Argentina Lifts Some Exchange Control Requirements on Outward Remittance of Funds
On December 17, 2015, the Argentine Central Bank issued Communication “A” 5850 which lifts several exchange control restrictions and allows Argentinian residents (both individuals and local entities, other than entities in the financial sector) to purchase foreign currency and transfer funds abroad for investment purposes (including for investment in foreign securities), subject to certain restrictions and requirements. For more information, please see our client alert from January 2016.
Please contact your GES attorney to discuss the implications of Communication “A” 5850 on your company’s equity plans, in particular the possibility of offering an ESPP (again).
Changes to Australian Share Plan Reports
The end of the Australian tax year is approaching (i.e., June 30, 2016) and companies need to get ready to prepare the Employee Share Scheme ("ESS") statements (to be delivered to employees by July 14, 2016) and the ESS returns (to be filed with the Australian Tax Office ("ATO") byAugust 14, 2016).
The ATO has announced changes to the ESS reporting process and to the information that needs to be provided in the ESS returns.
For more information, please see our Sydney office's client alert from March 4, 2016.
Shares Acquired Under Employee Share Plan Excluded from New Capital Gains Tax
A so-called speculation tax has been adopted in Belgium effective December 30, 2015, pursuant to which individuals are required to pay tax at a rate of 33% on capital gains realized from listed shares which are sold within six months of acquisition.
However, capital gains resulting from "listed shares acquired within the framework of the professional activity and of which the acquisition may have given rise to taxable income" are excluded from the scope of the new tax. Therefore, the speculation tax should not apply to shares acquired under any employee share plan.
In addition, employer social security contributions are scheduled to decrease over the coming years from the current rate of approximately 35% to 25%.
No Changes to Canadian Stock Option Deduction
In the recent Canadian federal elections, the fiscal agenda of the Liberal Party (which ultimately won the election) included a proposal to cap the 50% tax deduction applicable to stock option income at approximately CAD 100,000/year. Under current law, the 50% deduction is available with no cap provided the shares underlying the options meet certain criteria.
Conservative groups and the Canadian high-tech industry have argued that putting a cap on the deduction will force many young professionals and entrepreneurs to seek employment opportunities outside of Canada. These arguments apparently did not go unnoticed: in the government’s 2016 budget, published on March 22, 2016, there were no changes to the tax deduction applicable to stock options.
Therefore, at least for the time being, the deduction continues to apply with no cap on the exempt amount.
Shanghai SAFE Declines Registrations for Companies with Main Operations Elsewhere in China
Shanghai SAFE has recently declined a number of applications by companies on the basis that the company's main operations in China were in a province other than Shanghai. The affected companies all had at least one subsidiary in Shanghai, but the majority of the employees to be covered by the application were not in Shanghai but in another province. Shanghai SAFE’s decision is not based on any changes in law or regulations, but appears to be a change of policy and aimed at decreasing the number of applications filed in Shanghai.
It is not clear when a company is considered to have its main operations in Shanghai (or, differently put, how many of the employees in China need to be based in Shanghai) in order to satisfy Shanghai SAFE’s new policy.
Given the time and cost involved in the review and comment process, companies with relatively small operations in Shanghai may want to explore the possibility of pursuing their SAFE application in another province, after taking into account the requirements in such province.
Proposed Favorable Tax Regime for Share-Based Awards
The Danish Finance Act 2016, expected to be implemented in the spring of 2016, provides for a favorable tax regime for share-based awards granted to employees on or after July 1, 2016. Currently, share-based awards granted to employees generally are taxed when the employee acquires the shares (e.g., upon exercise for options or upon vesting for RSUs). Typically, the employee is subject to tax at his or her marginal income tax rate on the award income. However, companies may deduct the cost of the share-based awards, provided they actually incur the cost (e.g., by way of a reimbursement payment to the foreign parent company).
Under the proposed new tax regime, taxation is postponed until the shares are sold. Furthermore, at the time of sale, the gain will be taxed as share income (rather than employment income) which will likely result in a lower tax rate. Although the proposed regime provides employees with tax advantages, the company will not be able to deduct the costs related to the awards.
It is worth noting that a similarly favorable tax regime applied until 2012 (so-called Section 7H regime) but was subject to a number of conditions and limitations, including the limitation that only awards with a value not exceeding 10% of the employee's annual salary could benefit from the favorable regime. It is expected that the conditions of the new favorable tax regime will be similar to the conditions of the pre-2012 tax regime.
