlement to convert shall not be taken to include the performance of any duties in or in connection with the office or employment, and no part of the amount or value of the consideration shall be deducted more than once.

(11)(a) This section does not apply in relation to employment-related securities, where—

(i) the employment-related securities are shares in a company of a class,

(ii) all the company’s shares of the class are convertible securities,

(iii) all the company’s shares of the class are affected by an event similar to that which is a chargeable event in relation to the employment-related securities, and

(iv) immediately before the event that would, but for the provisions of this subsection, be a chargeable event, the majority of the company’s shares of the class are not employment-related securities,

or,

(b) if, at the time of the acquisition of the employment-related securities, the emoluments from the office or employment are not within the charge to tax under Schedule E or Schedule D.

(12) For the purposes of subsection (11)(a)(iii), shares are affected by an event similar to that which is a chargeable event in relation to employment-related securities, if—

(a) in the case of a chargeable event to which subsection (7)(a) applies, they are converted into securities of a different class,

(b) in the case of a chargeable event to which subsection (7)(b) applies, the entitlement to convert them into securities of a different description is released,

(c) in the case of a chargeable event to which subsection (7)(c) applies, they are disposed of,

(d) in the case of a chargeable event to which subsection (7)(d) applies, a similar benefit is received in respect of the entitlement to convert them.

(13) Notwithstanding any other provision of the Tax Acts, where a person is, by virtue of this section, chargeable to tax under Schedule E for a year of assessment in respect of a chargeable amount computed in accordance with subsection (8), then he or she shall be a chargeable person for that year for the purposes of Part 41, unless the person has been exempted by an officer of the Revenue Commissioners from the requirement of section 951 by reason of a notice given under subsection (6) of that section.

(14) Where a person is charged to tax under this section on a chargeable amount computed in accordance with subsection (8), then section 552 shall apply as if a sum equal to the amount so charged formed part of the consideration given by the person acquiring securities for their acquisition by that person.

(15) Where in any year—

(a) a person awards employment-related securities to an employee or director (or to any other person by reason of the director’s or employee’s office or employment) to which this section applies, or

(b) a chargeable event occurs in relation to employment-related securities so awarded,

then the person shall deliver to the Revenue Commissioners on or before 31 March in the year following the year in which the award was made or the chargeable event occurred, as the case may be, particulars of the awards or the chargeable event, as the case may be.