Equity-based compensationTypical 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?
These days equity compensation is being replaced by other forms; however, it is still used and the prevalent form of equity compensation is a share option plan operated by SPVs abroad or in Russia (subject to certain restrictions) (see question 9). Options are structured either as option agreements, under which the SPV grants shares to employees, or as options for conclusion of a share purchase agreement in the future, under which the SPV sells shares to employees (see question 9). The typical vesting period is between three and five years. The employer can select the participants, but must take into account the prohibition on discrimination as described in question 14.
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?
The corporate body that is entitled to grant equity-based compensation depends on the structuring of the respective award (whether the award is granted in Russia or by SPV abroad) and on distribution of competence between governing bodies of the company. Requirements to major and interested party transactions described in question 3 should also be taken into account.Tax treatment
Are there forms of equity compensation that are tax-advantageous or disadvantageous to employees or employers?
The Tax Code does not envisage specific rules for taxation of participants of option programmes. Tax liability arises if the employee exercises option and obtains shares from a company. The tax base is calculated as the difference between the share price set forth in the option programme and the fair market value of the shares. Equity compensation is taxed at a rate of 13 per cent for residents, and at a rate of 30 per cent for non-residents unless a double taxation treaty provides for a lower rate, exemption or relief.Registration
Does equity-based compensation require registration or notice? Are exemptions, or simplified or expedited procedures available?
The transfer of shares of a Russian issuer must be registered in the shareholders’ register, which is held by a registrar. A new issuance of shares must be registered with the Bank of Russia (for foreign securities, see question 9).Withholding tax
Are there tax withholding requirements for equity-based awards?
Russian employers are normally required by law to withhold and transfer income tax in the event of payment of any kind of taxable income from employment. The withholding of tax does not depend on the type of award. If the employer cannot withhold the tax by the end of the tax period, a notification is to be sent to the tax office and the employee. Thus, the responsibility for calculating and withholding income tax may be passed to the employee.Inter-company chargeback
Are inter-company chargeback agreements between a non-local parent company and local affiliate common? What issues arise?
Inter-company chargeback agreements are not common in Russia, since under Russian tax law a company must provide justification for the deduction of any expenses. The deduction of expenses related to an inter-company chargeback from a Russian company’s profit may be deemed illegal by the tax authorities. Owing to the tax risk, companies more often use an arrangement in which a Russian company pays management or services fees to a non-local parent company; however, this arrangement is also not tax risk-free and applying such a model may be considered illegal if the company fails to prove the necessity and authenticity of such services. The amounts of such fees are subject to tax control.Stock purchase plans
Are employee stock purchase plans prevalent or available? If so, are there any frequently encountered issues with such arrangements?
Employee stock purchase plans are available, but not prevalent. Frequently encountered issues related to such arrangements are:
- structuring and enforcement of options (see question 9);
- regulatory restrictions on placement of foreign securities (see question 9); and
- unlawfulness of deferral provisions (see questions 9 and 11).