It’s Worth the Effort: Targeting Awards to Ease
Compliance Burdens and Maximize Plan
Effectiveness
Valerie Diamond -- Partner, Baker & McKenzie LLP
June Anne Burke – Partner, Baker & McKenzie LLP
CT/Boston NASPP Regional Meeting
July 19, 2013
Baker & McKenzie Consulting LLC is a subsidiary of Baker & McKenzie LLP, a member firm of Baker & McKenzie International, a Swiss Verein of member law firms around the
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© 2013 Baker & McKenzie Consulting LLC
Agenda
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Assessing the Compliance Burden
Award Structuring by Country
• Type of Awards
• Tax-Qualified Programs
Recharge Arrangements
Other Tax Saving Ideas
Other Compliance Considerations
Questions
© 2013 Baker & McKenzie Consulting LLC
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Cost/Benefit Compliance Assessment
Assess by award and by country
– Regulatory issues
 Securities Offerings – generally territorial in nature / based on
size of offering & headcounts
 Prospectus filings/registration statements (e.g., EU, Japan)
 Securities notices/reports (e.g., Malaysia, Thailand)
 Exemption confirmations (e.g., Australia, Philippines)
 Show-stoppers (e.g., Indonesia, Colombia)
 Exchange Control Filings - for movement or holdings of foreign
securities / funds
 Exchange control approvals (e.g., China, Vietnam)
 Notices (e.g., Italy)
 Show-stoppers (e.g., Ukraine)
 Other filings (e.g., Singapore MoM approval)
© 2013 Baker & McKenzie Consulting LLC
Cost/Benefit Compliance Assessment (cont’d)
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Employer tax issues
 Tax withholding/reporting
 Employer social tax
 Favorable tax treatment (i.e., avoiding / minimizing social tax vs.
cost/burden to implement/maintain)
 Reimbursement/charge-back arrangements
Employee taxation
 Timing of tax / deferral of income
 Social tax withholding
 Favorable tax treatment (and cost/burden to implement/maintain)
Other issues (e.g., Danish Stock Option Act)
© 2013 Baker & McKenzie Consulting LLC
Cost/Benefit Compliance Assessment (cont’d)
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Prepare Summary Compliance and Tax Charts / Checklists
 Organize by County / Headcounts / Awards
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Note locations where a particular type of award will be granted due
to tax or regulatory benefits
Track Regulatory and Tax Considerations per Country
Ask for and Note Recommendations of Counsel
Consider Administrative Burden
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Check with stock plan broker / administrator for exchange control
issues to determine how difficult to implement
 Balance Burdens Against Competitive Risks / Employee Demand
 Document Key Decisions
 Keep a Record of Filings & Grant Documentation
 Update (At Least) Once a Year
The more streamlined you can be year-to-year, the more cost
effective the program
© 2013 Baker & McKenzie Consulting LLC
Award Structuring by Country
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Being Open to Grants of Different Kinds in a Country Can
Save the Company (or the Employee) Money
• Options vs. RSUs vs. RS vs. ESPP
• Qualified vs. Non-Qualified
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Many Companies Feel One Size Should Fit All – Not willing
to consider award variations
Watch for Hidden Costs of Managing Different Awards with
Broker / Administrator, Duplicate Systems, etc.
© 2013 Baker & McKenzie Consulting LLC
Award Structuring by Country
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Canada: consider granting stock options rather than other
forms of award
– 50% tax exemption on spread at exercise
– Primarily employee benefit, except for tax-equalized
expats
Brazil: consider granting stock options rather than other
forms of award (where no recharge)
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Stock options taxed at sale of shares
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Taxed as capital gains rather than salary income (15%
vs. 27.5%)
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No withholding or reporting obligation for employer
© 2013 Baker & McKenzie Consulting LLC
Award Structuring by Country (cont’d)
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Italy
– Grant stock options rather than other awards
• Exempt from social contributions – employee
(approx. 10.49%) and employer (approx. 30%)
– Don’t make broad-based grants
• RSUs and other awards exempt from social
insurance only if not offered on a broad basis
(much lesser €2,045 broad-based plan exemption
applies if plan is broad-based)
© 2013 Baker & McKenzie Consulting LLC
Award Structuring by Country (cont’d)
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Generally avoid cash-settled awards
– Often subject to social contributions that don’t apply to
equity awards, e.g., Brazil, Colombia, Japan, Malaysia,
New Zealand, Portugal
– Special tax regimes available for equity often do not
apply, e.g., French-qualified RSUs, Israeli trustee plans
– However, cash awards may allow for a local deduction
not otherwise available, e.g., Canada, Netherlands
– Note that cash awards are subject to liability
accounting treatment – additional burden/volatility
© 2013 Baker & McKenzie Consulting LLC
Award Structuring by Country (cont’d)
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Avoid restricted stock
– Generally taxed at grant
• Some exceptions: Australia, Singapore, U.K., U.S.
