In this section, we highlight some recent legislative changes which may affect your equity plans around the world.
From 1 July 2009, an entity which provides employee share schemes in Australia (an “ESS Provider”) is subject to reporting obligations to both the individual employee and the Australian Tax Office (ATO). An ESS Provider is required to provide an ‘ESS statement’ to each employee no later than 14 July each year if an ESS taxing event occurred for that employee in that financial year. In addition, such an ESS Provider is required to lodge an ‘ESS annual report’ in the approved form to the Commissioner of Taxation no later than 14 August for each year in which an ESS taxing event occurs for at least one employee during that year.
The Compliance program for 2010-11 was released by the Australian Taxation Office (ATO) on 8 July 2010. Following the successful review of tax affairs of executives and directors, the ATO proposes a new agenda which focuses specifically on internationally mobile employees. This will affect not only Australian nationals, but also Australian resident employees who receive overseas employee shares and bonuses. This increased ATO scrutiny requires employees to get comfortable with the new rules, whilst employers are expected to ensure that appropriate systems are put in place to facilitate employee compliance.
New Ordinance number 333 was enacted by the Brazilian Social Ministry on 30 June 2010, resulting in a 7.72% adjustment to the social security tax table, retroactive to January 2010. Employee social security contributions are levied from 8%-11% dependent on their income threshold. However, employer contributions are not affected.
China has introduced its first operational focused tax regulations with the publication of new Circular 461. This Circular extends and develops previous Chinese legislation by providing further guidance and clarification to operational procedures. The registration requirements with local tax bureaus (relating to company share options and stock appreciation right plans) apply to both Chinese domestic companies and listed overseas companies.
There has been an amendment to the Estonian Income Tax Act concerning stock options, restricted stock units and employee share purchase plans granted by a non-resident company in Estonia, which are to be deemed “fringe benefits” and therefore taxable to the employer (income and social security taxes). This amendment is likely to come into force on 1 January 2011.
Internationally mobile employees who spend their time both in and outside France during the vesting period of their options (and likely restricted stock units), will be subject to French income tax (on a pro-rata basis) based on the portion of the vesting period which they spent in France, following a French Supreme Court ruling. The social security treatment remains unchanged however the issue employer reporting and withholding obligations is unclear and it is suggested that affected employees should seek legal advice on this issue.
The new capital tax regime is set to come into effect as of 1 January 2011. The new rates will mean that the sale of shares which have been held for 3-12 months will be taxed at a 10% rate, whilst shares held for less than 3 months will be taxed at 20%. No capital gains tax will be due on the sale of shares held for over 12 months. The previous capital gains tax regime will continue to apply to shares acquired prior to 1 January 2011, where all shares sold would be subject to a flat transaction tax rate of 0.15%.
A new method of income calculation has been introduced following a new Greek tax law effective as of 27 April 2010, applying to all outstanding options as of this date. Income from options is now calculated as the difference between market value of the shares at exercise and the exercise price. It is advised that issuers apply for a tax ruling from the Ministry of Economy and Finance to confirm the tax treatment of equity awards other than options. Furthermore, a number of key issues have been left unaddressed including employer tax withholding and reporting obligations as well as social security contributions. Once again, it is advised that clarification is obtained from the Ministry of Economy and Finance, and/or the Greek social insurance authorities.
A circular was issued by the Israeli Tax Authorities addressing the calculation of the ordinary income gain on equity awards including stock options and RSUs granted under a trustee plan or capital gains track of section 102 of the Israeli Income Tax Ordinance. Companies with any shares traded outside Israel will be affected if they established a trustee plan in Israel for granting equity awards to their employees and if they elected for the capital gains track. Companies with established trustee plans or capital gains track programs for offering stock options or RSUs in Israel were able to make an election, by 28 July 2010, to potentially reduce the amount of tax that employees and the local employer in Israel will pay in respect of those options.
On 22 June 2010, the UK Chancellor announced in his Emergency Budget, that Capital Gains Tax would be increased to 28% for higher rate taxpayers, coming into effect as of 23 June 2010. The higher rates for UK income tax introduced in April 2010, together with the expected increases in NICs from April 2011, suggest that it remains potentially more beneficial for equity based compensation plans to deliver future gains which fall to be taxed as capital rather than income.