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What are the most common types of share option plan in your jurisdiction? Please outline the rules relating to each scheme.
The impact of share option plans is not easily determined, especially in the existing business environment where career plans change frequently. However, share option plans can help companies achieve objectives and fulfil strategies.
Further, in Mexico these plans became relevant in the mid-1990s following the signing of the North American Free Trade Agreement. However, it was not until 2005 that income tax law recognised share granting as personal income.
Shares are considered taxable income under the Income Tax Law 2005. However, the incorporation of transitional rules and the lack of modifications to Articles 6, 113 and 180 of this law have distorted the determination of cash flow and taxable income.
As companies residing in Mexico must assist the tax authorities with supervising the fulfilment of their employees’ tax requirements, the obligation to report share acquisitions was added to Article 118 of the Income Tax Law.
Labour and employment laws make no mention of stock options, share plans or any incentives thereafter. Therefore, when granting such benefits, the risk of including these amounts as an integral part of the salaries must be calculated in case of labour claims.
What are the tax considerations for share option plans?
In order to comply with these provisions, Mexican companies that are involved with these plans or indirectly associated with them through the participation of their employees are advised to retain details of the following:
- personnel inventories that include, among other things:
- the names of employees participating in the plan;
- the start and end dates of the ripening or vesting period;
- the number of shares that the employee could acquire;
- the number of shares exercised; and
- the profit derived from the exercise of shares;
- copies of inter-company agreements, through which it was agreed that Mexican employees could participate in said plan;
- notes of charges or invoices for which a portion or the total amount of the benefit received by the employees is charged; and
- calculation details of both the taxable amount and the total amount of the benefit.
Such records allow companies to fully comply with the fiscal obligations established in Article 118(8) of the Income Tax Law and adequately manage their plans.
Share acquisition and purchase plans
What are the most common types of share acquisition and purchase plan in your jurisdiction? Please outline the rules relating to each scheme.
Stock options are granted subject to the exercise of stock options to achieve a weighted share price for the same maturity period of the said options. This reduces the volatility of the value of a company's shares and encourages employees to maintain productivity levels that achieve the weighted value of the share.
Units of restricted stock, which may represent treasury shares, may be granted free of charge to employees after a certain period. The price of treasury shares is equal to that of the company’s other shares. Therefore, if the value of the shares diminishes, the total obtainable profit reduces by a proportionate amount – a situation that employees would not allow to happen.
If the possibility of employees receiving shares, despite the decrease in share value, is not a viable option for the company’s shareholders, predetermined dates for delivering shares should be set in order to maintain the interest of employees on which the value of the stock depends.
What are the tax considerations for share acquisition and purchase plans?
Shares are considered taxable income under the Income Tax Law 2005. However, the incorporation of transitional rules and the lack of modifications to Articles 6, 113 and 180 of this law have distorted the determination of cash flow and taxable income. Further, Article 118 obliges companies residing in Mexico to report all employee share acquisitions.
Phantom (ie, cash-settled) share plans
What are the most common types of phantom share plan used in your jurisdiction? Please outline the rules relating to each scheme.
Phantom stock options are:
- a means of attracting and retaining talented employees;
- a complement to wages;
- independent of their beneficiary’s position; and
- virtual actions of the grantor company (ie, without the economic and political rights inherent to shares in which the company's share capital is divided).
The lack of specific legal regulation for phantom stock options offers considerable flexibility when establishing the rules under which they must be governed.
A phantom stock option contract chiefly determines:
- the beneficiary (normally an employee with an existing employment relationship at the time of the grant);
- the consolidation period (ie, vesting period);
- the purchase price (which the beneficiary need not pay at the time of the grant and may be reduced in the course of a liquidity event);
- the definition of different assumptions of liquidity events (mainly assumptions relating to company transfers, but also (as a result of regulation flexibility) exceptions in case dividends are distributed by the granting company); and
- the cases in which the beneficiaries may lose granted phantom stocks.
The main difference between stock options and phantom stock options is that the former grants beneficiaries the status of shareholders of the granting company. As such, and accounting for the dilutive effect of liquidity events, phantom stock option plans should be approved by the general meeting of partners (or in the framework of a partnership agreement duly signed by all of them) and detailed by the administrative body that will be in charge of determining the specific beneficiaries of the same or the revision of the concession price of the same within the general lines approved by the partners.
What are the tax considerations for phantom share plans?
Phantom stock options are not taxed during concession, as their value is merely the expected difference between the execution and acquisition prices. Beneficiaries receive this amount, which is considered monetary income for tax purposes. It is subject to the personal income tax applicable at that time and companies must make the corresponding deductions from beneficiaries’ salaries.
Are companies required to consult with employee unions or representative bodies before launching an employee share plan?
Employee share plans are typically granted only to directors or administrators who, under the Mexican federal labour law, are considered employees outside unions. Therefore, if these plans are unavailable to the general workforce, no consultation with representative bodies or unions is required.
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