Withholding Headaches in Sweden

Sweden has not been a country previously featured in this blog, but we have become aware that the Swedish Tax Agency (the “STA”) has contacted several local employers in recent months to seek clarification on the amounts withheld in relation to equity award income and correct the reporting where needed. We believe it is possible that many more companies could be audited with respect to their equity award tax withholding practices in 2019 and beyond.

The Issue

As of January 1, 2019, a new monthly Pay-As-You-Earn (“PAYE”) reporting system replaced the annual income statements that were previously required in Sweden. The monthly tax returns include separate line items for the different categories of income (i.e., salary, car benefit, fuel benefit and other benefits including equity income) and the tax withheld on the income for the applicable month.

Separately, it has always been the case that the amount of tax withheld in a particular month may not exceed the total amount of an employee’s gross monthly salary for the same month. If taxes due exceed the employee’s gross monthly salary, companies may withhold tax only up to the amount of monthly salary. The employee would then be required to pay any remaining tax when he/she files his/her annual tax return.[1] We understand that, in the past, withholding amounts could be spread over multiple pay periods to avoid this issue, but this is no longer the case.

Prior to implementation of the new PAYE system, taxes withheld on equity award income and other income were reported in an income statement at year-end, in which case it was nearly impossible for the STA to determine whether taxes withheld for purposes of equity award income in a particular month had exceeded an employee’s monthly gross salary for the same month. Under the new PAYE process, however, any time the withholding amount reported through PAYE for a particular month exceeds the employee’s monthly salary, the STA technically is being alerted to the infraction.

Especially in case of RSUs vesting or options being exercised and considering the high tax rates in Sweden, it can often be the case that the total tax due on RSU/option income (together with tax due on regular salary and other income) exceeds an employee’s monthly salary. It is irrelevant/not helpful that most companies either (i) sell a number of shares on behalf of the employee and use the sale proceeds to cover applicable withholding taxes, or (ii) withhold a number of shares and come up with the equivalent cash to cover applicable withholding taxes. Even though these processes mean companies are not actually withholding any tax due on the equity award income from the employee’s salary, the rule that the tax withheld as reported through the PAYE system cannot exceed the monthly gross salary still applies.

In this respect, it is also important to point out that companies arguably may withhold taxes only from salary (i.e., cash payments) so a sell-to-cover or share withholding method are not contemplated under Swedish tax law. [2]

As mentioned, we have already seen the STA approaching several companies to question why taxes withheld in a particular month exceeded an employee’s monthly gross salary. More concerning, the STA has suggested that, to the extent the tax withheld exceeds the monthly salary, such excess amount will be deemed additional taxable income on which income tax and employer social security contributions are due.

What Next?

In light of the above, companies should review their obligations both with respect to taxable events that have previously occurred in 2019 and on a going forward basis. To date, we have not seen the STA challenge years prior to 2019.

Prior Taxable Events

Companies should review their monthly individual income tax returns for 2019 to determine if there are instances where the tax withheld on equity award income (together with other tax withheld for the relevant month) exceeded the employee’s gross salary for the applicable month. If this were to be the case, it is possible to apply for a reassessment of the taxes due in the applicable month. This would entail effectively telling the STA that taxes were withheld from an amount other than salary and that taxes were overwithheld, so companies will need to carefully consider if this is the right strategy for them. Further, under Swedish tax law, a taxpayer generally can apply for reassessment only when there is an obvious mistake, such as transposing figures. However, we have seen reassessments being accepted by the STA for this purpose. If the STA accepts the reassessment, it will refund any tax withheld in excess of the monthly salary to the employee via the company (and the employee would then be required to pay the tax when he/she files his/her annual tax return).[3]

Going Forward

To avoid any issues going forward, we believe companies essentially have two alternatives:

1. Withhold from salary and let employees cover the remainder of the taxes due on their own
Under this approach, the company will withhold taxes from the employee’s salary up to the employee’s gross monthly salary and leave it up to the employee to come up with the cash to pay any remaining amounts.  Instead of selling/withholding any shares to cover taxes, the company would issue all of the shares to the employee.

