Russia. Employee Stock Purchase Plans. Employment. Regulatory. Labor Concerns. Communications. Securities Compliance

Transcription

1 Russia Employee Stock Purchase Plans Employment Labor Concerns Russian labor laws should not generally impact purchase plans so long as participation in the Plan is not considered to be a benefit provided by the Russian employer pursuant to an employment relationship. However, as participation in the Plan can be connected to (and is usually conditional upon) the employees relations with the Russian employer, it is advisable to document the Plan in accordance with the requirements of the Russian Labor Code. Such inclusion of the Plan into Russian employment documentation may make some of the Plan s provisions unenforceable. Russian labor law is not clear on whether the employer may withhold portions of the employee s salary in connection with the Plan. Any withholdings and/or transfers of any portions of the employee s salary in connection with the Plan must be made under the employee s express and written instructions. A review of the exact language and structure of the purchase plans will be necessary in order to determine the enforceability of foreign plans in Russia. There is ultimately a risk that the Russian courts would choose to apply Russian employment law as the law regulating the Plan. Communications If a Plan is documented as a part of the Russian employment contract, it should be translated into Russian. Government filings must be in Russian. Regulatory Securities Compliance The principal regulatory framework for the offering of foreign securities is set out in Federal Law No. 39-FZ On Securities Market dated 22 April 1996, as amended (the Securities Market Law ). The Securities Market Law currently states that: (i) foreign securities that have not been admitted to public placement and/or public circulation in Russia, as well as (ii) foreign financial instruments that have not been recognized as securities, may not be offered in Russia in any form or by any means, including by way of advertising, to an unlimited number of investors and to persons who are not qualified investors under Russian law. Therefore, the offer of Stock under purchase plans to employees who are not qualified investors could be viewed as contrary to the Securities Market Law, to the extent that the said Stock has not been admitted to public placement and/or public circulation in Russia.

2 However, the Federal Service on Financial Markets (the FSFM ; as of 1 September 2013 the FSFM was replaced by the Service of the Central Bank for Financial Markets) issued Order No. 11-8/pz-n On Approval of the Regulation On Peculiarities of the Circulation and Registration of Rights to Securities Designated for Qualified Investors and of Foreign Securities, dated 5 April 2011 (the Order ). The Order raises the possibility of non-qualified investors acquiring foreign securities that have not been admitted to public placement and/or public circulation in Russia if such acquisition is made by (a) a foreign citizen, or (b) a Russian citizen under his/her employment contract or in connection with the fulfilment of duties under his/her employment contract, or in connection with his/her membership of the board of directors (supervisory board) of a legal entity. The actual position is therefore uncertain in light of the general restrictions on the offering of foreign securities established by the Securities Market Law. Until this point is clarified, consideration should be given to the implementation of an off-shore grant structure which does not amount to an offering in Russia. Currency Control The transfer of funds to and from a foreign jurisdiction, in relation to a transfer of securities from a foreign company to a Russian individual, may be made freely. This follows the general principle that all currency operations between Russian residents and non-residents may be made without any limitations. As a general rule, payments to or from Russian residents (both legal entities and individuals) should be effected through accounts with Russian authorized banks. In the event that a Russian resident seeks to use a bank account with a non-russian authorized bank, additional reporting requirements may apply. Data Protection As a general rule, the processing of personal data requires the consent of the data owner (i.e. the employee). The transfer of the personal data of a Plan participant from the employer to the Issuer will qualify as a transfer of personal data to a third party and also as a crossborder transfer of personal data. This will require the written consent of each participating employee. With effect from 1 September 2015, the following localization requirements were introduced, for certain operations of processing of personal data, i.e.: collection, recording, organization (systematization), accumulation, storage, verification (updating, alteration), and retrieval of personal data of Russian citizens: holders of information and operators of information systems shall ensure that the databases which are used for processing are located in Russia; and when collecting personal data, including from the Internet, operators shall ensure, that the respective processing operations, are performed by using databases that are located in Russia, except for the cases when personal data processing may be performed without the subject s consent (i.e., for the purposes (i) stipulated in international treaties or federal laws; (ii) administration of justice and enforcement of judgements; (iii) performance of state and municipal functions and services; and (iv) journalism and mass media, literature or other creative activities). A Russian Subsidiary, being the personal data operator, must generally notify the state authorities about the processing of any personal data.

