Deductibility of Stock Option Related Costs Denied by Brussels Court of Appeals
In an unfortunate decision, the Brussels Court of Appeals has upheld a decision by a lower court denying the deductibility of stock option costs charged by a foreign parent company to its Belgian subsidiary.
Please see the client alert from our Brussels office here.
Although the decision is unfortunate, it is worth pointing out that many companies do not charge equity award related cost to their Belgian subsidiaries to avoid triggering the very high employer social tax (approx. 35%) which can likely be avoided absent a recharge. These companies have already decided to forego a tax deduction, which means that the new decision will not impact them.
Updates From Beijing and Shanghai SAFE Bureaus
In conjunction with various pending SAFE applications, the SAFE Bureaus in Beijing and Shanghai have offered a number of clarifications and raised some new issues, the most noteworthy of which are summarized as follows:
Registration Requirements for Amended and Restated Plans
Beijing SAFE clarified that if a company amends and restates an equity compensation plan (a "successor plan") for which SAFE approval previously was obtained and no material differences exist between the terms of the awards granted to PRC employees under the original plan and the successor plan, the company only should include detailed information regarding the successor plan in the registration application when seeking approval for the same.
Further, Beijing SAFE clarified that a separate bank account is not required for the successor plan and the company can use the same dedicated bank account that was approved for the original plan.
Companies should note that Beijing SAFE continues to require companies to seek SAFE approval of any plan amendments (including amended and restated plans) within three (3) months of approval by company shareholders.
ESPP Quota Approval Requirements
Beijing SAFE clarified that for companies seeking approval to offer participation in an employee stock purchase plan ("ESPP") to Chinese employees, the quota approval for outward remittances runs 12 months from the date of approval (as opposed to 12 months from the end of the applicable calendar year). Thus, companies seeking approval for an outward remittance quota should be midful to coordinate the purchase period(s) that will run during the approval period to ensure that sufficient quota is available.
In addition, if an approved quota is insufficient to cover the outward remittance of payroll deductions in connection with a company’s ESPP, the company should apply to Beijing SAFE for the cancellation of its previous quota approval and request a new quota approval based on the expected remittance amounts (again, the new quota will apply for 12 months following Beijing SAFE’s approval of the request).
Uncertain Treatment of Awards Granted under Plans Adopted Prior to IPO
As part of a number of applications submitted in connection with companies undertaking an initial public offering ("IPO"), Shanghai SAFE has raised numerous questions about awards granted under previously adopted equity compensation plans ("pre-IPO plans").
While we continue to work with Shanghai SAFE to understand and resolve their concerns, companies in similar positions should note that the process for securing SAFE approval in Shanghai may be extended and it is even possible that Shanghai SAFE may reject such applications (or at least the portion of applications dealing with awards granted under pre-IPO plans).
New Exclusions From Securites Law Requirements
In conjunction with the enactment of the Financial Markets Conduct Act 2013 ("FMCA"), New Zealand adopted a new employee share scheme exclusion ("ESS Exclusion") and a small offering exclusion ("Small Offering Exclusion") effective April 1, 2014 that should be helpful to companies granting equity compensation awards in New Zealand for purposes of avoiding the new financial product disclosure requirements under the FMCA.
Under the ESS Exclusion, companies granting/offering equity compensation awards to employees in New Zealand can avoid the disclosure requirements under the FMCA if:
- the offer is made as part of remuneration arrangements for eligible persons or is otherwise made in connection with the employment or engagement of eligible persons;
- the primary purpose of the issuer's offer is not fundraising; and
- the total number of specified financial products issued or transferred under all of the issuer’s employee share schemes to eligible persons in any 12-month period does not exceed 10% of the specified financial products of the issuer that are of the same class at the beginning of the 12-month period.
For purposes of the foregoing requirements, "eligible person" means directors and employees of the issuer or the issuer's subsidiaries, and also includes persons who provide personal services (e.g., consultants, independent contractors) principally to the issuer or the issuer's subsidiaries.
