In the Tapestry Global Update webinar on 20 January, we gave an overview of tax and regulatory changes over the last few months of 2015 and the start of 2016. In this newsletter we will look at some of the topics covered in the webinar in more detail. If you missed the webinar and would like to listen to the discussion, please contact Gabby who will send you a link.
The topics covered in this newsletter are:
- Global tax changes in 2016 – Austria, Belgium, Brazil, Canada, Finland and Latvia
- Australia – on-line filing for ESS reports
- Denmark – Restrictive Covenants
- France – PAYE for income tax and electronic filing
- Japan - New restrictions on exporting personal data
- New Zealand - Revenue alert on employee share purchase agreements
- Sweden – Recent cases on the taxation of share plans for mobile employees
- Thailand – No reporting for options exercised on a cashless basis
Tapestry Team News:
If you would like more detail on any of the topics discussed in this newsletter, please let us know.
Global tax changes in 2016
For many countries, revised tax rates start on New Year’s Day. Often the rates are only announced in the last days of December and in some cases the final figures are not available until well into January. Our international advisors provide us with new rates to update our database as quickly as they become available. In this update we take a brief look at some of the changes:
- Austria – individual tax rates increase for earnings over EUR1 million - individual income tax rates will generally be reduced for all individuals on incomes less than EUR 90,000 per year. The income tax rates for individuals earning more than EUR1 million per annum will be increased from 50% to 55%. This tax rate increase is planned to apply from 2016 to 2020.
- Belgium – under the 2016 ‘tax shift’ - employer social security contributions have been reduced from the previous rate of 33% to 25%. The personal income tax rates have been restructured to benefit low and medium wages with a new top tax rate of 55% introduced for income over EUR1 million. Belgium has also introduced a capital gains tax of 33% for listed shares held for less than 6 months. Gains on shares acquired by employees in the context of an employee incentive scheme, which may have been subject to income tax, are excluded from the new capital gains tax.
- Brazil - capital gains rates increase for 2016 – from 1 January 2016, progressive rates apply to capital gains with a top rate of 30% on gains over BRL20,000,000.
- Canada – Federal income tax rate increased and limit on stock option deduction – the maximum federal tax rate has increased from 29% to 33%. The government has also proposed an amendment to the 50% stock option exclusion (which allows an employee to claim a 50% deduction (25% in Quebec) of the taxable benefit on the exercise of a stock option in certain circumstances). The details of this amendment, which are expected to apply to upper incomes, have not yet been released.
- Finland - increases in effective income tax rate and in capital gains tax rate – under the 2016 budget the maximum income tax rate of 31.35%(municipal and other taxes increase the maximum rates to 54.25%), now applies to income from EUR72,300 (previously the top rate applied to income from EUR90,000). Capital gains tax also increased from 33% to 34%.
- Latvia – introduces solidarity tax - from 1 January 2016, income over EUR48,600 is subject to a solidarity tax which is set at the current social security rates. The personal income tax rate was expected to reduce from 23% to 22% in 2016 but has remained at the 2015 rate.
Australia - Changes to filing of the Employee Share Scheme (ESS) annual report
For tax years beginning from 1 July 2015, the Australian Tax Office (ATO) will no longer accept ESS annual reports in paper based format or using the ATO’s spreadsheet for bulk reporting (other than for amendments to earlier filings and reports).
As part of the ATO’s modernisation of the tax reporting system generally, all further ESS report filing must be through the online ESS webpage portal (for employers reporting 20 or fewer individuals) or by using of the ATO’s official software (the new version is number 2.0.0) for online filing.
In addition to the new filing system, employers will be required to provide additional information, in particular in relation to mobile employees. Employers may also be required to provide a more detailed ESS statement to employees although the revised format of the ESS statement has not yet been released.