3 Tax Employee Tax Treatment: Individual Income Tax No individual income tax obligation should arise upon the grant of a right to purchase Stock, although the tax authorities may take a different position. In particular, there is a risk that such grant would be considered as receipt of a derivative financial instrument free of charge or the purchase of such derivative financial instrument without paying an arm s length purchase price. The employee is taxed upon the receipt/acquisition of the Stock if the acquisition cost is below the fair market value as calculated in accordance with applicable Russian securities and tax rules. Tax is also imposed on the gain from the subsequent sale of the Stock on the difference between the sale price and properly documented expenses related to the sale, acquisition and storage of the Stock and the amount on which individual income tax has been already paid upon purchase of the Stock. Tax is levied at a rate of 13% for Russian tax residents or at a rate of 30% for non-residents (subject to the provisions of any applicable tax treaties). Tax-Favored Program Withholding and Reporting None. The Russian employer is likely to be obliged to withhold tax if participation in the Plan is considered to be a benefit provided to employees pursuant to an employment relationship. Even if the Plan is structured such that it falls outside of the employment relationship between the local employer and the employees, the Russian employer will likely still be obliged to act as a tax agent and to withhold tax from all monetary funds payable to the employees. If no withholding is made, the employees are required to report income in their tax returns and to pay tax themselves. In such a case, however, the Russian employer can be penalized for failing to withhold tax. Employer Tax Treatment: Social Contributions and Accident Insurance Contributions No social contributions or mandatory accident insurance contributions should arise upon the grant of a right to purchase the Stock, although the funds authorities may take a different position. Social contributions and mandatory accident insurance contributions should only apply to material benefits derived by the employee from the acquisition of Stock at a discount, if such purchase is regarded as payment or other remuneration accrued to the employees under labor agreements with the Russian employer. If such liabilities arise, social contributions are payable to the Pension Fund, the Social Insurance Fund and the Federal Fund for Mandatory Medical Insurance at regressive rates. In 2016, these rates amount to (i) 30% for an individual s annual earnings up to a specific cap equalling RUB 796,000 (approximately EUR 11,300), subject to annual indexing, and (ii) a 10% additional rate to an individual s annual earnings in excess of this capped amount (RUB 796,000 / EUR 11,300). The mandatory accident insurance contributions are payable in the amount of %, depending on the employer s industry type.

4 Employer Tax Treatment: Cost Deduction Tax Rates It is unlikely that a local tax deduction would be permitted, even if the Russian Subsidiary reimburses the foreign parent company for the cost of Plan benefits. Corporate income tax is charged at rates of up to 20% (30% in exceptional cases of income on securities issued by Russian companies and held through foreign nominees with no beneficial ownership disclosure). Restricted Stock and RSUs Employment Social contributions are payable by the employer, on the employer s expense only. Where social contributions arise for the employer, these are levied at the rates as explained above. Any gain made on the sale of shares is taxed at a flat rate of 13% or 30% (depending on the individual s tax residency). Labor Concerns Russian labor laws should not generally impact restricted stock and RSU plans so long as participation in the Plan is not considered to be a benefit provided by the Russian employer pursuant to an employment relationship. However, as participation in the Plan can be connected to (and is usually conditional upon) the employees relations with the Russian employer, therefore, it is advisable to document the Plan in accordance with the requirements of the Russian Labor Code. A review of the exact language and structure of the Plans will be necessary in order to determine the enforceability in Russia of foreign Plans. There is ultimately a risk that the Russian courts would choose to apply Russian employment law as the law regulating the Plan. Communications If a Plan is documented as a part of the Russian employment contract, it should be translated into Russian. Government filings must be in Russian. Regulatory Securities Compliance The principal regulatory framework for the offering of foreign securities is set out in Federal Law No. 39-FZ On Securities Market dated 22 April 1996, as amended (the Securities Market Law ). The Securities Market Law currently states that: (i) foreign securities that have not been admitted to public placement and/or public circulation in Russia, as well as (ii) foreign financial instruments that have not been recognized as securities, may not be offered in Russia in any form or by any means, including by way of advertising, to an unlimited number of investors and to persons who are not qualified investors under Russian law. Therefore, the offer of Stock under Plans to employees who are not qualified investors could be viewed as contrary to the Securities Market Law, to the extent that the said Stock has not been admitted to public placement and/or public circulation in Russia.