This means: (a) the withholding could wipe out an employee’s entire pay check for one month and (b) employees will have to come up with the cash to cover the remainder of the tax obligation if/when it is due.  With respect to (b), employees can sell shares received from the equity awards (e.g., upon vesting of RSUs), but this could be problematic if the issuance occurs during a black-out (although we assume the employee could plan accordingly and enter into a 10b5-1 plan to sell shares).

2. Withholding from salary AND sell-to-cover/share withholding

    1. Step 1:  In the month of the taxable event, the local employer would withhold taxes from the employee’s salary up to the employee’s monthly salary and report only these withholdings through PAYE.
    2. Step 2:  The issuer would sell/withhold shares to cover the remaining taxes owed on the award income – these amounts would not be remitted or reported through PAYE. Instead, the issuer would either: (a) remit any remaining taxes to the employee’s tax account with the STA on behalf of the employee or (b) remit the amount of taxes to the employee for the employee to pay directly to the STA.

This alternative is more employee friendly as the employee can settle the tax liability immediately and will not have to worry about having to sell shares to cover the taxes due. However, it is more burdensome for the issuer from an administrative perspective.


As a first step, companies should check with their local payroll in Sweden to see if local payroll is aware of the issue and may have already been approached by the STA. As noted, it is recommended to review if the issue of withholding tax in excess of an employee’s monthly salary has already occurred in 2019 and, further, whether to file for a reassessment of taxes for the relevant month. Going forward, companies also need to make a decision on whether to change their withholding practices to follow one of the approaches outlined above. Most likely, communications to the affected employees will be required or at least highly advisable. Separately, some companies may decide to approach the STA to lobby for a change to the withholding rules for equity award income. We would be happy to assist with any of the above.


I would like to thank my colleagues Linnea Back (based in our Stockholm office) and Bianca Lansdown (based in our San Francisco office) for their help with drafting this post.

[1] If the total tax owed by an individual for the relevant tax year exceeds SEK 20,000, however, payment of the taxes must be made by February of the following year to avoid interest becoming due on the taxes owed.
[2] It is not entirely clear if the STA would be entitled to penalize companies for using these withholding methods. However, there is a chance an employee could claim to be entitled to the value of the shares sold/withheld (even though these amounts were used to settle taxes due by the employee).
[3] See FN 1.

Role of Share-Based Compensation for Gender Pay Gap/Pay Equity

Gender pay gap and pay equity are big discussion topics for companies around the world as more and more countries enact laws intended to close the gender pay gap and as case law develops involving discrimination claims related to pay equity. Beyond strictly legal obligations, many companies also face shareholder and employee pressure for increased transparency around diversity and gender pay.

The Gender Pay Gap vs. Pay Equity

In brief, the gender pay gap relates to the average difference in pay between men and women within an organization. By contrast, pay equity or equal pay relates to the question of whether men and women are paid equally for equal work and whether any disparity in pay for equal work is discriminatory. Many organizations have a gender pay gap; this is typically influenced by a variety of issues, but particularly by the lack of women at senior levels of the organization. A gap does not necessarily mean there is discrimination either in relation to pay or progression, but identifying and analyzing unexplained differentials can be the first step in furthering a company’s diversity and inclusion goals.

Most countries have legislation prohibiting discrimination in respect of employment decisions and requiring equal pay for equal work. But the gender pay gap has been slow to close, prompting a number of countries to introduce more stringent rules. These range from requiring at least some employers (usually if their employee headcount exceeds certain thresholds) to report publicly on their gender pay gap to more aggressive regulation such as disclosure of compensation paid to peers and bans on requiring job applicants to disclose their previous salary. EU countries and some US states are at the forefront of these efforts, but it is expected other countries around the world will follow suit (if they have not already).

Assessing Risk

Companies are well advised to get in front of these issues by assessing their own (potential) gender pay gaps and any risks related to discrimination claims for lack of pay equity. This usually involves a pay audit at least in the countries in which gender pay gap reporting is required or expected to be required. It is advisable to engage legal counsel to keep the audit under legal privilege since pay audits (even where voluntary and confidential) may otherwise be disclosable to would-be claimants in litigation.