As we have already seen in the UK and Ireland, tax authorities are increasingly moving to online filing. Although this may streamline processes for employers once the system has been tested, there will invariably be teething problems and we recommend taking early steps to ensure that the relevant in-house team (or external advisors) are aware of the new rules and that the information which is required can easily be accessed and processed in the new format.
Denmark and Sweden - restrictive covenants
Denmark recently passed a new act which regulates the use of restrictive covenants (non-compete and non-solicitation clauses) in employment contracts. The new rules apply to agreements entered into from 1 January 2016.
What are restrictive covenants?
Restrictive covenants in employment contracts may be in the form of a ‘non-compete’ clause which aims to prohibit an employee from competing against his or her employer, for example by moving to a competitor, or a ‘non-solicitation’ clause which seeks to prevent the employee from entering into a business relationship with former clients or work colleagues. A non-solicitation clause could also be agreed between employers who agree not to poach each other’s employees.
Key features of the new Danish rules
Denmark already had in place rules regulating restrictive covenants but the new act has made several important changes. Non-solicitation of employee clauses are no longer permitted, although existing clauses can be enforced until January 2021. The following points apply to non-compete and non-solicitation clauses.
- The previous rules only covered managerial staff, the new rules apply equally to all employees.
- Only employees in positions of particular trust can be subject to a non-compete clause.
- The clause can only be invoked if the employee has worked for the employer for at least six months (the previous period was three months).
- The term of the clause is limited to 12 months from the end of employment (six months where there is a combined non-compete and non-solicitation clause).
- The employee must be compensated during the term of the restrictive covenant, the amount depends on the term and nature of the clause but can be up to 60% of the employee’s salary.
- A non-solicitation of customers clause is limited to customers with whom the employee had direct contact during the previous 12 months.
Danish law also provides that a non-compete clause is not enforceable where the employment has been terminated by the employer without good reason or where the employee has resigned because of the behaviour of the employer (i.e. constructive dismissal).
Sweden’s rules on non-compete clauses are governed by the Contracts Act which states that non-compete commitments which are found to be too extensive, may be deemed unreasonable and unenforceable. A new collective bargaining agreement regarding non-compete clauses in employment agreements was entered into in July 2015, the agreement includes provisions on reasonableness, duration, scope and compensation. The new agreement applies to employment contracts entered into on or after 1 December 2015.
Whilst employers are keen to minimise the number of country specific amendments to their plan documents, as the Danish and Swedish examples demonstrate, in the context of a global incentive plan, there are likely to be jurisdictions were certain aspects of a plan might not be enforceable or might not work as the employer expected. There might also be a cost to enforcement: under the Danish rules, the employee is entitled to compensation if a restrictive covenant provision is enforced. We often work with our network of international counsel to perform global due diligence exercises on specific provisions in incentive plans, in particular where a new clause is to be included in an existing plan structure. We would be very happy to discuss any aspect of your plan documents with you to consider whether such a review would be helpful.
France – Introduction of PAYE income tax and electronic filing of tax returns
Currently France does not have a tax withholding system for employment income. Income tax is assessed on the basis of individual tax returns and paid by employees directly on an annual basis. In the 2015 budget, the French government announced that a withholding tax system (PAYE or pay-as-you-earn) will come into effect on 1 January 2018. Details of the new system have not yet been released, in particular how income for the 2017 year will be taxed and guidance is expected to be announced during 2017. It seems likely that the PAYE tax will be implemented gradually and that the tax will be collected and processed by employers through payroll, as is currently the case with social security contributions.
Individuals will still be required to file annual tax returns. However, France is to bring in a system of compulsory electronic filing of the annual tax return and the payment of income tax. The system will be phased in over a four-year period with different income bands being included each year so that by 2019 the electronic filing and payment obligation will apply to all taxpayers.
The introduction of a PAYE system will bring France into line with most other developed countries. The actual process has yet to be finally finalized but employers should investigate how the new system could be integrated into their existing payroll system.
