ESO plan. ESO plan. CROSS-BORDER HANDBOOKS 95

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1 Portugal Portugal Inês Reis, Pedro Pinto, Reis & Associados (member of Ius Laboris) GENERAL 1. Is it common for employees to be offered participation in an employee share plan? divided into quotas rather than shares. Any type of corporation can operate an. Popularity. s are the most widely used form of employee share plan. Portuguese companies do not often use employee share Therefore, employee share plans are only common with listed and multinational companies. These plans are usually limited to senior executives, although they are sometimes offered to other employees. 2. Is it lawful to offer participation in an employee share plan where the shares to be acquired are shares in a foreign parent company? There is no restriction on offering shares in a foreign parent company. 5. In relation to the grant of share options under the plan: Can options be granted on a discretionary basis or must they be offered to all employees on the same terms? Is there a maximum value of shares over which options can be granted, either on a per-company or per-employee basis? Must the options have an exercise price equivalent to market value at the date of grant? What are the tax and social security obligations arising from the grant of the option? SHARE OPTION PLANS 3. Please list each type of share option plan operated in your jurisdiction (if more than one). One share option plan is operated in Portugal. This is the employee share option (ESO) plan. 4. In relation to the share option plan: Discretionary/non-discretionary. Options can be granted on a discretionary basis, although employers must comply with equal treatment principles under anti-discrimination legislation, such as anti-gender discrimination. shares that can be placed or awarded. Market value. ESO options can be granted at above or below market value. Main characteristics. s are not specifically regulated, so their features are usually at the employer s sole discretion. They do not provide any particular tax advantages for employees. Types of company. Only corporations ( sociedades anónimas ) can offer s, because they have their statutory capital divided into shares. The other main type of entity is a private limited company ( sociedades por quotas ) that has its statutory capital Tax/social security. No tax charges or social security contributions arise on grant. 6. In relation to the vesting of share options: Can the company specify that the options are only exercisable if certain performance or time-based vesting conditions are Exercisable only on conditions being met. The employer can CROSS-BORDER HANDBOOKS 95 This chapter was first published in the Cross-border Labour and Employee Benefits Handbook 2007/08 Volume 2: Employee Share Plans and is reproduced with the permission

2 Portugal Labour and Employee Benefits 2007/08 Volume 2: Employee Share Plans specify performance or time-based vesting conditions for exercise of the option. Tax/social security. Generally, tax liability is triggered when vesting conditions are met. However, tax does not arise on vesting if one of the following conditions is met: The employees do not acquire or register any shares on their own behalf. The employees are not allowed to enter into an agreement over the acquired shares (such as a promissory sale agreement or other agreement that will result in shares being transferred). The employees are not allowed to impose any burden (such as pledges to guarantee payment obligations) over the acquired shares. The employees are subject to a holding period (for example, they are excluded from the plan if their employment contract is terminated). If a tax charge does arise on vesting, personal income tax is charged on employment income, that is, the difference between the shares value on vesting and their purchase price (if any). For personal income tax rates, see Question 7, : Tax/social security on exercise. If the employee holds the shares for a minimum period of 12 months, no tax is charged on capital gains or losses when they are sold, unless the employer s majority of assets is composed, either directly or indirectly, of real estate located in Portugal, or of other property rights over real estate located in Portugal. If the employee is non-resident, the capital gain is taxed at a flat rate of 25%. When the employee sells the option, the difference between the shares market value on sale and purchase price (if any) is treated as employment income and charged to personal income tax. SHARE ACQUISITION OR PURCHASE PLANS 8. Please list each type of share acquisition or purchase plan operated in your jurisdiction (if more than one). Two types of share purchase plan are operated in Portugal. These are: s. s. 9. In relation to the share acquisition or purchase plan: 7. Do any tax or social security implications arise when the: Option is exercised? Shares are sold? Tax/social security on exercise. If no tax was charged on vesting ( see Question 6, : Tax/social security ), tax arises when an option is exercised. Personal income tax is charged on employment income, that is, the difference between the shares market value on exercise and purchase price (if any). Main characteristics. Employees receive shares, either for a purchase price or for free. Types of company. Only corporations can offer share incentive Personal income tax is charged at progressive rates for tax residents, which vary between 10.5% and 42%. Non-residents are taxed at a flat rate of 25%. The employee pays personal income tax, because this is a type of income that is expressly excluded from the list of items on which the employer withholds tax. Tax/social security on sale. When the employee sells the shares, the positive difference between the shares sale price and market value on exercise is taxed as a capital gain. With some exceptions that arise from provisional tax rules of 2001 and 2002, the employee can choose to have this capital gain taxed independently at a personal income tax rate of 10%. If the employee does not make that choice, the capital gain will be combined with other types of income, and therefore taxed at progressive income tax rates ( see above, : Tax/social security ). Popularity. s are not very popular in Portugal. Main characteristics. All or part of an employee s bonus is deferred to buy shares after a certain period. This means that employers can reward employees without having to pay them a cash bonus. Employees may be entitled to further shares if performance conditions are met. Types of company. Only corporations can offer gross bonus deferral Popularity. These plans are quite popular in Portugal, with large and multinational companies. 96 CROSS-BORDER HANDBOOKS This chapter was first published in the Cross-border Labour and Employee Benefits Handbook 2007/08 Volume 2: Employee Share Plans and is reproduced with the permission