Defining “Pay”

When conducting an audit and/or preparing for (public) gender pay gap reporting requirements, an important question is how to determine the items of compensation that need to be factored in to determine “pay.”

Share-based compensation does, in many cases, comprise a big (if not the biggest) element of an employee’s total compensation. Therefore, it does make sense that many countries that mandate gender pay gap reporting require (either expressly or implicitly) that share-based compensation be included when determining (and reporting) an employee’s pay. For instance, the UK’s 2017 Regulations require covered employers to report the difference in mean bonus pay between male and female employees. “Bonus pay” is defined to include shares, share options or restricted shares, among other things. (For more on the UK Regulations, please see here.)

How to Calculate the Value of Share-Based Compensation

However, what is not always clear (or consistent) is how to calculate or value share-based compensation. Different approaches include:

  • Using the fair value of any share-based award at the time of grant (i.e., equal to the accounting expense for such award),
  • The amount included in the employee’s taxable income (usually at the time of issuance of the shares after meeting vesting conditions), or
  • The intrinsic value of all outstanding awards in any particular year.

Any of these alternatives arguably do not represent a “fair” representation of the value of the share-based award. The fair value at grant or the intrinsic value in any given year could be misleading because employees may never actually benefit from the award if vesting conditions are not met. On the other hand, relying on the taxable income could differ from country to country depending on local tax laws (e.g., some countries view vesting/exercise of an award as the income tax event, while others allow deferral of tax until sale of the shares) and, at least in the case of options, employees decide when to exercise the options so the income could vary significantly from year to year.

We are far from reaching a global consensus on how to value share-based compensation for pay equity or reporting purposes, and in some countries, further clarifications (and possibly case law) will be required to determine how share-based compensation is to be valued.

Whatever the approach on the calculation of share-based compensation, companies will need to be ready to report share-based compensation as part of the gender pay gap reporting requirements. This may entail working with a plan broker to share relevant data with local entities that must comply with local reporting requirements (keeping in mind data privacy restrictions, which may differ from country to country).


As you can see from the above, although gender pay gap and pay equity considerations are a reality for almost all multinational companies, the details of compliance are complicated and will almost certainly remain in flux for years to come.

To assess your company’s potential exposure for gender pay gap compliance and discrimination claims related to pay equity, working with legal counsel to conduct a pay audit is an important first step. For more information on how we can assist, please see here.

Not So Fast: Tax Deduction For Share-Based Awards in Canada

After discussing the issues for a tax deduction for share-based awards in Israel in my last blog, I wanted to revisit another tax deduction conundrum, this time in Canada.

In the past, the Canada Revenue Agency (CRA) generally has not allowed a local tax deduction for the cost of share-settled awards (other than under very narrow circumstances).  However, based on a technical interpretation released on April 12, 2017, the CRA updated its position such that a company should be entitled to a tax deduction for the cost of awards if:

  • it retains the discretion to determine whether the award will be settled in cash or shares;
  • it does not commit to delivering the shares at any time before settlement;
  • it actually delivers shares upon settlement; and
  • where the award is granted by a non-Canadian parent company, the Canadian entity reimburses the parent for the cost of the award.

Based on this interpretation, most companies should be able to obtain a tax deduction in Canada for (time-based or performance-based) RSUs granted under the above conditions.  By contrast, it would be more difficult to structure an option or purchase rights granted under an ESPP as being able to be settled in cash or shares.¹

But even for RSUs, companies will need to consider two issues before restructuring their awards to be settled in cash or shares to obtain the tax deduction.

First, companies will need to confirm with their accountants whether retaining the discretion to settle the award in cash or shares will subject the award to liability accounting, i.e., mark-to-market accounting (rather than (fixed) equity accounting).  Liability accounting can introduce greater volatility for the balance sheet, but depending on the number of awards granted in Canada, this may not be material for most companies.

Second (and probably more importantly), if the award can be settled in cash or shares, it will be subject to the salary deferral rules, which is Canada’s version of Section 409A (sort of).   If an award runs afoul of the salary deferral rules, it is taxed at grant, and not only when the shares are issued, which is obviously a very undesirable outcome.