Japan – Data protection
Amendments to the Act of the Protection of Personal Information (the Act) were passed by the Japanese parliament in September 2015. The amendments are due to come into force by September 2017.
Although there is a long lead in time, and further details are expected to be released, companies doing business in Japan should start now to ensure that their data privacy policies and personal data procedures will comply with the Act.
What data is affected by the new rules? The definition of “personal information” is extended to include biometric data and identifying numbers (such as passport and membership numbers). Sensitive information (which includes race, medical history and criminal history) is subject to stricter controls and cannot be collected without the subject’s prior consent. It is also subject to more severe restrictions on disclosure to third parties. However, anonomyised information (where identifying features have been removed) can generally be transferred without permission.
Who controls the application of the new rules? The government is due to establish a Personal Information Protection Committee (the Committee) in early 2016. The Committee will have the authority to investigate data collection and protection practices, including on-site inspections.
What are the reporting obligations? Disclosure of personal data to third parties, or changes to the proposed use of personal data, will require a report to the Committee. The report will become public information and is likely to be made available via the Internet. The provider and recipient of the data must keep records of the transfer.
What about exporting data outside Japan? A data controller may not transfer personal data to a separate legal entity outside Japan (including a group company), without first obtaining the data subject's consent or complying with the pre-amendment Act. In addition, either the foreign jurisdiction or the recipient entity must have a data protection regime that meets the standards approved by the Committee. The Act will also apply to businesses outside of Japan that collect personal data in the course of supplying goods and services to Japan.
What are the consequences of non-compliance? The theft or transfer of a personal information database for improper gain will constitute a crime. Penalties may be imposed on companies and current and former employees. The maximum penalty is one year in prison or a fine of JPY500,000.
What companies are covered by the Act? The exemption for companies who handled personal information for under 5,000 individuals is removed. The Act will now cover all companies that deal with personal data.
The Japanese amendment reflects a global trend towards stronger data protection laws and enforcement. We recommend that companies check that their data protection policies and practices comply on a country by country basis rather than relying on a ‘one size fits all’ global policy.
New Zealand – Revenue alert on employee share purchase agreements
In November, the New Zealand Inland Revenue issued a Revenue Alert (RA 15/01) which addresses concerns over the taxation of some structures in employee share purchase plans. The Revenue noted that some of the plans that it has reviewed ‘could be seen as altering the tax treatment Parliament intended’ and that in certain cases the structuring of the plans could amount to tax avoidance.
An Alert is a notice on an issue which is of concern to the Revenue and is not binding but it does provide guidance on areas of focus for the Revenue.
How are share plans taxed: tax is payable on the difference between the amount an employee pays to purchase the shares and the market value of the shares on acquisition. Currently employees are responsible for paying the tax on any share benefit in their tax return (although this is under review – see our August newsletter on proposals to reform the procedure for the payment of tax on share plan income).
What is the Revenue’s concern? the Alert focuses on employee share plans which contain arrangements which appear to transfer ownership of the shares in such a way as to reduce the participant’s tax obligation. Two examples are given:
- On purchase, the shares are held by a trust and the employee can subsequently reject the shares: in the first example, an employee purchases shares at market value which are then held on trust for three years. The purchase of the shares is funded by way of a limited recourse loan from the employer. The employee does not receive any voting, dividend, or similar rights from the shares while they are held on trust. After the three year period expires, the shares vest and the loan must be repaid. However, at this time the employee may choose to reject the vesting of the shares. If the shares are rejected then the loan will be satisfied by the transfer of the beneficial ownership in the shares from the trust back to the employer.
- Where the shares are reclassified after purchase: in the second example, shares are issued as one class which has a lower value than ordinary shares and are subsequently reclassified. The employee is able to purchase Class B shares in the company at market value. The shares vest immediately. However, because the Class B shares do not contain any dividend or voting rights (the only right the Class B shares have is to reclassify to ordinary shares at a future point), their market value is substantially lower than the market value of ordinary shares. After a specified period of time, the class B shares held by the employee are reclassified by the company into ordinary shares.