5 However, the Federal Service on Financial Markets (the FSFM ; as of 1 September 2013 the FSFM was replaced by the Service of the Central Bank for Financial Markets) issued Order No. 11-8/pz-n On Approval of the Regulation On Peculiarities of the Circulation and Registration of Rights to Securities Designated for Qualified Investors and of Foreign Securities, dated 5 April 2011 (the Order ). The Order raises the possibility of non-qualified investors acquiring foreign securities that have not been admitted to public placement and/or public circulation in Russia if such acquisition is made by (a) a foreign citizen, or (b) a Russian citizen under his/her employment contract or in connection with the fulfilment of duties under his/her employment contract, or in connection with his/her membership of the board of directors (supervisory board) of a legal entity. The actual position is therefore uncertain in light of the general restrictions on the offering of foreign securities established by the Securities Market Law. Until this point is clarified, consideration should be given to the implementation of an off-shore grant structure which does not amount to an offering in Russia. Currency Control Given that employees will not pay for the restricted stock or RSUs, they will not be required to comply with any currency control formalities. However, details of the law regarding currency control in Russia are set out below for completeness. The transfer of funds to and from a foreign jurisdiction, in relation to a transfer of securities from a foreign company to a Russian individual, may be made freely. This follows the general principle that all currency operations between Russian residents and non-residents may be made without any limitations. As a general rule, payments to or from Russian residents (both legal entities and individuals) should be effected through accounts with Russian authorized banks. In the event that a Russian resident seeks to use a bank account with a non-russian authorized bank, additional reporting requirements may apply. Data Protection As a general rule, the processing of personal data requires the consent of the data owner (i.e. the employee). The transfer of the personal data of a Plan participant from the employer to the Issuer will qualify as a transfer of personal data to a third party and also as a crossborder transfer of personal data. This will require the written consent of each participating employee. With effect from 1 September 2015, the following localization requirements were introduced, for certain operations of processing of personal data, i.e.: collection, recording, organization (systematization), accumulation, storage, verification (updating, alteration), and retrieval of personal data of Russian citizens: holders of information and operators of information systems shall ensure that the databases which are used for processing are located in Russia; and when collecting personal data, including from the Internet, operators shall ensure, that the respective processing operations, are performed by using databases that are located in Russia, except for the cases when personal data processing may be performed without the subject s consent (i.e., for the purposes (i) stipulated in international treaties or federal laws; (ii) administration of justice and enforcement of judgements; (iii) performance of state and municipal functions and services; and (iv) journalism and mass media, literature or other creative activities). A Russian Subsidiary, being the personal data operator, must generally notify the state authorities about the processing of any personal data.

6 Tax Employee Tax Treatment: Individual Income Tax No individual income tax obligation should arise upon the award of RSUs, although the tax authorities may take a different position. In particular, there is a risk that such award would be considered as receipt of a derivative financial instrument free of charge or the purchase of such derivative financial instrument without paying an arm s length purchase price. The employee is taxed at receipt of the Stock (i.e. upon award/receipt of restricted stock, or vesting of RSUs) on the fair market value of that Stock (calculated in accordance with applicable Russian securities and tax rules) less any amount paid for the Stock. Tax is also imposed upon the subsequent sale of the underlying Stock on the difference between the sale price and properly documented expenses related to the sale, acquisition and storage of the Stock and the amount, if any, on which individual income tax has been already paid upon acquisition of the Stock. Tax is levied at a rate of 13% for Russian tax residents or at a rate of 30% for non-residents (subject to the provisions of any applicable tax treaties). Tax-Favored Program Withholding and Reporting None. The Russian employer is likely to be obliged to withhold tax if participation in the Plan is considered to be a benefit provided to employees pursuant to an employment relationship. Even if the Plan is structured such that it is outside of the employment relationship between the local employer and the employees, the Russian employer will likely still be obliged to act as a tax agent and to withhold tax from all monetary funds payable to the employees. If no withholding is made, the employees are required to report income in their tax returns and to pay tax themselves. In such case, however, the Russian employer can be penalized for failing to withold tax. Employer Tax Treatment: Social Contributions and Accident Insurance Contributions No social contributions or mandatory accident insurance contributions should arise upon the award of RSUs or performance Stocks, as there is no disposal of Stock to the employee at this point. Social contributions and mandatory accident insurance contributions are only likely to be due on the fair market value of the Stock transferred free of charge, where participation in the Plan is considered to be a benefit provided by the Russian employer pursuant to the employment relationship. If such liabilities arise, social contributions are payable to the Pension Fund, the Social Insurance Fund and the Federal Fund for Mandatory Medical Insurance at regressive rates. In 2016, these rates amount to (i) 30% for an individual s annual earnings up to a specific cap equalling RUB 796,000 (approximately EUR 11,300), subject to annual indexing, and (ii) a 10% additional rate to an individual s annual earnings in excess of this capped amount (RUB 796,000 / EUR 11,300). The mandatory accident insurance contributions are payable in the amount of %, depending on the employer s industry type.