– Cash-flow issue with paying employer/employee social
contributions and meeting tax withholding obligations at
grant when amounts cannot be withheld from award
– Adverse employee tax position – increased risk of noncompliance by employees in countries where no
employer withholding
© 2013 Baker & McKenzie Consulting LLC
Tax-Qualified Plans
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France
– Qualified options or RSUs
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Avoid employer social security (up to 46%) on exercise/vest
But employer tax savings greatly reduced as of July 11, 2012
due to increased employer social tax due at grant
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Generally, tax due at 7.5% of value of underlying shares
for options; 30% of value of underlying shares for RSUs
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Tax cannot be recouped if awards forfeited
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If forfeitures are high, grantees are top earners and/or
stock price growth is slow, non-qualified awards may be
tax favorable
© 2013 Baker & McKenzie Consulting LLC
Tax-Qualified Plans (cont’d)
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France (cont’d)
– Employee tax savings also greatly reduced following 2012
year-end tax reforms - employee now subject to a maximum
combined rate of approx. 61% on qualified awards - effective
for grants on or after September 28, 2012
– Likely that non-qualified awards will be more favorable for
employees
– In all cases, any potential tax savings need to be weighed
against administrative burden of implementing/maintaining
qualified plan in France (e.g., RSU holding periods, special
reports for options and RSUs) and new severe employer
penalties for failure to file required special reports
© 2013 Baker & McKenzie Consulting LLC
Tax-Qualified Plans (cont’d)
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Israel
– Trustee plan options, RSUs or ESPP
– Can avoid or reduce employer social security (5.9%,
capped at approx. $11K per month) on gain at sale
– Local employer qualifies for tax deduction on
employee’s ordinary income – if recharge arrangement
in place
– Requires Israeli trustee and lock-up of shares, but
trustee handles withholding at sale of shares so
ensures tax compliance
– New “deposit” requirements announced in July 2012
increase administrative burden
© 2013 Baker & McKenzie Consulting LLC
Tax-Qualified Plans (cont’d)
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United Kingdom
– HMRC-approved options (CSOP)
– Avoid employer NICs (13.8%, uncapped) on exercise
– Substantial employee benefit – avoid income tax (up to
45%) and employee NICs on spread at exercise; gain
at sale taxed as capital gains (18% or 28%), subject to
annual exemption (£10,900)
– Rules recently adopted to simplify approved plans
– Savings limited by £30,000 cap on approved options
– Note: same employer saving via transfer of employer
NICs to employee
© 2013 Baker & McKenzie Consulting LLC
Tax-Qualified Plans (cont’d)
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United States
– Code Section 423 ESPP and 422 Incentive Stock
Options
– Save employer FICA and FUTA costs
– But forgo tax deduction on spread/discount unless
disqualifying disposition
– Overall, not the best approach for employer tax savings
– Note: requires shareholder approval within 12 months,
holding periods, special reporting
© 2013 Baker & McKenzie Consulting LLC
Tax-Qualified Plans (cont’d)
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Plans that provide significant employee benefit – indirect
employer savings for tax-equalized expatriates:
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Canada – 50% tax exemption on option spread
Belgium – options – elect tax at grant and undertake not to
exercise for 3+ years – tax on only 11.5% of FMV at grant of
10-year option
China – Tax Circulars 35 and 902 – equity income taxed
separately from monthly salary, usually at lower rate
Singapore – ERIS – tax exemption up to SGD 1M (US$800K)
over 10-year period (must offer awards to 25% of employees)
– for grants prior to December 31, 2013 only
U.K. – CSOP/SIP – as discussed previously
U.S. – ISO/ESPP – as discussed previously
© 2013 Baker & McKenzie Consulting LLC
Recharge Arrangements
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Where equity plans are sponsored by a non-resident parent
company, tax authorities generally will not permit a local tax
deduction for the employer absent a recharge agreement
– Exceptions where no agreement required: U.S. and
U.K.
– Exceptions where no deduction permitted, even with
recharge: Netherlands and Canada
Other local requirements may apply, e.g., special signature
or local board approval requirements, requirement to use
treasury shares, tracking of cost of shares issued to
employees, etc.
© 2013 Baker & McKenzie Consulting LLC
Recharge Arrangements (cont’d)
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How does a recharge save taxes?
– Foreign subsidiary may claim a corporate tax deduction
not otherwise available (most countries allow
deduction):
• Reduces foreign taxes paid by subsidiary on its
earnings
• Thus, reduces global effective tax rate
© 2013 Baker & McKenzie Consulting LLC
Recharge Arrangements (cont’d)
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How does a recharge save taxes for a U.S. issuer?