3 Portugal 10. In relation to the initial acquisition or purchase of shares: Can entitlement to acquire shares be awarded on a discretionary basis or must it be offered to all employees on the same terms? Is there a maximum value of shares that can be awarded under the plan, either on a per-company or per-employee basis? Must employees pay for the shares and, if so, are there any rules governing the price? the shares are awarded? certain conditions ( see Question 6, : Tax/social security ). Restrictions removed only on conditions being met. Gross bonus deferral plans can have performance or time-based vesting conditions attached to them. certain conditions ( see Question 6, : Tax/social security ). 12. What are the tax and social security implications when the shares are sold? Discretionary/non-discretionary. s can be offered on a discretionary basis. shares that can be awarded. Payment of shares and price. Employees do not have to pay for the shares and there are no rules governing price. Tax/social security. No tax or social security liability arises on award. Personal income tax is charged on employment income, that is, the difference between the shares market value on sale and purchase price (if any). For personal income tax rates, see Question 7, : Tax/social security on exercise. The tax treatment is the same as for a share incentive plan ( see above, ). PHANTOM OR CASH-SETTLED SHARE PLANS Discretionary/non-discretionary. s can be offered on a discretionary basis. shares that can be awarded. Payment of shares and price. Employees do not have to pay for the shares and there are no rules governing price. Tax/social security. No tax or social security liability arises on award. 13. Please list each type of phantom or cash-settled share plan operated in your jurisdiction (if more than one). No specific types of phantom share plan are operated in Portugal. 14. In relation to the phantom or cash-settled share plan: 11. In relation to the vesting of share acquisition or purchase awards: Can the company award the shares subject to restrictions that are only removed when performance or time-based vesting conditions are Restrictions removed only on conditions being met. Share incentive plans can have performance or time-based vesting conditions attached to them. Main characteristics. s are structured to offer employees the same economic reward that they would have received if they had been granted a market value share option and in due course exercised it and sold the resultant shares. Phantom share plans are not specifically regulated so their particular features are at the employer s discretion. Types of company. Only corporations can offer phantom share Popularity. s are less popular than ESO CROSS-BORDER HANDBOOKS 97 This chapter was first published in the Cross-border Labour and Employee Benefits Handbook 2007/08 Volume 2: Employee Share Plans and is reproduced with the permission