Further, the ESS Exclusion applies to the grant of stock options or stock purchase rights under an employee stock purchase plan (these awards are treated as "specified financial products"), but does not apply to the grant of restricted stock, restricted stock units and other forms of award that do not require payment for the underlying shares (these awards continue to be outside the scope of New Zealand securities laws).
If the foregoing requirements are satisfied, companies will not need to prepare a detailed and comprehensive product disclosure statement but instead must provide employees with certain information as part of the distributed grant materials (including a warning statement) and comply with their reporting obligations under the Financial Reporting Act (which also is being overhauled).
Small Offering Exclusion
Companies granting stock options or offering ESPP participation to employees in New Zealand also may be able to avoid the disclosure requirements under the FMCA via the Small Offering Exclusion, which is modeled off of the "20 in 12" exemption in Australia.
Under this new carve-out, companies that make personal offerings to no more than 20 eligible individuals during any 12-month period resulting in proceeds of less than NZ$2 million will not need to prepare a financial product disclosure statement. Rather, employees will need to be provided with certain information as part of the award documentation (including a warning statement) and companies will need to submit certain post-offering information to the Financial Markets Authority within one month of the conclusion of the applicable accounting period.
Interestingly, personal offerings to individuals who have annual gross income of at least NZ$200,000 for each of the two most recent income years are covered under the Small Offering Exclusion (in addition to employees of the issuer or the issuer's subsidiaries).
While the ESS Exclusion and Small Offering Exclusion provide promising relief for equity compensation awards, companies should note that during the period where the FMCA is phased in to supplant the Securities Act and related legislation, many of the exemptions existing under the Securities Act remain effective and continue to be a viable means for avoiding the otherwise burdensome securities requirements in New Zealand (including the "Overseas Issuer Exemption" and the "Previously-Allotted Securities Exemption"). As a result, companies making covered offerings in New Zealand should consult with their GES attorney to evaluate the best means for effectuating such grants.
Possible Extended Approval From Capital Markets Authority
In connection with the offering of equity compensation to employees Saudi Arabia, local securities laws require issuers to obtain prior approval from the Capital Markets Authority ("CMA") via an "Authorized Person" (that is, an entity licensed to engage in securities activities in Saudi Arabia). Typically, the CMA's approval remains valid for one year and upon expiration, issuers are required to seek a new approval from the CMA. Further, issuers are required to submit a post-offering report to the CMA on an annual basis.
Because of the high costs associated with obtaining CMA approval and submitting the required post-offering report (due to the exorbitant service fees charged by the Authorized Persons), issuers often are hesitant to grant stock options, restricted stock units and other forms of award to employees in Saudi Arabia. However, in a recent application, the CMA granted one U.S. multinational a 3-year approval through a particular Authorized Person and further provided that a single post-offer report was due upon expiration of the 3-year approved period (rather than annually). Based upon informal discussions, we understand that the term of the CMA's approval was a point of negotiation with the CMA based upon the terms of the award and the applicable equity compensation plan.
In light of this particular application, we are hopeful that the CMA now may be willing to approve an extended offering period in certain circumstances. Companies that are contemplating granting equity compensation awards to employees in Saudi Arabia as part of their upcoming annual grants should contact their GES attorney to discuss the possibility of seeking extended approval from the CMA.
New Share Scheme Registration Requirements
Under new rules effective April 6, 2014, employee incentive plans under which securities are offered or issued to U.K. employees must be registered online with HM Revenue and Customs (“HMRC”), regardless of whether the equity awards are tax-advantaged in the United Kingdom.
Existing employee incentive plans under which equity awards have been or will be granted to U.K. employees must be registered with HMRC during the current U.K. tax year (April 6, 2014 - April 5, 2015).
For further details regarding how to register your company’s plans, please see the materials (including FAQs) from our recent webinar or contact your GES attorney.
- Webinar – "New Share Plan Registration Requirements in the UK"
- New Registration Requirements for UK Share Plans – FAQs for Non-UK Issuers
- HMRC Website Walkthrough
- HMRC Employment-Related Securities Bulletins
- ERS Online Service FAQs
HMRC Proposes New Valuation Rules for Listed Shares
On June 30, 2014, HMRC published proposed regulations on determining the fair market value of listed shares that are intended to simplify future calculations of income tax and capital gains.
