Equity-based compensation

Typical forms

What are the prevalent forms of equity compensation awards in your jurisdiction? What is a typical vesting period? Must the arrangements be offered to a broad group of employees, or can the employer select the participants?

The most common share-based incentive plans in Spanish jurisdiction are the following.

Schemes indexed to the value of the shares.
  • Restricted stock unit plans, which consist of the granting of a specific number of units, or a promise to deliver shares, which confer the holder the right to receive free shares on one or more dates, provided that certain requirements are met.
  • Deferred stock bonus plans, which consist of the delivery of restricted stock, based on the number of shares that the beneficiary acquires with all or part of his or her annual variable compensation.
Schemes indexed to share-price appreciation
  • Stock options plans, which consist of the granting of a certain number of options, free and non-transferable, to purchase shares in the company. After a vesting period, the options may be exercisable on one or several exercise dates.
  • Stock appreciation rights plans, which consist of the granting of a specific number of rights entitling the holder to receive, after a certain period of time has elapsed, an incentive in cash or in shares based on the value increase of the shares between the start and end date of the plan.

There are no restrictions for companies in establishing the vesting period of the equity-based incentives. However, as stated in question 11, proxy advisers have been recommending in recent years that vesting periods of at least three years are established.

The employer can decide to select the participants on the offered plan. It should respect, in any event, equality and non-discrimination principles. Regardless, it is recommended that objective criteria are used.

Must equity-based compensation be granted by the company’s board of directors (or its committee) or can the authority be delegated to officers or employees of the company? Are there limitations or requirements that apply to delegation?

Share-based incentives addressed to directors of Spanish companies must be expressly contemplated in the company by-laws, and shall require the approval of the shareholders’ meeting of the company. For executives reporting directly to the board, their participation in equity-based compensation should be approved by the board of directors, since it is considered as a basic term of their contracts (notwithstanding the possibility of the board choosing to delegate the execution of such contracts). For the rest of employees, the approval of their participation in equity-based compensation will be approved by the person who has this faculty (ie, the chief executive officer and human resources director, etc).

Tax treatment

Are there forms of equity compensation that are tax-advantageous or disadvantageous to employees or employers?

Equity-based compensation plans can imply special tax treatment for employees. Under the current PIT Law, an annual exemption of €12,000 can be applicable to the remuneration in kind derived from the delivery of shares of a company to its employees as a consequence of the participation in the company or other group company under certain conditions.

As long as the PIT Law requires that the delivery of shares has to be made to active workers, this exemption should not be applicable to any member of the board of directors.

In addition, there is a 30 per cent reduction on irregular income which can be applied, up to an annual gross amount of €300,000, in case the below requirements are met, as follows:

  • the remuneration must have been generated over a period of more than two years;
  • in the previous five tax years, the individual has not received any other income generated in more than two years on which the reduction has been applied; and
  • the income must always be imputed for tax purposes in a single tax period.

Does equity-based compensation require registration or notice? Are exemptions, or simplified or expedited procedures available?

Notwithstanding the reporting obligations described in question 7, it must be noted that:

  • The offer of shares by a company to qualified investors or to fewer than 150 natural or legal persons (other than qualified investors) is not considered as a public offering pursuant to article 1.4 of Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC (the Prospectus Regulation).
  • In case that the offer of shares is aimed at more than 150 individuals, if such offer of shares is aimed at existing or former directors or employees by their employer or by an affiliated undertaking, and provided that said securities are of the same class as the securities already admitted to trading on the same regulated market and that a document is made available containing information on the number and nature of the securities and the reasons for and details of the offer or allotment, it will not require a prospectus pursuant to articles 1.4 and 1.5 of the Prospectus Regulation.
Withholding tax

Are there tax withholding requirements for equity-based awards?

Shares derived from equity-based awards are considered as employment income in kind subject to withholding requirements by the employer company at a progressive tax scale ranging from 19 per cent to 45 per cent (the 45 per cent is applicable for a tax base as of €60,000).

When incentive compensation is paid in shares, in order to manage the withholding obligation, it is common practice to deduct a number of the shares, corresponding to the value of the withholding tax due, from the gross amount of shares to be granted, and only deliver to the beneficiary the net number of shares amount.

Inter-company chargeback

Are inter-company chargeback agreements between a non-local parent company and local affiliate common? What issues arise?

It is, indeed, advisable to proceed with such an agreement in place, in order to enable evidencing the nature and rest of the features of the expenses and correlative income deriving from such equity-based compensation schemes between foreign parent and local affiliate entities.

It is particularly important to consider tax issues, in order to ensure a proper treatment of both income and expenses. In this respect, transfer pricing rules must also be observed, and intragroup transactions arising from the implementation of these schemes have to be valued at arm’s length and included (if applicable) within the compulsory reports to be produced.

Stock purchase plans

Are employee stock purchase plans prevalent or available? If so, are there any frequently encountered issues with such arrangements?

Stock purchase plans are frequently implemented by Spanish listed companies. In this regard, it is important to determine if the purchase is made from the gross remuneration, in order to be considered as compensation in kind, or from the net remuneration, which involves a direct purchase by the employee.

In any case, it is a common practice that shares must be held by the employee during a specific period of time and, after that period has elapsed, the company usually offers a matching of free shares based on the number of shares purchased and held by the employee.