International Equity Awards: Granting to Employees Outside of Israel

Transcription

1 International Equity Awards: Granting to Employees Outside of Israel April 13, 2015 Valerie Diamond Baker & McKenzie LLP Webinar Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm.

2 Today s Speaker Valerie Diamond Partner, Baker & McKenzie LLP valerie.diamond@bakermckenzie.com 2

3 Discussion Topics 1. Formulating the Game Plan for Grants 2. Key Country Updates The Basics What Else You Should Know What s New 3. Market Practices and Trends 4. Questions? 3

4 1 Formulating the Game Plan for Grants

5 Game Plan Gather information about contemplated grants Timing: Ideally 2 to 3 months prior to actual grant date Countries/headcount/corporate structure Options vs. restricted share units, key terms and conditions Global approach to award agreements covering all jurisdictions Employee communications (materials, mode of communication) Administration and local country involvement Charging cost to employing entity Practice Tool: B&M Annual Equity Compensation Grant Questionnaire 5

6 Game Plan Assess contemplated grants from legal, regulatory, tax and administrative perspectives Securities/Exchange Controls Filings/approvals/notices Understand tax implications for you and employee Required actions by Company (consider timing of when materials must be prepared and distributed) Estimated costs and administrative burdens KEY: Adjust awards to avoid/minimize issues and costs Practice Tool: B&M Free 50 Country Matrix/App 6

7 Global Equity Matrix App Information on the key compliance issues for equity awards. It covers tax and securities, exchange control, labor and data privacy issues in 50 countries. Available for free on your iphone, ipad or Android smartphone More at 7

8 Game Plan Prepare implementation plan and timeline Identify specific tasks and responsible party(ies) Establish due dates (in light of committee or other approvals) Determine broker / administrator / trustee support for memorializing decisions and actions Implement! 8

9 2 Key Country Issues

10 Country Updates United States United Kingdom Germany China Russia Hong Kong India France Japan Singapore Spain 10

11 United States The Basics Options: incentive stock options (ISOs) or Non-qualified options Timing of Taxation ISO: At Sale (although AMT may apply at exercise) NQOs: At Exercise (assuming non-transferable option with exercise price equal to FMV of share on grant date) Taxable Amount ISO: generally, capital gain treatment but ordinary income may apply to portion of gain up to spread at exercise if disqualifying disposition NQO: spread at exercise. When shares sold, long-term capital gain rates apply if shares held more than 1 year Withholding ISOs: Not required (even if disqualifying disposition) NQOs: Required ISO Tax Reporting 11 W-2 if disqualifying disposition (no withholding) IRC 6039 report to employee by Jan 31 in year following exercise Form 3921 to IRS by March 1/31 electronic reporting

12 United States The Basics Options: incentive stock options (ISOs) or Non-qualified options Employer Tax Deduction ISOs: Unavailable for unless disqualifying disposition NQOs: Available ISO Requirements 12 Employees Only (not contractors or consultants) of corporation or a subsidiary or parent 10 Year Term (but 5 Year if Employee owns more than 10% of company) Option Price = no less than 100% FMV of shares at grant (110% for 10% owners) Written Plan (must state an aggregate fixed number of shares issuable as ISOs) Shareholders of company must approve plan within 12 month of adoption by board Plan term 10 years Options non-transferable Up to US$100,000 worth of options first exercisable in any calendar year Holding periods: (1) at least 1 year from exercise, and (2) at least 2 years from grant ( disqualifying disposition )

13 United States The Basics Restricted Shares Tax at vesting when the restriction on the shares lapse. Employee may elect tax on grant under IRC 83(b). Taxable amount is fair market value of the shares on the tax event (less any amount the employee pays for the shares). Restricted Stock Unit Income tax when shares made available or delivered at or after vesting. Taxable amount is fair market value of the shares on the tax event (less any amount the employee pays for the shares). (Note: social security may be due earlier at vesting event.) Code Section 423 ESPP Similar to ISO in terms of requirements and with taxation deferred until sale of shares, but allows purchase of shares through payroll deductions at a discount up to 85% of FMV of the shares on the first or last day of an up to 27 month purchase period. Requires shareholder approval. 13

14 United States What You Should Know 409A regulates the treatment of nonqualified deferred compensation for U.S. federal income tax purposes applies to all forms of compensation (unless excluded) including equity where earned in one year but paid in another Restricted shares and options if granted at 100% of FMV on the grant date are exempt from 409A RSUs maybe exempt from or subject 409A depending upon design Impact of violation of 409A on employee 20% additional federal income tax Reporting obligation for the employer 14

15 United States What You Should Know S-8: Short form registration available for employee share plans offered by US public companies (a company that files periodic reports under Exchange Act of 1934 in the US) Require prospectus be delivered to employees in advance of exercise Registration of the shares available for issuance under the equity plan Private companies may be able to rely on Rule 701 exemption to offer awards in the US. The aggregate sales price in any 12-month period is limited to the greatest of: $1,000,000; 15% of the total assets of the issuer; and 15% of the outstanding amount of the class of securities being offered. The company must deliver to plan participants a copy of the plan and, if the aggregate sales price or amount of securities sold during any consecutive month period exceeds $5,000,000, additional disclosures required.

