Tax considerations for US companies offering international equity incentive programmes

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1 Financial institutions Energy Infrastructure, mining and commodities Transport Technology and innovation Life sciences and healthcare Tax considerations for US companies offering international equity incentive programmes

2 Tax considerations for US companies offering international equity incentive programmes Introduction Employee stock incentive programmes are as popular internationally as they are in the United States and any US company looking to expand outside the US is likely to want to offer stock awards to non-us executives as part of its competitive remuneration package. To be effective, a US company will want to ensure that its stock award programmes are structured in the relevant jurisdictions to: Norton Rose Fulbright avoid triggering tax charges where stock cannot be sold to fund those charges (commonly referred to as dry tax charges) Norton Rose Fulbright minimise is a global tax and legal social practice. security We provide costs for the both world s employees pre-eminent and the group corporations and financial institutions with a full business law service. We have more than 3800 lawyers take based advantage in over 50 of cities tax-saving across structures Europe, the and United reliefs States, which Canada, may be available. Latin America, Asia, Australia, Africa, the Middle East and Central Asia. This brochure aims to provide a high level overview of the tax considerations when offering Recognized for our employees industry across focus, jurisdictions we are strong in across the European all the key Union industry (EU) participation sectors: financial US-style institutions; energy; stock infrastructure, programmes. mining and commodities; transport; technology and innovation; and life sciences and healthcare. Overview Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to EU maintain jurisdictions that level recognise of quality the concept at every of point a stock of contact. option, restricted stock unit and restricted stock award, although the names given to these arrangements may differ slightly; for Norton Rose Fulbright example, LLP, conditional Norton Rose share Fulbright award Australia, or performance Norton Rose share Fulbright award are Canada more typical terms. LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) and Fulbright & Jaworski LLP, each There of is which no harmonised a separate taxation legal entity, framework are members across the ( the EU. Norton However, Rose most jurisdictions adopt Fulbright members ) a common of Norton approach Rose Fulbright by treating Verein, share a awards Swiss Verein. as taxable Norton earnings Rose Fulbright at the point of receipt of Verein helps coordinate the stock. the activities of the Norton Rose Fulbright members but does not itself provide legal services to clients. Before offering participation to employees, the company should establish in each relevant jurisdiction the position in relation to the following questions: When will the employee be charged to income or earnings tax: upon grant, vesting and/or exercise? Can the employee elect between paying income or earnings tax on grant or later on vesting/exercise? Will a charge to any other tax or a liability to pay social security contributions arise for the employee and/or the employing company and, if so, when? Will the employing company be required to operate withholding in respect of income or earnings tax and/or employee social security liabilities and, if so, what are the time limits for accounting to the relevant taxation authority? References to Norton Rose Fulbright, the law firm, and legal practice are to one or more of the Norton Rose Fulbright members or to one of their 02 respective Norton affiliates Rose (together Fulbright Norton Rose Fulbright June 2014 entity/entities ). No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any Norton Rose Fulbright entity (whether or not such individual is described as a partner ) accepts or assumes responsibility, or has any liability, to any person in respect of this communication. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of the relevant Norton Rose Fulbright entity. The purpose of this communication is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of any Norton Rose Fulbright entity on

3 Tax-advantaged programmes available in the EU If employer social security contributions and/or withholding obligations arise, would it make any difference if the awards/options were granted by the US parent company and the local employing company had minimal involvement? What will the tax treatment be on a sale of the stock acquired? Is the employee given credit for any amounts on which income or earnings tax was previously calculated on exercise/vesting? How is the value of stock determined for the purposes of calculating the tax/social security contributions due? Are there any reporting requirements for the local employing company to comply with in respect of tax and social security liabilities? Are there any tax-advantaged programmes that may be available and/or any available reliefs? Are there any corporate tax deductions available to the employing company in respect of the benefits received under the programme? Are there any anti-avoidance provisions which might apply to the proposed arrangements and of which the company should be aware? Tax-advantaged programmes available in the EU Several EU jurisdictions offer programmes similar to Incentive Stock Options (ISOs) and section 423 Employee Stock Purchase Plans (ESPP). The table below provides an overview of the programmes and reliefs currently available in the key EU jurisdictions. In most cases there are a number of conditions which must be met in order for a company to offer these programmes and reliefs these may apply to the company/group and/or to the employees to whom participation may be offered and/or to the stock/options awarded. Where the participants and/or stock options/awards themselves must meet certain requirements, this is usually achieved by adding an addendum to the US company s existing programme under which options/awards may be granted to employees resident in a specific jurisdiction. Norton Rose Fulbright June