7 Employer Tax Treatment: Cost Deduction Tax Rates It is unlikely that a local tax deduction would be permitted, even if the Russian Subsidiary reimburses the foreign parent company for the cost of Plan benefits. Corporate income tax is charged at rates of up to 20% (30% in exceptional cases of income on securities issued by Russian companies and held through foreign nominees with no beneficial ownership disclosure). Social contributions are payable by the employer, on the employer s expense only. Where social contributions arise for the employer, these are levied at the rates as explained above. Any gain made on the sale of shares is taxed at a flat rate of 13% or 30% (depending on the individual s tax residency). Stock Option Plans Employment Labor Concerns Russian labor laws should not generally impact option plans so long as participation in the Plan is not considered to be a benefit provided by the Russian employer pursuant to an employment relationship. However, as participation in the Plan can be connected to (and is usually conditional upon) the employees relations with the Russian employer, it is advisable to document the Plan in accordance with the requirements of the Russian Labor Code. Russian labor law is not clear on whether the employer may withhold portions of employee s salary in connection with the Plan. Any withholdings and/or transfers of any portions of the employee s salary in connection with the Plan must be made under the employee s express and written instructions. A review of the exact language and structure of the option plans will be necessary in order to determine the enforceability of foreign option plans. There is ultimately a risk that the Russian courts would choose to apply Russian employment law as the law regulating the Plan. Communications If a Plan is documented as a part of the Russian employment contract, it should be translated into Russian. Government filings must be in Russian. Regulatory Securities Compliance The principal regulatory framework for the offering of foreign securities is set out in Federal Law No. 39-FZ On Securities Market dated 22 April 1996, as amended (the Securities Market Law ). The Securities Market Law currently states that: (i) foreign securities that have not been admitted to public placement and/or public circulation in Russia, as well as (ii) foreign financial instruments that have not been recognized as securities, may not be offered in Russia in any form or by any means, including by way of advertising, to an unlimited number of investors and to persons who are not qualified investors under Russian law.

8 Therefore, the offer of Stock under option plans to employees who are not qualified investors could be viewed as contrary to the Securities Market Law, to the extent that the said Stock has not been admitted to public placement and/or public circulation in Russia. However, the Federal Service on Financial Markets (the FSFM ; as of 1 September 2013 the FSFM was replaced by the Service of the Central Bank for Financial Markets) issued Order No. 11-8/pz-n On Approval of the Regulation On Peculiarities of the Circulation and Registration of Rights to Securities Designated for Qualified Investors and of Foreign Securities, dated 5 April 2011 (the Order ). The Order raises the possibility of non-qualified investors acquiring foreign securities that have not been admitted to public placement and/or public circulation in Russia if such acquisition is made by (a) a foreign citizen, or (b) a Russian citizen under his/her employment contract or in connection with the fulfilment of duties under his/her employment contract, or in connection with his/her membership of the board of directors (supervisory board) of a legal entity. The actual position is therefore uncertain in light of the general restrictions on the offering of foreign securities established by the Securities Market Law. Until this point is clarified, consideration should be given to the implementation of an off-shore grant structure which does not amount to an offering in Russia. Currency Control The transfer of funds to and from a foreign jurisdiction, in relation to a transfer of securities from a foreign company to a Russian individual, may be made freely. This follows the general principle that all currency operations between Russian residents and non-residents may be made without any limitations. As a general rule, payments to or from Russian residents (both legal entities and individuals) should be effected through bank accounts with Russian authorized banks. In the event that a Russian resident seeks to use a bank account with a non-russian authorized bank, additional reporting requirements may apply. Data Protection As a general rule, the processing of personal data requires the consent of the data owner (i.e. the employee). The transfer of the personal data of a Plan participant from the employer to the Issuer will qualify as a transfer of personal data to a third party and also as a cross border transfer of personal data. This will require the written consent of each participating employee. With effect from 1 September 2015, the following localization requirements were introduced, for certain operations of processing of personal data, i.e.: collection, recording, organization (systematization), accumulation, storage, verification (updating, alteration), and retrieval of personal data of Russian citizens: holders of information and operators of information systems shall ensure that the databases which are used for processing are located in Russia; and when collecting personal data, including from the Internet, operators shall ensure, that the respective processing operations, are performed by using databases that are located in Russia, except for the cases when personal data processing may be performed without the subject s consent (i.e., for the purposes (i) stipulated in international treaties or federal laws; (ii) administration of justice and enforcement of judgements; (iii) performance of state and municipal functions and services; and (iv) journalism and mass media, literature or other creative activities). A Russian Subsidiary, being the personal data operator, must generally notify the state authorities about the processing of any personal data.