16 United States What You Should Know Foreign Private Issuer Available for foreign incorporated company whose shares not listed in the US 16 To qualify: 50% or less of outstanding voting securities held by US residents OR if more than 50% held by US residents, then none of the following applies majority of executive officers or directors are US citizens or residents more than 50% of issuer's assets are in the US issuer s business is administered principally in the US No registration necessary with SEC to offer employee share awards unless or until FPI: Wants to conduct public offering of securities in US Offers class of securities on NYSE/NASDAQ Exceeds Thresholds (Rule 12g3-2(b) exemption): issuer has over $10 million in assets at end of its fiscal year; record holders is either 2,000 or greater worldwide or 500 person who are not accredited investors or greater worldwide; and number of US resident holders is 300 or more Can use S-8 to register share plan offering

17 United Kingdom The Basics Options Timing of Taxation At Exercise (assuming non-transferable option with exercise price equal to FMV of share on grant date) Taxable Amount Spread at exercise. When shares sold, lower capital gain rates apply subject to an annual exclusion Withholding Required if readily convertible assets Social (National Insurance Contributions/NICs) Taxes Due from employer and employee if readily convertible assets Reporting Real time reporting (14 day of end of tax month) Special Tax Year End (April 6 - April 5) Share Scheme Reporting to HMRC by July 6 Deduction Statutory deduction available 17

18 United Kingdom The Basics Restricted Shares Tax at vesting when the restriction on the shares lapse. Employee may elect tax on grant (on unrestricted value) under 431 election within 14 days. Taxable amount is fair market value of the shares on the tax event (less any amount the employee pays for the shares). Restricted Share Unit Income tax when units vest and shares are issued. Many Forms of Tax-Favored Plans Enterprise Management Incentive Plans (EMI) Company Share Option Plans (CSOP) Savings-Related Share Option Plans (SAYE) Share Incentive Plan (SIP) Most do not retain tax-favored treatment in a corporate transaction except in limited circumstances 18

19 United Kingdom What You Should Know Employer National Insurance Liability Can be Shifted to Employee Promise vs. joint election form Private Companies Have Special Tax Considerations Readily Convertible Assets Notion 431 Election for Restricted Securities Grants to Non-Employees Raise Securities Risks (as do transferable rights) 19

20 United Kingdom What s New Companies required to register all existing and new share plans through Pay As You Earn ( PAYE ) online system by July 6, 2015 From April 2015, information currently filed on prescribed reporting forms (e.g., Form 42) must be submitted online Advance HMRC approval no longer required for tax-approved plans; self-certification required Effective April 6, 2015, new income allocation rules apply for mobile employees 20

21 United Kingdom What s New Example of Transfers of Employees After April 6, 2015 Inbound (From Israel to the UK) UK Taxation of Income at Exercise (spread allocated over vesting period). Withholding and reporting apply (Pre-April 6, 2015, there was no UK taxation if the grant was made when employee outside of the UK and was not intended to relate to UK employment.) Israeli Taxation of Income at Sale (maybe granted under trustee plan or not) Relief from Double Taxation of Income may be available to employee as a result of tax credits / treaty relief may be available Outbound similar result 21

22 Germany The Basics Options Timing of Taxation At Exercise (assuming non-transferable option with exercise price equal to FMV of share on grant date) Taxable Amount Spread at exercise. When shares (acquired after Jan. 1, 2009) sold, capital gain rates apply. Withholding Required Social Taxes Due from employer and employee Reporting Required Deduction 22 Difficult if not a real cost for shares and recharge of costs from parent to German employer properly documented

23 Germany More to know Restricted Shares and RSUs Restricted shares likely taxed at grant (not vesting) on FMV RSUs taxed on FMV of shares at vesting if no shareholder rights until that time Proper Tax Withholding and Reporting is key! No Securities Law filing issues if non-transferable employee rights and no cash consideration paid to receive the grant. If ESPP offered, be mindful of the regulator s interpretation of the 5 million exclusion 23