EU Court of Justice Invalidates Safe Harbor Program
In October 2015, the European Court of Justice ruled that the transatlantic Safe Harbor framework, which allowed U.S. companies registered under Safe Harbor to transfer consumer and employee personal data from Europe to the U.S., was invalid. This meant that companies had to find other permissible grounds to transfer such data from Europe to the U.S.
The EU and the U.S. have been in the process of negotiating a new program to replace Safe Harbor and, in early February 2016, unveiled the EU-U.S. Privacy Shield program. The program still awaits final adoption in the EU and also will need to withstand future court challenges.
In the meantime, if personal data is transferred from the EU to the U.S. to administer EU employees' participation in an employee share plan, companies should consider requiring the employees' consent to such data transfer (if they have not done so already) or rely on the Model Contractual Clauses and require their EU entities to enter into data transfer agreements with the U.S. parent. For more information, please see our client alert and blog post on this topic.
Recent Court Decision Impacts "Cost-Plus" Arrangements
In late December 2015, the Tel Aviv District Court ruled on a tax issue related to expensing of equity-based compensation. The issue arose as a result of the change in the accounting standards in 2006 (FAS 123, IFRS 2, Israeli accounting Standard 24) which require expensing of equity-based instruments granted to employees of a subsidiary, at the subsidiary level.
The court ruled that the expense related to the grant of options to employees of an entity that had a "cost-plus" arrangement with its foreign parent company had to be included in the local entity's cost base. The "cost" to be included was equal to the accounting expense of the options, not the value of the shares issued to employees (minus the exercise price paid by employees).
In addition, the court ruled that the costs were not deductible under Section 102 of the Income Tax Ordinance. Effectively, the court ruled that the cost related to the options granted to employees of the local entity plus the markup were subject to tax in Israel., with no ability to deduct the cost of the options.
It should be noted that the company in this particular case retroactively amended its intercompany agreement to exclude the cost of the options from the cost basis. This could have been a factor in the court's decision. Nevertheless, if Israeli tax authorities follow the decision, cost-plus entities in Israel are at a significant risk for being challenged to pay additional taxes in Israel due to the increased cost base and lack of deduction for those "costs."
Please talk to your GES attorney to understand the impact of the decision on your company, especially if you operate a cost-plus arrangement in Israel. For more information on the decision, please also read our blog on this topic.
New Tax Exemption for Stock Option Plans
Effective as of January 1, 2016, Romanian tax law introduced a new tax exemption applicable to the grant of awards under "stock option plans." This tax exemption allows the optionee to defer tax until the sale of the shares (instead of paying tax at exercise). The gain at sale is taxed as capital gain, rather than employment income. The exemption requires that there be a minimum one-year period between the grant of the option and the vesting of the option.
There is some uncertainty whether the exemption applies to restricted stock units or other forms of equity awards.
Please talk to your GES attorney to determine whether the exemption could apply to your awards.
Foreign Account Reporting Requirements Detailed in New Regulations
The Russian government has adopted and published new regulations detailing the foreign bank account reporting requirement for Russian individuals. The reporting deadline is June 1 of the year following the reporting year.
The form to be used for the report is very brief and requires:
- the account balances as of the beginning of the reporting period,
- the account balances as of the end of the tax period, and
- the aggregate amount credited to / debited from the account during the period.
No bank statements or other supporting documents are required absent a special inquiry from the Russian tax authorities. Companies may want to notify their employees in Russia of their obligations under the new regulations.
Cash Proceeds from Sale of Shares Not Required to be Repatriated as from January 1, 2018
Effective as of January 1, 2018, the Russian exchange control laws have been relaxed such that Russian residents can receive funds directly into foreign accounts in OECD or FATF countries, without first repatriating such funds to Russia, provided the cash proceeds are from the sale of securities listed on the Russian stock exchange or foreign stock exchanges specified by Russian federal law.
Again, companies may consider notifying their employees of these changes to the repatriation requirements.
Income Tax Exemption Further Limited
As we reported in our fourth quarter 2014 newsletter, as of January 1, 2015, the €12,000 income tax exemption requires that awards be offered to all employees under the same conditions. Subsequent regulations from and conversations with the Spanish tax authorities reveal that the equal condition for all employees requirement will be strictly interpreted and applied.
