The Ministry of Finance and Economy and the Ministry of Labour have decided to adopt the Employee Stock Ownership Plan (ESOP) in order to provide employees with incentives for better performance, and enhance companies' management performance by expanding the opportunities for employees to purchase their companies' stocks.
The Korean ESOP differs from the US ESOP in that the latter is operated as a pension plan. The Korean ESOP is rather similar to the British All Employee Share Ownership Plan, which is a performance-based bonus payment programme.
Under the ESOP, a company sets up a trust fund composed of a trust account and the individual accounts of employees. Three types of contributions can be made to the trust fund. First, the company can contribute its treasury stocks. In this case, the trust fund keeps the treasury stocks in the trust account for three years, and deposits the stocks into employees' individual accounts between the beginning of the fourth year and the end of the seventh year in accordance with a distribution schedule. Second, the company may contribute cash, in which case the trust fund is required to purchase company shares with the cash by June of the following year. The shares purchased by the trust fund are kept in the trust account for three years and deposited into employees' individual accounts between the beginning of the fourth year and the end of the seventh year. Third, the employees may contribute cash. The trust fund purchases the company's stocks with the cash contributed by the employees by June of the following year, and deposits the stocks immediately into the relevant employees' individual accounts.
An employee can withdraw the shares from his or her individual account after one year of depositing them.
Various tax benefits accompany the ESOP. The company may deduct its contributions to the trust fund as business expenses. An employee may deduct the amount of his or her contribution to the trust fund up to W2.4 million a year. No taxes are imposed on dividends up to W50 million received by an employee with respect to the shares that are kept in his or her individual account for at least one year. This amount will decrease to W18 million from 2004. The income tax to be imposed on an employee for the deposit of stocks into his or her individual account is deferred until her or she withdraws the stocks from his or her individual account. If the employee withdraws the stocks after three years of the deposit, the employee's income arising from the acquisition of the company's stocks is subject to only 9% income tax. If the withdrawal is made within three years of the deposit, the income is subject to an ordinary income tax rate.
No gift taxes are imposed on the trust fund for contributions made by the company or employees. Also, the dividends or interests that the trust fund receives for the stocks kept in the trust account or the management of the funds are tax free.
The ESOP is expected to take effect in January 2002. Korean tax laws, including the Tax Benefit Limitation Act, will be amended in order to incorporate the ESOP's tax benefits.
For further information on this topic please contact Catherine Eun-gyoung Shin at Woo Yun Kang Jeong & Han by telephone (+82 2528 5200) or by fax (+82 2528 5200) or by email ([email protected]).