24 China The Basics Options Timing of Taxation At Exercise Taxable Amount Spread at exercise. When shares sold, lower capital gain rates apply Withholding Required Social Taxes Arguably due from employer and employee but cap threshold likely exceeded Reporting Registration (Notice 35) with each tax bureau Due in advance of operating the plans in China and requirements vary Deduction Difficult due to exchange controls (see next slide)

25 China The Basics Circular 7 / SAFE Any non-chinese public company offering equity awards to PRC domestic individuals must register the plan with the State Administration of Foreign Exchange or SAFE Must be public to offer equity Must register in location where company has a subsidiary / WFOE (cannot register rep office or branch) Must have a trustee or stock plan administer that will help administer Must establish onshore bank account through which all funds pass If ESPP, must have SAFE approved quota of funds Shanghai SAFE and Beijing SAFE routinely have approved applications within 2 to 3 months (or less) if no complicating factors; other SAFE bureaus have been unpredictable Beijing SAFE has focused on past non-compliance but still rarely imposes penalties Treatment of non-prc nationals continues to be an uncertain area 25 Circular 7 requires inclusion of all domestic individuals All SAFE bureaus seem to view the inclusion of non-prc nationals as optional Beijing SAFE will not allow inclusion unless an individual has been resident in China for at least one (1) year Inclusion of non-prc nationals can facilitate ESPP administration

26 China What s New Shanghai SAFE requires quarterly reports and annual re-registration; delays in approvals cause ESPP quota and other fund flow issues Beijing SAFE requires separate accounts for each equity compensation plan Treatment of terminated employees Need to liquidate awards/shares within 3-6 months after termination (in Shanghai) Problem for performance awards More companies seeking to implement ESPPs in China No additional legal hurdles for approval process (other than quota) Various administrative considerations (e.g., treatment of non-prc nationals, separate account in Beijing, multiple brokers / trustees) Annual quota application required Some concern that company delivery of proceeds of sale of shares through SAFE account means withholding of capital gains taxes 26

27 Russia The Basics Options Timing and Amount of Taxation May be at grant on option value and again at exercise on difference between exercise price and fair market value of the shares at exercise Recent private ruling of the Federal Tax Service indicates that no taxation should apply on the grant Tax at the sale of shares Withholding No withholding (if structured to be outside the employment relationship and no recharge of the costs locally) Social Taxes No if assumptions above apply Reporting No if assumptions above apply Deduction Difficult if not a real cost for shares and recharge of costs from parent to Russian employer properly documented; may raise withholding and social tax issues 27

28 Russia What You Should Know Restricted Shares Possible tax at grant on FMV of the shares RSUs Tax at vesting on the FMV of the shares Securities Law Keep offering and shares outside of the employment relationship and treat as offshore grant. Requires no local delivery of grant materials or shares locally and no local involvement. Alternative is to include with employment terms and rely on employee exemption but that may raise entitlement concerns 28

29 Hong Kong The Basics Taxation of Options Tax on spread at exercise No withholding; reporting only Taxation of RSUs Tax at vesting on FMV of shares No withholding; reporting only No Tax at Sale of Shares Deduction allowed if reimbursement of parent by Hong Kong affiliate Securities law exemptions available if disclosure made Watch out for ORSO on cash awards 29

30 India The Basics Taxation of Options Tax on spread at exercise Taxation of RSUs Tax on FMV of shares at vesting Indian Category 1 Merchants Bank required to value shares for tax purposes even if share listed on a recognized exchange (unless listed in India) Withholding required Tax on sale of Shares Deduction available if recharge of costs by the Indian subsidiary to the parent company issuer but exchange control requirements must be met Also Watch for exchange control issues on fund transfers 30

31 France The Basics Non-Qualified Options Timing of Taxation At Exercise (assuming non-transferable option with exercise price equal to FMV of share on grant date) Taxable Amount Spread at exercise. When shares sold, deduction available if shares held for a number of years Withholding No income tax required for French residents; but required for nonresidents (by trusted / administrator as payer?) Social Taxes Due from employer and employee (at high rates) and must be withheld Reporting Required Deduction Difficult if not a real cost for shares and recharge of costs from parent company issuer to French employer properly documented 31

32 France The Basics French Qualified Options and RSUs Current French-qualified option regime requires: Payment of employer social taxes at grant at rate of 7.5% of value of shares or 30% of IFRS value (not refundable) No holding periods (it used to be 4 years) Exercise price must be at least equal to French FMV For public companies, cannot grant during closed periods Current French-qualified RSU regime requires: Payment of employer social taxes at grant at a rate of 30% of value of shares or IFRS value (not refundable) a minimum 2-year vesting period a 2-year post-vesting holding period This is a list of key requirements, but there are others and they need to be well documented 32