Under the proposed regulations, rather than using the formula currently required to determine fair market value for U.K. purposes (which can be somewhat complicated), the fair market value of listed shares would be calculated as the sale price received (when shares are acquired and sold on the same day) or the mid-point between the closing “buy” and “sell” prices quoted on the relevant trading day (when shares are acquired and held). These rules would apply equally to shares listed in the United Kingdom and to those listed on a recognized stock exchange overseas (e.g., the NYSE or NASDAQ).
HMRC currently is seeking comments on the draft regulations, with final regulations slated for issuance next year. We will continue to monitor developments and provide updates as additional information emerges.
For further information about the proposed regulations and how to comment, please see the July 2014 alert from our London office.
New Rules on Taxation of Equity Award Income for Mobile Employees
Under current U.K. tax rules, equity compensation income realized by inbound and outbound internationally mobile employees is subject to taxation in the U.K. depending on residency status, which can lead to over-withholding (and the need to claim a tax credit on the employee's personal annual return), double taxation (if the new host country does not have a tax treaty with the U.K,), or the payment of no U.K. income tax (if the award was granted before transferring to the U.K.).
Under new rules effective April 6, 2015, for all taxable events occurring on or after that date (regardless of when or where the award was granted), equity compensation income realized by inbound and outbound internationally mobile employees will be prorated based upon the number of days worked in the United Kingdom or another country during the period over which the income is earned (generally, the vesting period for most equity awards).
In light of these new rules, companies should review their tax withholding and reporting procedures for equity income earned by internationally mobile employees who have transferred into or out of the United Kingdom to ensure that these new proration rules are properly applied. Please contact your GES attorney for more information.
Cash Dividend Equivalents Not Deferred Compensation for FICA Tax Purposes
In IRS Chief Counsel Advice (CCA) 201414018, the IRS concluded that dividend equivalents payable in cash that were granted as part of an award of restricted stock units ("RSUs") were subject to FICA taxes at the time of actual payment and were not nonqualified deferred compensation subject to FICA taxes at the time the related RSUs vested and company shares were issued in settlement of the vested RSUs.
In reaching these conclusions, the IRS determined that the dividend equivalents were a benefit that was separate and distinct from the RSUs on the basis that the dividend equivalents only were payable if the granting company actually declared and paid dividends on its common stock (i.e., award recipients did not have a legally binding right to dividend equivalent payments, which is one of the requirements for treatment as nonqualified deferred compensation for FICA tax purposes). The IRS also noted that the dividend equivalents were payable at different times as compared to the RSUs -- dividend equivalents were payable in cash at the time regular dividends were paid, whereas the RSUs were settled in company shares at the time of vesting. For these reasons, the IRS also concluded that the dividend equivalents were not FICA tax-exempt earnings on the RSUs.
The IRS' guidance under the CCA should not impact the ability to defer FICA taxes on dividend equivalents that accrue over the vesting period of RSUs and are payable at the time of RSU settlement, but please contact your GES attorney for additional information about the FICA tax treatment of different dividend equivalent structures that your company may be considering.
Venezuela Relaxes Exchange Control Rules
Venezuela recently reformed its exchange control rules such that employees now are able to purchase and hold shares of a foreign company via equity compensation vehicles (such as stock options and ESPPs).
Previously, the exchange control rules prevented the purchase and transfer of foreign currency abroad for any investment purpose, including the acquisition of foreign securities under an employee equity plan.
Under the new rules, individuals and legal entities domiciled in Venezuela can convert local currency into foreign currency for any purpose whatsoever under the “Alternate Currency Exchange System for Foreign Currency” (“SICAD II”), which is supervised, administered and controlled by the Central Bank of Venezuela and the Ministry of the People’s Power for Economic, Finance and State Banking Matters. The amount of foreign currency that can be purchased apparently is not subject to minimum / maximum amounts and is not limited to any specific purpose.