An exemption to the salary deferral rules exists, but is often described incorrectly as applying if an award is fully vested at least by the third anniversary of the grant date.  Therefore, it is assumed that awards that vest pro-rata over a three-year period from the grant date or awards that cliff-vest on the third anniversary of the grant date are fine.

However, the three-year vesting exemption from the salary deferral rules is a bit more nuanced.  In particular, it applies only if the award is fully vested within three years after the end of the year in which the services were rendered for which the award is granted.  For example, if a company grants an award in February 2017 (at least partially) for services rendered in 2016, the award would have to be fully vested by December 31, 2019 to avoid taxation at grant (i.e., less than three years from the grant date).

The question then becomes if or when awards are granted in consideration for services rendered before the grant date.  For new hire awards, it should be relatively easy to argue that the awards are not granted to reward past performance, in which case it will be sufficient if the awards are vested by the third anniversary of the grant date.  However, for refresh grants, this argument is more difficult to make, and there is an inherent assumption that awards made to existing employees are made to, at least in part, reward past performance.  This becomes even more clear if a company determines the size of the refresh grant (again, at least in part) based on prior year performance.

Consequently, granting awards that can be settled in cash or shares to obtain a tax deduction in Canada may require additional changes to the award terms to avoid running afoul of the salary deferral rules, i.e., shortening the vesting schedule (in some cases, quite significantly).

Given the above, before rushing into relying on the CRA interpretation to take a tax deduction in Canada, companies should carefully consider if retaining the discretion to settle the award in cash or shares makes sense in light of the challenges posed by the salary deferral rules.

¹  For options, it is also important to point that, even if companies are able to retain discretion to settle the option in cash or shares, such discretion will eliminate the 50% tax exemption that otherwise applies to options.  Therefore, going this route for options is hardly going to be popular with employees.

Tax Deduction and Other Troubles in Israel

I hope most of you have seen our client alert on the recent Israeli Supreme Court ruling that confirmed that stock-based compensation has to be included in the cost base of Israeli subsidiaries of multinational companies.  As a result of the decision, we have already seen a flurry of activity as many companies are evaluating how to obtain a tax deduction for awards granted to Israeli employees.

As a reminder, for companies with a cost-plus arrangement with their Israeli subsidiary, the decision means that the income of the Israeli subsidiary is effectively increased by the amount of the stock-based compensation, plus the mark-up.  To mitigate the tax due on this increased income, it will be crucial for most companies to deduct at least a portion of the equity award income.

The problem is, however, that a tax deduction for equity award income is available in Israel generally only for awards granted under a trustee plan.  Many companies have already set up a trustee plan to grant awards in Israel because trustee awards can provide for beneficial tax treatment for the employees and, thus, most Israeli employees push hard to receive trustee awards.

So let’s look more closely at the requirements of a trustee plan and the corresponding tax benefits.

Trustee Plan Requirements

As the name indicates, a trustee plan has to be administered by an Israeli trustee which has to hold the awards and underlying shares for the duration of the holding period (more on this below), and which will satisfy the applicable tax withholding and reporting obligations.  Most companies enter into a “supervisorial” trust arrangement with the trustee, which means the awards and shares are not physically held by the trustee.  Instead, they are held by the existing broker (e.g., in the U.S.) and the Israeli trustee works with the broker to ensure the awards/shares are not sold before the holding period ends.

There are a number of companies in Israel which can act as a trustee for this purpose, and several are very familiar with U.S.-style equity plans and can work with the brokers that generally administer the plans.  The fees vary by trustee, and usually depend on the number of grantees in Israel and the number of transactions.

Further, to implement a trustee plan, an Israeli sub-plan to the parent plan will need to be adopted and filed for approval with the Israeli Tax Authority (“ITA”).

Once the initial filing has been made, companies must report each grant to the trustee within 45 days of the grant date.  This can be done by sending the trustee a copy of the board resolutions approving the grants.

There are two possible tracks for a trustee plan: the capital gains track and the ordinary income track.   Almost all companies we work with opt for the capital gains track because only this track also provides tax benefits for the employee.