4 Tax considerations for US companies offering international equity incentive programmes EU jurisdiction France Overview of tax-advantaged programmes and reliefs French-qualified stock option plan Selected executives may be granted options to acquire stock at up to a 20% discount to market value at grant which can be exercised free from income tax and social security. However, employer social security charges apply on grant and income tax and employee social security charges apply on sale of the stock acquired. There is no individual limit on the value of stock over which options may be granted (however, an overall plan limit of one third of a company s stock applies) and there is no longer a requirement for the stock to be held for a specified period post-exercise. Bons de souscription de parts de créateurs d enterprise (BSPCE) A programme aimed at private and smaller listed companies under which employees are granted options to subscribe for stock at a fixed price (which must not be less than the price of any stock issued to investors within the previous six months if a capital increase occurred during this period). No income tax or social security charges apply on grant or exercise of the options however, income tax and social security charges apply on sale of the stock acquired. There is no limit on the value of options which may be granted and no minimum holding period. Plan d Epargne Enterprise (PEE) A programme which must be offered to all qualifying French employees on similar terms under which participants invest up to 25% of gross salary (with employers contributing up to 3,000) per year to acquire stock at up to a 20% discount to market value on acquisition. A beneficial tax regime applies for both the employees and employer provided the stock is held within the programme for at least five years. Note that for all the French tax-advantaged arrangements, there are very strict requirements which must be met in order to qualify for the beneficial tax treatment. Germany Compared to other key EU jurisdictions, German tax law does not provide significant tax benefits for employee share plans. However, the limited reliefs below are available. Stock grant or purchase plan Up to 360 worth of stock per year may be purchased at a discount, or stock awarded at nil cost, free from income tax and social security contributions, providing the programme is offered to all qualifying German employees on the same terms. Social security upper limit In addition, social security contributions are only payable on pre-tax earnings up to 5,995 per month, so for executives whose salaries exceed this, no additional social security contributions will be payable on the acquisition of stock. 04 Norton Rose Fulbright June 2014

5 Tax-advantaged programmes available in the EU EU jurisdiction Italy Spain UK Overview of tax-advantaged programmes and reliefs Stock grant or purchase plan A programme which must be offered to all qualifying Italian employees on similar terms under which up to 2,065 worth of stock may be purchased, or stock awarded at nil cost, free from income tax and social security contributions provided the stock is held for at least three years. Stock delivery plan Up to 12,000 worth of stock per year may be purchased at a discount, or stock awarded at nil cost, free from income tax provided the stock is held for at least three years. However, employee and employer social security charges will arise on exercise. Where this exemption is not available or where stock is awarded above the 12,000 limit, an additional relief is available for one-off arrangements where the amount subject to income tax on acquisition may be reduced by 40% provided at least two years elapse between grant and vesting. However, social security contributions would be payable on the full amount. Enterprise Management Incentive (EMI) options The most tax-efficient arrangement available in the UK, this programme is aimed at small trading companies (with less than 30 million gross assets) under which executives may be granted market value options over up to 250,000 worth of stock (measured at grant) which can be exercised at any time free of income tax and social security contributions. In addition, optionholders may benefit from a lower rate of capital gains tax on disposal of the stock acquired on exercise. Company Share Option Plans (CSOPs) Executives may at any one time hold options over up to 30,000 worth of stock (measured at grant) which have an exercise price equal to market value at grant. Exercise is free of income tax and social security providing it takes place at least three years after grant. Save-As-You-Earn (SAYE or Sharesave ) plans A savings-related option plan which must be offered to all qualifying UK employees on similar terms. Employees save up to 18,000 over three years (or 30,000 over five years) and at the end may exercise their option to acquire stock at up to a 20% discount to market value at grant, free of income tax and social security contributions. Norton Rose Fulbright June