– Tax-free repatriation of cash from foreign sub to U.S.
parent under IRC § 1032:
• 1032(a) – U.S. parent not required to recognize
gain or loss upon receipt of money for its stock
• Need to ensure amount reimbursed by foreign sub
does not exceed cost to U.S. parent, i.e., FMV of
share less amount paid by employee (“employee
benefit”)
• Foreign subsidiary’s reimbursement to parent for
employee benefit is thus not treated as dividend for
U.S. tax purposes
© 2013 Baker & McKenzie Consulting LLC
Recharge Arrangements (cont’d)
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Key implementation considerations:
– Foreign exchange controls may prevent recharge
• Argentina – Central bank prohibits transfer and
conversion of funds
• Brazil – Local bank approval required for recharge
• China – SAFE approval generally required for
recharge
• South Africa – Reserve Bank approval required and
not likely to be granted
• Intercompany book transfer of funds not permitted
in these countries
© 2013 Baker & McKenzie Consulting LLC
Recharge Arrangements (cont’d)
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Collateral issues to watch
– Recharge/local tax deduction may trigger
withholding/reporting obligations and/or social
contributions
• Employer social insurance triggered in several
countries, mainly in Eastern Europe and Latin
America, e.g., Brazil, Chile, Czech Republic,
Mexico, Poland
• Thus, need to make sure recharge produces
overall tax saving
• Note – Belgium – recharge triggers 35% uncapped
employer social tax – likely negates tax savings of
recharge
© 2013 Baker & McKenzie Consulting LLC
Recharge Arrangements (cont’d)
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Collateral issues to watch
– Recharge/local tax deduction may increase labor law
risk
• Increased risk that awards included in “salary” for
determination of severance payments, etc. (e.g.,
Argentina, Brazil)
• May increase acquired rights/entitlement risk (e.g.,
France, Italy, Spain)
• May trigger possible need to consult with works
council (e.g., Czech Republic, Germany)
© 2013 Baker & McKenzie Consulting LLC
Other Tax Saving Ideas
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Reduce, limit or cap grants in high employer tax countries,
e.g.,
– Argentina – employer social contributions 23% or 27%
uncapped
– Estonia – employer-paid FBT due at total rate of 68.4%
(limited exception if options not exercised/RSUs don’t
vest for three years from grant)
– Sweden – employer social contributions 31.42%
uncapped
© 2013 Baker & McKenzie Consulting LLC
Other Tax Saving Ideas
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Transfer employer social charges to employee
– U.K. – transfer employer NICs at 13.8% to employee
• Need HMRC-approved joint election signed by
employee prior to taxable event (transfers liability)
• Can also accomplish via unapproved agreement
with employee (but no transfer of liability)
• Employee can deduct employer NICs paid from tax
liability
– Israel – transfer of employer social charges (5.9%
capped) likely permitted if included in award
agreement/initial terms
© 2013 Baker & McKenzie Consulting LLC
Other Tax Saving Ideas (cont’d)
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Transfer employer social charges to employee (cont’d)
– Romania – potentially transfer all income tax and
employer/employee social contributions to employee via
agreement with the employee
– Saves employer social contributions applicable to
“payor” of income (approx. 6.8% is uncapped)
– Need to register the agreement
– Often not permitted in other countries, e.g., Sweden
© 2013 Baker & McKenzie Consulting LLC
Other Tax Saving Ideas (cont’d)
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Avoid tax penalties through strong ongoing compliance
– Determine country employer withholding/reporting and
social insurance requirements when implementing
equity awards and update annually
– Identify countries with special year-end equity award
reports and set up compliance systems, e.g., Australia,
France (qualified plans), Ireland, U.K.
© 2013 Baker & McKenzie Consulting LLC
Other Compliance Considerations
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Create a Global Form of Agreement to Address Mobile
Employee Risks and Ease Administration
– One form given to employees regardless of location
with a country-specific appendix
– Easier to update and administer because clear what
country-specific terms apply
– If employee moves from country A to country B over
the life of the award, it is clear that terms of country B
apply
– Establish a tracking and compliance system for globally
mobile employees – many countries currently stepping
up enforcement in this area, e.g., Australia, Canada,
Sweden, U.K., U.S.
© 2013 Baker & McKenzie Consulting LLC
Other Compliance Considerations
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Keep Equity Awards Out of Employment Agreements and
Offer Letters
– If employee work for separate subsidiary, then grant by
issuer is not a benefit offered by the employer
– Document new hire equity offerings through equity side
letter on parent company letterhead
– Keep to a consistent policy of separating employment
benefits and equity compensation to minimize
exposure to entitlement claims and termination
indemnities
© 2013 Baker & McKenzie Consulting LLC
Questions?
© 2013 Baker & McKenzie Consulting LLC
Contact Information
Valerie H. Diamond
415.576.3086
valerie.diamond@bakermckenzie.com
June Anne Burke
212.626.4371
juneanne.burke@bakermckenzie.com
© 2013 Baker & McKenzie Consulting LLC
Disclaimers
This presentation was prepared for general information purposes for
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presentation.
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