Capital Gains Track

Under the capital gains track, employees will be taxed at sale on the sale proceeds minus any price paid by the employee to acquire the shares (i.e., exercise price for options, purchase price under an ESPP, nil for RSUs).  For public company awards, the tax treatment at sale is bifurcated: the value of the shares underlying the award at grant minus any price paid by the employee to acquire the shares is taxed as ordinary income at the employee’s marginal tax rate.  Any appreciation in value between grant and sale is taxed as capital gain at a rate of approximately 25%.

The employer will be able to claim a tax deduction for the ordinary income portion, provided the employer is charged for this cost.  The tax deduction can be claimed only once the shares have been sold.¹

To qualify for the capital gains track, the trustee must hold the shares for a minimum of 24 months from the date of grant for options and RSUs and 24 months from the purchase date for ESPP.

For RSUs, the ordinary income portion is equal to the value of the underlying shares at grant.  Because this typically will equal the amount that has to be included in the cost base, companies will be able to offset the additional tax burden with a corresponding tax deduction.  However, a timing issue remains because the tax deduction is available only in the year of sale, while the additional tax burden is created in the year of grant.

For options, given that the exercise price will in almost all cases be equal to the value of the shares at grant, there typically will not be any ordinary income portion at grant and, hence, no deductible amount.²

For ESPP, the ordinary income portion is equal to the value of the shares at grant minus the purchase price.  However, offering an ESPP under a trustee plan usually is not very beneficial to the employees.  Furthermore, because the 24-month holding period for an ESPP starts running on the purchase date, employees have to hold the shares for a longer period of time than the shares subject to options and RSUs.³

Ordinary Income Track

Under the ordinary income track, the entire gain at sale (i.e., sale proceeds minus any price paid by the employee to purchase the shares) will be taxed as ordinary income and, thus, deductible to the local entity, provided it is charged for this cost.4

To qualify for the income tax track, the trustee must hold the shares for a minimum of 12 months from the date of grant for options and RSUs and 12 months from the purchase date for ESPP.

Given the treatment of the entire gain as ordinary income and the 12-month holding period, this track is obviously not popular with employees and rarely implemented.


To maximize the tax benefits for both the company and the employee, granting RSUs under the capital gains track of a trustee plan is (and will be) the preferred approach for most companies that are interested in seeking a tax deduction.  As noted above, a timing issue still remains because the tax deduction cannot be taken until the shares are sold (even though the deductible amount will be limited to the value of the shares at grant).  In order to claim the tax deduction, the local entity has to be charged for the deductible amount pursuant to a written reimbursement agreement.

One additional wrinkle to consider for U.S. parent companies is that the amount that can be charged to local entities should not exceed the value of the shares at vesting.  Any amount charged in excess of this value could be considered as a taxable dividend under Section 1032 of the U.S. Internal Revenue Code.  Therefore, the charge-back amount should be limited to the lower of the value of the shares at grant and the value of the shares at vesting.  If the stock price drops between grant and vesting, this will reduce the value of the reimbursement amount and, thus, of the deductible amount in Israel.


1  For awards granted by a private company, the entire sale proceeds (minus any price paid for the shares) are treated as capital gain, which means no deduction is available.

2  Note that, to determine the value of the shares at grant under a trustee plan, companies will need to look to the prior 30-trading day average price of the shares.  Therefore, if the exercise price is determined based on the closing price on the grant date (or prior day closing price), a small discount could exist.

3  It used to be possible to obtain tax rulings for ESPP granted under a non-trustee plan in Israel whereby the ITA would agree to allow companies to treat the discount at purchase as ordinary income and take a tax deduction for this amount.  While it is still possible to get the ITA to agree that the discount at purchase should be treated as ordinary income, in recent years, the ITA has refused to allow a tax deduction for this amount.

4  It may be problematic for U.S. issuers to charge the local employer for an amount that is greater than the market value of the shares at vesting.

Data Privacy Compliance for Equity Awards Post-GDPR


As most of you are aware, the collection, processing, use and transfer of personal data is regulated and restricted in most countries outside the US. This is especially true for countries in the EU and EEA, where any such action generally requires a valid basis, or risks being illegal.

