Employee Benefit Trust (EBT) hold assets, often company shares, in trust by an independent trustee to be awarded to some or all employees of a company.  The purpose of an EBT is to attract, retain and reward employees.  The intention of the EBT is to encourage loyalty and commitment of the employees by aligning the interests of employees with those of the shareholders, as a result to improve the company’s performance.  Companies benefit from dedicated and motivated employees who in turn may expect greater reward from the successes of their employer.

An EBT usually set up as a discretionary trust of which all the employees or selected employees such as senior management of the company are beneficiaries.  The trustees normally have wide powers under the terms of the trust in relation to the administration and operation of the EBT which enables various types of benefits to be delivered.  This can include the granting of share options or vesting of share awards or awards in cash to beneficiaries.

The beneficiary class can be as wide as covering all the employees of the company or can only cover a select group of employees such as senior management, depending on the company’s objectives.

When administering the discretionary EBT, trustees usually follow the recommendations given by the management committee or the authorized persons of the company, although these recommendations are not binding.  Such recommendations can include suggestions as to the type of assets to hold in the EBT such as shares in the company, requests to purchase shares from employees who are leaving or the granting of benefits to employees who have achieved benchmark objectives.  It is also common for trustees to be asked to satisfy awards granted to employees by the company.  

EBTs can be flexible and allow different types of benefits to be delivered to beneficiaries, both share based and cash based.  Examples include:

1. Restricted share awards；
2. Conditional share awards；
3. Share options；
4. Cash payments；
5. Phantom awards.

The types of arrangement operated through an EBT are tailored to the needs and objectives of the company.  A company can operate one or more of the types of the abovementioned arrangements through an EBT, with EBT to hold shares pending the vesting and satisfaction of awards.  It is common to use an EBT following an acquisition or reorganisation of a business or where the company will have an exit event such as listing on a stock exchange or private sale of shares.  Equally a company may wish to establish an EBT as a way of incentivising its employees.

The benefit of using an Employee Benefit Trust (EBT):

1. Asset Protection: If the company go bankrupt, the company’s creditors cannot gain access to the shares or other assets held under the EBT.  The assets remain in the EBT to be used for the benefit of the employees.  Usually, the company or its affiliates are excluded from benefit under the EBT.
2. An EBT can be used to create an internal market in shares.  This is useful for private companies, where there is no ready market for shares which are forfeited or required to be sold by leavers.  In an internal market, the trustees can acquire such shares and recycle them for future awards.
3. The company usually appoint an independent professional trustee as trustee of an EBT.  Since the trustee is required to act in the interests of the beneficiaries, the employees can gain comfort that their interests are being looked after.  It avoids potential conflicts of interest, which can arise if an entity related to the company acts as trustee.
4. Tax benefits: An offshore EBT based in Jersey or Guernsey, providing it has no Jersey or Guernsey resident beneficiaries, are not subject to income tax and capital gain tax.

The tax treatment of EBT including contributions to and benefits received from EBT is usually relevant to the employer and the beneficiaries.  It is important to seek tax advice regarding the tax implications for both the company and the employee beneficiaries.