Australia Announces Changes to Taxation of Employee Share Plans
On October 14, 2014, the Australian Government announced changes to the taxation of employee share plans. The legislation will be drafted in consultation with industry and currently is intended to come into effect July 1, 2015.
The most important change contemplated under the proposed legislation for companies granting equity awards in Australia is that options will once again generally be taxable at exercise (instead of at vesting). Additionally, the proposed law should provide start-up companies with favorable tax treatment for options and other share awards. It is uncertain how the new legislation will impact outstanding awards, but it is almost certain that the employer reporting obligations introduced in 2009 will continue to apply.
For more information, please see our October 2014 client alert or contact your GES attorney.
Australia Securities and Investment Commission (ASIC) Publishes New Class Order Exemptions
As previously reported in our June 2014 Client & Friends Newsletter, ASIC was due to publish a new Class Order exemption from the prospectus disclosure requirement applicable to employee share plans. Finally, on October 31, 2014, the highly anticipated exemption was gazetted in the form of Class Order 14/1000 (for public companies) and Class Order 14/1001 (for private companies).
Please see our November 2014 client alert for more information or contact your GES attorney.
Chilean Tax Reform
On September 29, 2014, the Chilean government published new tax legislation, the 2014 Tax Reform Act, that introduces significant changes to the tax laws for both companies and individuals.
Among other things, the new tax legislation will clarify the tax treatment of equity awards. Until the new legislature was enacted, the only guidance on the tax treatment of stock options and other equity awards in Chile was in the form of tax rulings.
The new tax legislation will be phased in over the next three years, and the changes to the taxation of equity awards will take effect January 1, 2017.
The new law likely will change the timing of taxation for stock options and ESPP. For stock options, it appears that taxation may be at the time of vesting (although it is unclear whether this change will apply to transferable options only, or also to non-transferable options). For ESPP, taxation will arise at the time of purchase. Currently, it is our view that stock options and ESPP are taxed only when the shares are sold, provided the local employer does not reimburse the parent company for the cost of the awards. In addition, it is expected that the income realized upon vesting (options) and purchase (ESPP) will be treated as employment income (and not investment income).
These changes will bring stock options and ESPP more in line with the taxation of RSUs which are subject to tax at vesting (with the market value of the shares issued at vesting being considered employment income).
We are expecting the Chilean tax authorities to issue further guidance and interpretive rules in the next few months, which will help clarify the impact on the taxation of equity awards. We will be carefully monitoring new developments and will provide updates as additional information emerges.
Impact of EU Sanctions against Russia on EU Prospectus Filers
On July 31, 2014, the European Union (the "EU") adopted sanctions against Russia through Council Regulation 833/2014, as amended by Council Regulation 960/2014 (the "Regulation"), in response to Russia’s actions in the Ukraine.
The Regulation applies restrictions on access to the capital markets for certain financial institutions, restrictions on legal persons, entities or bodies established in Russia in the defense sector (excluding those mainly active in the space and nuclear energy industry); and restrictions on legal persons, entities or bodies established in Russia whose main activities relate to the sale or transportation of crude oil or petroleum products.
As a consequence of the adoption of the Regulation, the UK securities regulator, the Financial Conduct Authority, requires issuers requesting to passport a prospectus prepared under the EU Prospectus Directive into the UK to issue a statement that they do not violate the Regulation and in particular its restrictions on access to the capital markets.
If your company has to passport an EU prospectus into the UK, please contact your GES attorney for more information on the statement that needs to be provided.
Changes Proposed to French-Qualified RSU Regime
A new law (Loi Macron) has been introduced that would result in significant (and mostly positive) changes to the requirements and tax treatment of French-qualified RSUs.
The draft law will be discussed in the French Parliament starting at the end of January 2015 and we expect that the discussions will last several weeks.
As currently drafted, the law would introduce the following changes:
- Minimum vesting period reduced from two years to one year from the grant date;
- Holding period after vesting (currently minimum of two years for RSUs that vest within four years of grant date) is optional, but shares cannot be sold for a minimum period of two years from the grant date (effectively requiring a minimum one-year holding period for RSUs that vest on the first anniversary of the grant date);
- Employer social tax liability moved to vesting and due at a rate of 20% on the value of the shares issued at vesting (currently 30% on the value of the shares subject to the RSUs at grant - no reimbursement if RSUs forfeited prior to vesting); and
- Gain at vesting taxed as capital gain (currently taxed as salary income).
It remains to be seen if all of these proposals will be adopted in the final version of the law. However, if your company has started to grant non-qualified RSUs or is considering switching to non-qualified RSUs, you may want to reconsider this decision in light of the proposed changes, which may make the grant of qualified RSUs once again favorable for most companies.
Possible Change in Timing for Calculation of Taxable Amounts for Equity Awards
To calculate the taxable amount realized from equity awards in Germany, the general rule under administrative guidelines published by the German tax authorities has been to use the fair market value (“FMV”) of the underlying shares on the date that beneficial ownership of the shares is actually transferred to the employee. In practice, for administrative reasons, many multinational companies calculate the taxable amount on the date of exercise/vesting/purchase, as applicable, which may occur earlier than the actual transfer of beneficial ownership.