6 Tax considerations for US companies offering international equity incentive programmes EU jurisdiction Overview of tax-advantaged programmes and reliefs Share Incentive Plans (SIPs) A stock purchase plan which must be offered to all qualifying UK employees on similar terms under which employees may acquire stock on the following basis without incurring income tax or social security liabilities: up to 1,800 worth of pre-tax salary may be invested in partnership shares per year up to two free matching shares may be awarded for each partnership share purchased up to 3,600 worth of free shares may be awarded per year unlimited dividends received on any partnership, matching and/or free shares may be reinvested to acquire dividend shares. Employee Shareholder shares Employees may acquire between 2,000 and 50,000 worth of free stock which qualifies for attractive tax reliefs on acquisition and disposal in return for waiving or varying certain statutory employment rights. For more information on these programmes, please see our Enterprise Management Incentive Options and Employee Shareholders brochures. Restricted stock and section 431 taxation elections Where employees acquire restricted stock outright, they may enter into a section 431 taxation election (equivalent to a section 83(b) election in the US) to be taxed up-front on the unrestricted market value of the stock (ie, ignoring the restrictions) so that any future growth is subject to the capital gains tax regime, rather than income tax and social security contributions. Case study Example Inc. is a Delaware corporation listed on Nasdaq, headquartered in the US, which has recently expanded into the UK, France, and Germany. The company currently offers the following programmes to its US employees: restricted stock units subject to performance conditions for senior executives ISOs and non-qualifying stock options (NQSOs) for mid-level employees a section 423 ESPP under which all employees may acquire stock at a maximum discount of 15 per cent. The table opposite shows how these programmes could be adapted so that the company can extend participation to its employees outside the US. 06 Norton Rose Fulbright June 2014

7 Next steps UK France Germany The UK has a very wide range of tax-efficient arrangements which are less prescriptive than those available in other jurisdictions such as France. An addendum is added to the ISO plan under which mid-level employees can be granted CSOP options up to the 30,000 limit. The NQSO plan is used to deliver top-up awards above that limit. Executives enter into NIC elections to agree that they will bear the cost of the employer social security charges arising on exercise. An addendum is added to the section 423 ESPP under which Sharesave options to acquire stock at the same 15% discount can be granted to all qualifying employees (and which still satisfy the overriding US conditions). A UK administrator is engaged to operate the Sharesave arrangements. The planning objective in France is to overcome the extremely high social security rates (with top rates of around 20% for employees and 45% for employers) this means that stock incentives will only be feasible if it is possible to qualify for one of the tax-efficient programmes. An addendum is added to the ISO plan under which mid-level employees can be granted Frenchqualified stock options. An addendum is added to the section 423 ESPP to implement a Plan d Epargne Enterprise so that French employees can acquire stock at the same 15% discount (whilst still satisfying the overriding US conditions). The reliefs available in Germany are not as significant as other EU jurisdictions but they are less prescriptive, so the existing US arrangements can simply be extended to German employees. Restricted stock units are granted to senior German executives. For those earning 5,995 per month or above, no social security will be payable. The section 423 ESPP is offered to all German employees, with the first 360 per year of stock being acquired free from income tax and social security. Next steps If you are considering rolling out your existing stock programmes to employees outside the US (whether in the EU and/or elsewhere), the Norton Rose Fulbright team can conduct a global feasibility study for you on the tax and other implications in the relevant jurisdictions and/or provide you with further information on the type of programmes which may be available to you. Of course, as well as the tax implications, any global feasibility study would also need to take into account other issues such as securities laws, employment laws and data protection implications: the Norton Rose Fulbright team can provide further guidance on these issues. Norton Rose Fulbright June

8 nortonrosefulbright.com Contact If you would like further information please contact: Monique Fry Global head of employee benefits and executive compensation Norton Rose Fulbright LLP Tel Louise Dent Senior associate, London Norton Rose Fulbright LLP Tel Norton Rose Fulbright Norton Rose Fulbright is a global legal practice. We provide the world s pre-eminent corporations and financial institutions with a full business law service. We have more than 3800 lawyers based in over 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia. Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare. Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact. Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) and Fulbright & Jaworski LLP, each of which is a separate legal entity, are members ( the Norton Rose Fulbright members ) of Norton Rose Fulbright Verein, a Swiss Verein. Norton Rose Fulbright Verein helps coordinate the activities of the Norton Rose Fulbright members but does not itself provide legal services to clients. References to Norton Rose Fulbright, the law firm, and legal practice are to one or more of the Norton Rose Fulbright members or to one of their respective affiliates (together Norton Rose Fulbright entity/entities ). No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any Norton Rose Fulbright entity (whether or not such individual is described as a partner ) accepts or assumes responsibility, or has any liability, to any person in respect of this communication. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of the relevant Norton Rose Fulbright entity. The purpose of this communication is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of any Norton Rose Fulbright entity on the points of law discussed. You must take specific legal advice on any particular matter which concerns you. If you require any advice or further information, please speak to your usual contact at Norton Rose Fulbright. Norton Rose Fulbright LLP NRF /14 (UK) Extracts may be copied provided their source is acknowledged.