In both examples, the Revenue found that the effect is artificially to reduce the value of the shares on purchase and to remove the tax liability on any subsequent increase in the value of the shares. The Revenue considers that these arrangements are designed primarily to avoid tax.
What is the Revenue going to do? The Revenue has indicated that arrangements which it considers amount to tax avoidance arrangements will be subject to investigation and the amount of tax paid by employees subject to reassessment. Before launching an official investigation, the Revenue will initially approach employers who have implemented employee share schemes for more details about the schemes and, if there are concerns, potentially request details of employees (and former employees) who have participated.
Some local advisors have cautiously welcomed the Alert as it clarifies what seemed to be the practice of the tax authorities. However, the examples given in the Alert are felt only to illustrate extreme situations and there is little guidance on how this will affect plans which contain only some of the features objected to by the Revenue or where the structure has sound commercial reasons. A review of the tax rules relating to share plans is expected to be announced in 2016 which should provide more certainty for employers and employees.
Sweden – Taxation of share plans
The Swedish Administrative Court of Appeal has recently ruled on two issues affecting the taxation of share plans for mobile employees.
Timing of foreign tax credits
The court held that a foreign tax credit on share-based incentive income may be granted only for the income year in which the income is subject to tax in Sweden. The court held that any foreign tax credits claimed must be applied for in the same income tax year that the double-taxed income is subject to tax and that any reassessment of a tax return in Sweden must be filed within six years (under Swedish law, the statute of limitations for reassessing a tax return is six years from the end of the relevant accounting year). In this case, the income was taxed in Sweden in the year of vesting and taxed again in Finland at the time the option was exercised, more than six years later. The court held that tax credit had to be applied for in the year the tax was paid in Sweden and, as that was more than six years before the double taxation arose, the Swedish tax payment could not be reassessed.
As this case demonstrates, the treatment of tax credits, in particular timing issues, is complex. Employers may consider how they can assist mobile employees in navigating their way through the application of international tax law. The incentivising benefits of share plans can be lost through the unfortunate intervention of the tax man.
Changes to the taxation of share awards and stock options for EU citizens
In a separate case, the Court held that the Swedish system of taxation of share plans, in relation to share income earned by an employee who was an EU-citizen and who was working outside Sweden for part or all of the time that the income was earned, breaches the EU’s principles on freedom of movement.
Under Swedish tax law, share awards and stock options are taxable in full if the employee is resident in Sweden at the point of vesting for share awards and exercise for stock options, even if the income was partly or fully earned while the individual was non-resident in Sweden. As discussed above, in the event of double-taxation, the employee is able to claim a foreign tax credit.
In its ruling, the court held that Sweden has the right to tax the full benefit under Swedish law. However, it found that the rule, applied in these circumstances, had the effect of discriminating.
The ruling is a clarification but opens up the possibility for employees to apply for a reassessment of earlier tax returns (within the six year deadline). The ruling only addressed the position of EU citizens and does not cover non-EU employees (although the income does not have to have been earned in an EU member state). Employers should check that their payroll is able to take this into account so that tax and social security withholding in respect of share benefits for employees who are EU citizens can be apportioned according to the number of days spent in Sweden during the period from grant to vest/exercise.
Thailand – no reporting for options exercised on a cashless basis
In general, the Thai Securities and Exchange Commission (SEC) requires foreign issuing companies to make filings throughout the term of the plan. Under a change announced in 2015, there is no longer a requirement to report share options where the options are automatically exercised on a cashless basis, and the shares are immediately sold, so that the employee never receives the shares but is only entitled to the cash balance.
This is a welcome development which reduces the ongoing reporting obligation on companies. While the filings are not complicated or expensive they need to comply with prescribed documents and time-frames, depending on the plan features, so generally require the input of local counsel.