9 Tax Employee Tax Treatment: Individual Income Tax No individual income tax obligation should arise upon the grant of stock options, although the tax authorities may take a different position. In particular, there is a risk that such grant would be considered as receipt of a derivative financial instrument free of charge or the purchase of such derivative financial instrument without paying an arm s length purchase price. The employee is taxed upon the exercise of the option, calculated by reference to the difference between the fair market value (calculated in accordance with applicable Russian securities and tax rules) and the exercise price. Tax is also imposed on the gain from the subsequent sale of the Stock on the difference between the sale price and properly documented expenses related to the sale, acquisition and storage of the Stock and the amount on which individual income tax has been already paid upon purchase of the Stock. Tax is levied at a rate of 13% for Russian tax residents or at a rate of 30% for non-residents (subject to the provisions of any applicable tax treaties). Tax-Favored Program Withholding and Reporting None. The Russian employer is likely to be obliged to withhold tax if participation in the Plan is considered to be a benefit provided to employees pursuant to an employment relationship. Even if the Plan is structured such that it falls outside of the employment relationship between the local employer and the employees, the Russian employer will likely still be obliged to act as a tax agent and to withhold tax from all monetary funds payable to the employees. If no withholding is made, the employees are required to report income in their tax returns and to pay tax themselves. In such a case, however, the Russian employer can be penalized for failing to withold. Employer Tax Treatment: Social Contributions and Accident Insurance Contributions No social contributions or mandatory accident insurance contributions should arise upon the grant or exercise of stock options, although the funds authorities may take a different position. Social contributions or mandatory accident insurance contributions should only apply to material benefits derived by the employee from the acquisition of Stock at a discount, if such purchase is regarded as payment or other remuneration accrued to the employees under labor agreements with the Russian employer. If such liabilities arise, social contributions are payable to the Pension Fund, the Social Insurance Fund and the Federal Fund for Mandatory Medical Insurance at regressive rates. In 2016, these rates amount to (i) 30% for an individual s annual earnings up to a specific cap equalling RUB 796,000 (approximately EUR 11,300), subject to annual indexing, and (ii) a 10% additional rate to an individual s annual earnings in excess of this capped amount (RUB 796,000 / EUR 11,300). The mandatory accident insurance contributions are payable in the amount of %, depending on the employer s industry type.

10 Employer Tax Treatment: Cost Deduction Tax Rates It is unlikely that a local tax deduction would be permitted, even if the Russian Subsidiary reimburses the foreign parent company for the cost of Plan benefits. Corporate income tax is charged at rates of up to 20% (30% in exceptional cases of income on securities issued by Russian companies and held through foreign nominees with no beneficial ownership disclosure). Social contributions are payable by the employer, on the employer s expense only. Where social contributions arise for the employer, these are levied at the rates as explained above. Any gain made on the sale of shares is taxed at a flat rate of 13% or 30% (depending on the individual s tax residency). whitecase.com In this publication, White & Case means the international legal practice comprising White & Case llp, a New York State registered limited liability partnership, White & Case llp, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities. This publication is prepared for the general information of our clients and other interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice. This summary is intended to reflect local law and practice as at 1 September Please note, however, that recent amendments and legal interpretations of the local law may not be included in these summaries. In addition, corporate governance, administration, and plan design facts that are specific to your company may impact how the local laws affect the company s equity based compensation plans. With these matters in mind, companies should not rely on the information provided in this summary when implementing their stock plans. Capitalised terms used in this report which are not otherwise defined shall have the meanings assigned to them in the Glossary, which can be accessed from the Countries at a Glance page on the White & Case llp website. Attorney Advertising. Prior results do not guarantee a similar outcome. NY1016/ECBEL/M/314460_04