The new Key Employee Engagement Programme (Keep) would "support small and medium enterprises in their efforts to attract and retain key employees in a competitive international labour market, by providing for an advantageous tax treatment on share options," Mr Donohoe said yesterday.
The measure is designed to help smaller firms recruit talented staff without draining the balance sheet, enabling them to offer potentially lucrative share options in lieu of a generous salary.
Under the existing laws, employees pay punitive rates of income tax on share awards and share options - but they are then hit with a capital gains charge if they go on to sell the shares.
Gill Brennan, CEO of industry lobby group the Irish ProShare Association (IPSA), had described the exiting legislation as "bonkers" and warned that without a tax reduction, smaller firms faced a "brain drain", particularly from multinationals such as Google, Facebook and Apple.
A hypothetical scenario set out by the department illustrated the scale of the tax saving in the new scheme.
It showed that if an employee was provided the opportunity to purchase €10,000 worth of shares in April next year at a price of €1 per share, but did not exercise the option for three years - by which time the shares have increased in value to €3 per share - that would deliver a €20,000 discount to the employee to the shares' market value.
If the same individual then sold the shares a year later, when the stock's value has risen to €40,000, the employee must then pay capital gains tax at 33pc on the total €30,000 gain - delivering a 15.75pc tax saving on the initial discount.
Lobby groups and accountancy firms immediately welcomed Mr Donohoe's announcement, with Ibec characterising it as "very positive".
Senior economist at the organisation Gerard Brady said that Ibec had campaigned for the tax reduction for years, but stressed its impact could be assessed only when the details of the scheme were released in the upcoming Finance Bill.
John Murphy, a tax specialist at accountancy firm PwC, said the new scheme reduced the tax bill on share options by close to 20pc and noted that the incentive would be relevant for share options granted from January 1, 2018, to December 31, 2023.