Lending some support to this position, a recent German federal tax court case found that the relevant date for calculating the taxable amount realized on a stock option exercise was the date on which the issuer and the optionee had a binding contractual agreement to buy and sell the shares (i.e., the exercise date). The German tax authorities have not yet reacted to the tax court’s decision, so it is unclear whether this case will trigger a broader policy change.
Please contact your GES attorney to determine the impact, if any, of the case on the tax treatment of your company's equity awards granted in Germany.
Restricted Stock Units and Other Nil Consideration Awards May Be Subject To Securities Law Regime
Restricted stock units and other types of equity awards for which no payment is required to receive the award or the underlying shares generally have not been subject to New Zealand securities laws, including the new regime under the Financial Markets Conduct Act 2013 ("FMCA"). However, a recent case in New Zealand presents some risk that RSUs (and other nil consideration awards) could be caught under the New Zealand securities law regime on the basis that continued employment as a condition for vesting could amount to consideration.
The case did not contain a ruling on this point, but the judge nonetheless considered the possibility that RSUs could be subject to New Zealand securities laws.
In the absence of a binding ruling or guidance from the New Zealand securities authorities, companies may continue to take the position that RSUs and other nil consideration awards are not subject to securities law in New Zealand. Alternatively, companies could also decide to rely on one of the new exemptions under the FMCA for such awards, as previously described in ourJune 2014 and September 2014 Clients and Friends newsletters.
As there will likely be additional guidance and clarifications related to the transitional rules under the FMCA and phase out of the existing exemptions, companies making offerings in New Zealand should contact their GES attorney regarding the best approach for their awards.
Russian Central Bank Clarifies Currency Regulations
As reported in our June 2013 Clients & Friends newsletter, amendments to Russian currency regulations brought uncertainty as to whether employees in Russia could receive payments related to equity awards into accounts located outside Russia. In particular, it was not certain if shares or proceeds resulting from the awards (e.g., sale proceeds, dividend payments) could be issued into a non-Russian brokerage account, or had to be paid into an account established in Russia.
In response to a company’s request for clarification on the above issue, in early October 2014, the Russian Central Bank issued a letter stating that, under the federal currency regulations, Russian employees would be permitted to receive and hold shares in a foreign brokerage account. However, they would not be permitted to hold cash in foreign brokerage accounts. Our Moscow office interprets this last statement to mean that once the proceeds from the sale of shares or receipt of dividends are paid into the foreign brokerage account, it is the employee’s obligation to repatriate such proceeds to Russia.
In other words, our Moscow office believes it is permissible for companies (or the broker) to issue cash proceeds into a foreign brokerage account (whether as a result of a cash-settled award or upon sale of the shares issued under a stock-settled award), but it is not permissible for the employees to hold the proceeds in the account. Therefore, we recommend that companies notify employees of the requirement to immediately repatriate any proceeds to Russia.
It should be noted that the letter was in response to a company’s particular request for clarification and cannot be relied on by other companies. Notwithstanding, it is an indication of the Central Bank’s current position.
South Korea Relaxes Exchange Controls and Permits Intercompany Offsets in Connection with Equity Awards Granted by Foreign Issuers
Under the Foreign Exchange Transaction Regulations (the “FETR”), South Korean companies were prohibited from remitting funds collected under an employee share plan (e.g., payroll deductions under an ESPP) to the parent company by way of an intercompany offset. Instead, the funds had to be remitted by wire transfer and the remittance had to be "confirmed" by an authorized bank in South Korea. In some instances, the bank required a power of attorney from each participating employee.
The South Korean exchange controls have since been relaxed, and it is now permissible for companies to transfer funds to the parent company for the purchase of shares under an employee share plan by way of an intercompany offset. However, the local company will need to submit a prescribed form to an authorized foreign exchange bank at the time of offset to report the remittance.
Please contact your GES attorney for a copy of the form.
Spanish Tax Reform Bill Changes Income Tax Exemptions
The Spanish government presented a number of tax reform bills that will affect the taxation of employee equity awards.
Stock options currently qualify for a limited 40% reduction of the taxable income realized at exercise up to certain limits and subject to certain conditions. Effective January 1, 2015, the tax reform bill will lower the reduction to 30%, and in addition require that the employee not obtain any income that benefitted from the reduction during the previous five years.
Although it was initially proposed that the new tax bills would eliminate the €12,000 exemption that applies to equity award income realized in a calendar year by employees in Spain under certain circumstances, the tax reform bills did not, in fact, eliminate the exemption. It appears the exemption will remain available, provided the awards are offered to all employees globally. We expect that the Ministry of Finance will adopt regulations during the first quarter of 2015 which will include additional guidance on the conditions of the €12,000 exemption.
For any equity award income realized in 2014, the exemption remains available subject to its current requirements. For any equity award income realized in 2015, please check with your GES attorney to determine whether (or under which conditions) the exemption can be applied.