For options and RSUs, this means that the exemption will not be available if there is any difference in the number of shares granted to different employees based on their position, seniority and salary.
In contrast, the exemption likely will continue to apply to rights to purchase shares under employee stock purchase plans (ESPP). Even though the number of shares purchased under an ESPP depends on each employee’s salary and election, an ESPP is viewed as being offered under the same terms to all employees and should, therefore, satisfy the requirement for the exemption.
If you have previously applied the exemption to calculate the withholding taxes due on option and RSU income, we recommend revisiting your withholding practices in Spain. In addition, we recommend reviewing any tax information provided to employees in Spain to ensure that it correctly reflects whether or not the exemption may be available.
Court Rules that Inbound Employees Subject to Tax Only on Swedish Source Income Related to Equity Awards
The Swedish Supreme Administrative Court found in two rulings in November that the existing Swedish tax regime discriminates against EU/EEA citizen employees who become Swedish tax residents after having received an equity grant abroad.
According to Swedish tax rules effective from 2009, inbound employees who become Swedish tax residents are subject to tax on the full amount of the taxable income at the time of the taxable event (e.g., the spread at exercise of an option), notwithstanding that the award was granted before the employee was a Swedish tax resident and that the award, partly or in whole, was attributable to a period when the employee was tax resident in another country. Swedish law envisioned that any potential double taxation had to be eliminated through application of the relevant tax treaty.
The court ruled that the foreign source portion of the award income is not subject to tax in Sweden. As a consequence of the rulings, tax payers may request a reassessment by the Tax Agency for any award income that was fully taxed in Sweden, even though the award partly or in whole vested when the employee was working outside Sweden. The application for reassessment can be made until the end of the sixth year after the income year (e.g., an application for a reassessment for income year 2010 must be submitted during 2016 and an application for a reassessment for income year 2009 must have been submitted during 2015).
It is possible that the ruling by the Supreme Administrative Court can apply also to non EU/EEA citizens in case they are citizens of a country (e.g., the U.S.) that has a tax treaty with Sweden with a non discrimination provision. In particular, there is an argument that it would be deemed a violation of this provision to treat U.S. citizens less favorable than Swedes. The Swedish Tax Agency is expected to issue comments on the rulings that may provide more clarity on this point.
In the meantime, companies are advised to review their policies for taxation of employees who transfer to Sweden with outstanding equity awards and adjust their withholding practices to reflect the rulings.
Recent Court of Appeals Case Rules U.K. Court has Jurisdiction over U.S. Stock Option Plan
The English Court of Appeals recently ruled that a U.K. court has jurisdiction over a U.K. executive's lawsuit involving a stock option plan offered by the U.S. parent company, despite the plan's clear language providing for Massachusetts law as the governing law.
Although the court recognized the parent company (that had granted the options to the U.K. employee) was not the employer in the domestic law sense, the court ultimately decided that the employee deserved the protection of EU law on the basis that the equity awards were intrinsically tied to the individual's contract of employment.
This decision is not entirely surprising. Notwithstanding, we recommend that U.S. companies continue to include U.S. governing law provisions as well as U.S. venue provisions in their plans and award agreements. First, these provisions could offer a deterrent effect for employees and, second, it is possible that other courts will honor these provisions. In any event, provided the agreement also includes a severability clause, there is no harm in including such provisions, even if ultimately struck down by a non-U.S. court.
State Bank of Vietnam Issues Decree that Could Allow Individuals to Hold Shares in Foreign Companies
On February 15, 2016, the Vietnamese government issued a decree which allows individual Vietnamese investors to “implement indirect investments in plans issued abroad.” It appears that the new ordinance is designed to relax certain exchange control requirements but it is unclear how much of a practical effect the new decree will have.
Under current exchange control rules, while it is possible to obtain approval to operate a share plan offered by a non-Vietnamese company to employees in Vietnam, holding any shares acquired under the plan is treated as an offshore indirect investment and is prohibited. This means that the shares have to be sold immediately and the sale proceeds remitted to Vietnam.
It is expected that the State Bank of Vietnam will issue a circular in the near future which may clarify the new decree and provide additional information on the process for implementing a share incentive plan in Vietnam.
However, until the circular is released, we recommend that companies that have obtained approval for their share plans in the past continue to force the immediate sale of shares. Similarly, to avoid the approval, we recommend that companies continue to grant only cash-settled awards paid through local payroll.