4 Portugal Labour and Employee Benefits 2007/08 Volume 2: Employee Share Plans 15. In relation to the grant of phantom or cash-settled awards: Can the awards be granted on a discretionary basis or must they be offered to all employees on the same terms? Is there a maximum award value that can be granted under the plan, either on a per-company or per-employee basis? the award is made? Discretionary/non-discretionary. Phantom awards can be granted on a discretionary basis, although employers must comply with equal treatment principles under gender discrimination legislation. Maximum value of awards. There is no limit to the value of awards that can be granted under a phantom share plan. GUIDELINES 18. Are there any institutional, shareholder, market or other nonstatutory guidelines that apply to any of the above plans, and which types of companies are subject to them? What are their principal terms? Private companies that operate any employee share plan must comply with their own internal rules, for example, their articles of association. The stock market s supervising entity, the Securities Market Commission ( Comissão do Mercado de Valores Mobiliários ) (CMVM), requires listed companies to send it a prospectus ( see Question 23 ) and may impose additional requirements that it deems necessary to protect investors. These are analysed on a case-by-case basis. EMPLOYEE REPRESENTATIVES Tax/social security. No tax or social security contributions arise when the award is made. 16. In relation to the vesting of phantom or cash-settled awards: Can the awards be made to vest only where performance or time-based vesting conditions are Award vested only on conditions being met. Phantom awards can be structured to vest only when performance or time-based conditions are met. certain conditions ( see Question 6, : Tax/social security ). 17. What are the tax and social security implications when the award is paid out? 19. Is consultation or agreement with, or notification to, employee representative bodies required before an employee share plan can be launched? It is not mandatory to consult, agree with or notify any employee representative bodies before launching an employee share plan. However, employers can enter into information and consultation agreements on a voluntary basis, which is particularly common if the employer has a European Works Council (EWC). An EWC is a representative body of employees who work for companies or groups that have a European dimension. The EWC has particular rights to information and consultation on certain matters involving employees. EXCHANGE CONTROL 20. Do exchange control regulations prevent employees sending money from your jurisdiction to another to purchase shares under an employee share plan? There are no exchange control restrictions in Portugal. 21. Do exchange control regulations permit employees to repatriate proceeds derived from selling shares in another jurisdiction? When the phantom award is paid out, tax is charged on the difference between the underlying shares market value on award and the phantom share award s purchase price (if any). For personal income tax rates, see Question 7, : Tax/social security on exercise. See Question CROSS-BORDER HANDBOOKS This chapter was first published in the Cross-border Labour and Employee Benefits Handbook 2007/08 Volume 2: Employee Share Plans and is reproduced with the permission

5 Portugal INTERNATIONALLY MOBILE EMPLOYEES 22. What is the tax position when: An employee who is ordinarily resident in your jurisdiction at the time of grant of a share plan leaves your jurisdiction before exercising the option? An employee who is not ordinarily resident in your jurisdiction is sent to your jurisdiction holding share awards already granted in another jurisdiction? Resident employee An employee who was resident in Portugal when granted a share plan pays personal income tax on the exercise of the option even if no longer resident in Portugal on exercise. A double taxation treaty (DTT) generally removes any overlap in taxation between Portugal and the other jurisdiction. If no DTT is in place, Portugal gives credit on a unilateral basis for any foreign tax paid. This usually corresponds to the amount paid abroad, if less than the amount paid in Portugal. Special rules apply if the employee has gone to a jurisdiction that has a DTT with Portugal and the DTT has an employment income clause similar to Article 15 of the model DTT established by the OECD Model Tax Convention on Income and on Capital. Non-resident employee Complementary rules issued by the CMVM. These implement Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading and require an employer to issue a prospectus of an offer of securities if both: The offer qualifies as a public offer. An offer is public if it meets the requirements laid out in Article 109 of the Securities Code, for example, it is addressed to at least 100 persons who have an address in Portugal. The employer has securities admitted to trading in an EU regulated market. There are a number of exemptions to the prospectus requirement, for example, if the offer is only addressed to employees and directors. In these cases, the employer can issue a specific document that includes information on the: Number and nature of the securities. Grounds and characteristics of the offer. The employer must submit the prospectus and the document to CMVM before publishing it. Other regulatory consents or filings No other regulatory consents or filings are necessary. DEVELOPMENTS AND REFORM An employee who becomes a Portuguese tax resident is taxed in Portugal on worldwide income, and therefore pays tax on the exercise of the option in Portugal. A DTT generally removes any overlap in taxation between Portugal and the other jurisdiction. A non-resident employee who exercises an option in Portugal pays no tax on it in Portugal if it relates to a foreign company. PROSPECTUS REQUIREMENTS AND OTHER CONSENTS OR FILINGS 23. For the offer of and participation in an employee share plan: 24. Please briefly summarise: The main trends and developments relating to employee share plans over the last year. Any official proposals for reform of the law on employee share Trends and developments There have not been any recent developments or trends relating to employee share Reform proposals What prospectus requirements (if any) must be completed and by when? What exemptions (if any) are available? What other regulatory consents or filings (if any) must be completed and by when? What exemptions (if any) are available? There are no official proposals to reform the law on employee share Prospectus requirements Employee share plans are governed by: The Securities Code. CROSS-BORDER HANDBOOKS 99 This chapter was first published in the Cross-border Labour and Employee Benefits Handbook 2007/08 Volume 2: Employee Share Plans and is reproduced with the permission