The new French Finance Bill and Social Security Financing Bill (the French Tax Bills) entered into force as from 1 January 2011 and have raised tax rates generally, and in particular, those applicable to share based income in France.
Social Security Contributions - qualifying share awards and options
Employees who receive French tax qualifying share awards and options are subject to employee’s social security contributions at a rate of 2.5% (the liability is calculated when options are exercised or awards vest), which is payable on sale of the underlying shares. The French Tax Bills have increased the rate of employee social security contributions from 2.5% to 8% on grants of qualifying share options or awards valued at €17,616 or greater.
In addition, employer’s social security contributions on grants of qualifying share options or awards valued at €17,616 or greater has increased from a rate of 10% to 14%.
Income tax – qualifying share options
Previously, provided an option holder retained the underlying shares for at least 4 years from the date of grant of his qualifying share options, any gains made over €152,500 on the exercise of such options was subject to income tax at an overall tax rate of 52.1% (basic tax rate of 40% plus social surtaxes of 12.1%). This is increased to an overall employee tax rate of 53.3% due to an increase in the income tax rate to 41% and the social surtaxes rate to 12.3%
Income tax – qualifying free shares
Previously, the acquisition gain realised upon vesting of free shares (i.e., at the time of the delivery of the shares) was taxed at an overall 42.1% tax rate (basic tax rate of 30% plus 12.1% social surtaxes) in the hands of the employee upon the sale of the underlying shares. This is increased to an overall employee tax rate of 42.3% due to an increase in the social surtaxes rate to 12.3%.
Capital gains tax
Under the French Tax Bills, the exemption from capital gains tax for any gains arising from option exercises when sale proceeds for the calendar year remain under a certain threshold (€25,830 for 2010) has been abolished.
In addition, the current 18% tax rate on capital gains has increased to 19% as from 1 January 2011 (with the consequence that the overall tax rate applicable to capital gains, including the new increased 12.3% social surtaxes rate, has increased from 30.1% to 31.3%).
From 1 April 2010 India’s fringe benefit tax, chargeable at a 30% flat rate on shares allotted or transferred pursuant to employee share options or awards, has been abolished.
From 1 April 2010, the benefit receivable by an Indian employee on exercise of an option or vesting of an award will be taxed as salary. The benefit will be calculated as the difference between the aggregate fair market value of the shares allotted as at the date of the vesting or exercise less (in the case of options) any amount the participant has paid to exercise the options.
The fair market value is to be determined by an Indian merchant banker registered with the Securities Board of India. Companies operating international share schemes in India should be aware that a qualified merchant banker needs to be engaged in order to assess the fair market value of the company’s shares at the relevant date for the purposes of calculating income tax liabilities. In practice, we understand that at least for listed companies, it should be straightforward for a bank to assess the value by reference to the listed share price.
With effect from 1 January 2011, the Irish income and health levy has been abolished and has been replaced with a Universal Social Charge (USC). USC will arise on the taxable amount of a share award on vesting and is applied at progressive rates from 2% to 7%, depending on the employee's annual income level.
Tax due on gains arising from shares vested prior to 1 January 2011 is payable by the participant under the self-assessment system and the local employing entity does not have any withholding obligation. Income tax and USC arising after 1 January 2011 must be deducted from salary by the employer.
In December 2010 the Irish Government introduced a new pay related social insurance (PRSI) at a rate of 4% for employees chargeable on share based remuneration awarded after 1 January 2011. However, as part of its Jobs Initiative, the new Irish Government announced on 10 May 2011 that it will abolish employer's PRSI on share based remuneration as and from 1 January 2011. This development will be welcomed by employers and means that there is a real advantage to using share based remuneration, as against cash incentives.
The Israel Tax Authority (ITA) has recently provided helpful guidance on a number of issues regarding the taxation of qualifying employee share options or awards (i.e. grants subject to the Israeli capital gains tax regime not the income tax regime).
Date of grant
The date of grant of a qualifying option or award triggers the start of the mandatory two-year holding period. However, the Israeli Income Tax Ordinance (ITO) does not define “date of grant” and this has been problematic for companies trying to evidence the two year holding period. The ITA has now clarified that the date of grant means the date a grant of options or awards has internally been approved by a company, even if such grants require approval from Israel authorities (i.e. the Tel Aviv Stock Exchange).
Grants to employees of non-Israeli companies
Previously qualifying option or award grants could only be made to employees of an Israeli company. However, the ITA has confirmed that qualifying grants can be made to employees of a foreign registered company for as long as the foreign company files tax returns in Israel.
Qualifying options or awards must be deposited with a qualifying Israeli trustee in order for the options or awards to retain favourable tax treatment. ITA has confirmed that multinational companies can use a non-Israeli broker to hold their options or awards as a “supervisor trustee” so long as the trustee (i) is a trustee entity rather than a company; and (ii) receives the proceeds of sale for all Israeli employees and puts in place an arrangement to ensure that the transfer of shares out of the trustee arrangement is subject to Israeli tax withholding.