33 France What s New A new law introduced significant (and mostly positive) changes to requirements and tax treatment of French-qualified RSUs (not options): Employer social tax liability moved to vesting and due at 20% rate on the value of the shares issued at vesting Minimum vesting period reduced from 2 years to 1 year from grant date (at least for small / start up companies) Shares cannot be sold for a minimum period of 2 years from grant date (effectively requiring a minimum 1-year holding period for RSUs that vest on 1 st anniversary of grant date) (small / start ups only?) Gain at vesting taxed as capital gain (currently taxed as salary income) Unclear when changes will take effect (maybe in May); based upon past practice, they may be retroactive 33

34 Japan The Basics Timing of Taxation Options: At Exercise RS/RSUs: Likely at vesting when restrictions lapse or shares are issued Taxable Amount Options: spread at exercise. RS/RSUs: FMV on vesting date Withholding Not Required Social Taxes N/A Reporting Required on an annual basis (Form 9(3)) Deduction Difficult if not a real cost for shares and recharge of costs from parent company issuer to Japanese employer properly documented. Not available for directors and officers of Japanese affiliate 34

35 Japan What You Should Know Securities Filings Offering of options (not RSUs) to 50 or more employees valued at 1 million or more requires securities registration Foreign companies that file a Form 7 registration statement with the KLFB are considered "continuous disclosure" companies under Japanese securities law and are subject to various ongoing filing requirements that are onerous (time-consuming, costly) These continuing requirements may continue to apply even if the company no longer grants new equity awards in Japan Previously, the only way in which companies could cease continuous disclosure company status was where the company's total shareholder count in Japan decreased to less than 25 35

36 Japan What s New A foreign company may now petition the KLFB for release from the continuous disclosure requirements if: Number of shareholders in Japan at the end of each of the five most recent fiscal years is fewer than 300; and/or Number of optionees/espp right holders at the end of each of the five most recent fiscal years is fewer than 25 If the KLFB approves the petition, the company will no longer be subject to the ongoing disclosure obligations The exemption becomes void if, at the end of any future fiscal year, the number of shareholders in Japan equals or exceeds 1,000 36

37 Singapore The Basics Taxation of Options Tax on spread at exercise No withholding (except for departing expats and others terminating employment on deemed basis); reporting only Taxation of RSUs Tax at vesting on FMV of shares No withholding; reporting only No Tax at Sale of Shares Securities law exemptions available if disclosure made Special Reporting for directors and CFO 37

38 Singapore What s New Background Companies offering ESPP participation to employees in Singapore are required to obtain the prior approval of the Ministry of Manpower (MOM) to take payroll deductions from employees subject to the Employment Act (Act) (or face civil and criminal penalties) The Act originally covered non-managerial and non-executive employees; employees in managerial or other executive roles were exempt Update Effective April 1, 2014, the Singapore government amended the Act to cover employees in managerial or executive roles who earn less than SGD4,500 per month ESPP payroll deductions for such employees now are subject to prior MOM approval 38

39 Spain The Basics Timing of Taxation Options: At exercise (assuming non-transferable option with exercise price equal to FMV of share on grant date) RS/RSU: At vesting when shares are issued Taxable Amount Options: spread at exercise (unless exemption applies) RS/RSUs: at FMV at vesting When shares sold, lower capital gain rates apply subject to an annual exclusion Withholding Required Social Taxes Due from employer and employee Reporting Required Deduction Difficult if not a real cost for shares and recharge of costs from parent company issuer to Spanish subsidiary properly documented 39

40 Spain What you should know Special Exemptions From Tax for Equity Awards Through December 21, 2013, the first 12,000 of equity income realized during calendar year was exempt from income tax and employee/ employer social security contributions if certain requirements met Effective December 22, 2013, exemption eliminated for social contribution purposes Previously, stock options meeting certain conditions qualified for limited 40% reduction of the taxable income realized at exercise 40

41 Spain What s New Effective January 1, 2015, the 12,000 tax exemption only available where offer is made under the same conditions to all employees of company or group Effective January 1, 2015: 40% reduction has been lowered to 30%, and requires employee not obtain income that benefitted from reduction during previous 5 years 41

42 3 Gazing into the Crystal Ball: Market Practices and Trends 42

43 2015 Market Practices and Trends Continued use of restricted stock units as predominant form of award (time-based and performance-based) Increase in combination awards and choice programs options and RSUs (and cash awards?) Shift to global form of award agreements Continued interest in global ESPPs Continued focus on tax withholding and reporting obligations by authorities Mobility taxation issues raised in audit New legal focus: data privacy, claw backs/restrictive covenants, foreign asset reporting 43

44 4 Questions?