Compliance with EU data privacy requirements can be challenging for US-based multinationals which collect, process and transfer personal data of EU/EEA-based employees to administer the employees’ participation in an equity or other incentive plan offered by the US parent company. Additional challenges arise if the parent has engaged a US-based broker or third-party plan administrator to assist with the administration of the plan.


On May 28, 2018, the General Data Protection Regulation (GDPR) will take effect in the EU/EEA, replacing the Data Privacy Directive which has been in place since 1995. Under GDPR, increased penalties will apply if the collection, processing and transfer is effected without a valid basis. Enforcement activity from EU regulators may also increase once the GDPR takes effect.

In terms of satisfying local data protection requirements in the context of equity award offerings, the most challenging aspect is to find a justification to transfer an EU/EEA employee’s personal data from the EU/EEA to the US, which is generally necessary to administer the employee’s participation in an equity plan offered by a US-parent company. To further complicate matters, the personal data not only has to be transferred to the parent company but usually also to third-party vendors, which are assisting the company with the administration of the plan (i.e., US brokers/plan administrators).

To justify such transfers, companies can take any one or a combination of approaches, e.g., (A) obtaining employee consent, (B) establishing the use of data is necessary to perform a contract, (C) establishing the issuer has a legitimate interest in transferring the data, (D) registration under the EU-US Privacy Shield Program, or (E) entering into Standard Contractual Clauses or binding corporate rules with the various parties involved in the data handling.

A.   Consent

For purposes of establishing a valid basis under GDPR for collecting, processing and transferring personal data to administer equity awards, it may be possible to rely on the employee’s consent.  The consent language can be included in the award agreement (and has historically been included in most of our clients’ award agreements). However, to comply with the specific requirements under GDPR, updates to the consent language are likely required. Furthermore, although it is permissible to obtain consent within the award agreement, it is highly recommended to have employees separately accept the consent language. This could be achieved by having a separate call-out box for the data privacy consent when the employee accepts the agreements electronically, or by having an entirely separate consent document.

The consent will cover both the transfer of personal data from the EU/EEA employing subsidiary to a US-based issuer and from the US issuer to the broker/plan administrator. This is a significant advantage of the consent approach, as further discussed below.

Notwithstanding the above, companies should be aware that consent may be viewed as an invalid basis under GDPR based on the arguments that (i) it is not obtained before the data is actually collected, processed and transferred, and (ii) some countries may not deem employee consent a valid basis because employees are viewed as coerced to give consent if it is requested in the context of the employment relationship. Furthermore, consent is problematic because it can be withdrawn by the employee at any time.

B.   Necessary to Perform Contract

If the US issuer is able to identify and limit the data being collected, processed and transferred to that which is absolutely necessary to perform its contractual duties under the award agreement and plan, this complies with the GDPR requirements. In this case, the issuer will need to prepare a data privacy notice (rather than consent) for grantees in EU/EEA jurisdictions which sets out the data being collected and the purpose for which the data is being processed and transferred.

C.   Registration with the EU-US Privacy Shield Framework

Registration with the EU-US Privacy Shield certifies the transfer of data between the EU/EEA and the US is operated in compliance with applicable protection regulations, including GDPR. The registration process is fairly straightforward and is done completely online. However, the issuer should ensure it has undertaken appropriate measures in advance of self-certifying during the registration process to confirm compliance with the self-assessment and preparation of the due diligence documentation required by the Privacy Shield.

Additional information on the certification process and compliance with the Privacy Shield is available on the framework’s governmental website. The issuer should also consider that, once self-certified, annual re-certification is required. However, changes in the practical details of data processing do not need to be notified.

D.   Legitimate Interest

Similar to the argument that the transfer of data is necessary to perform a contract, the issuer could take the position that it has a legitimate interest in doing so in situations where the local entity is not equipped from a Human Resources (or other) perspective to handle the data locally. Particularly in the context of equity incentive awards granted exclusively by the US-parent company, this position may be viable. However, this could become challenging to the extent there are larger, well-equipped EU/EEA entities that may have more independent administrative functions.

E.   Standard Contractual Clauses / Binding Corporate Rules (BCRs)

Another basis on which an issuer can rely to validly transfer data under GDPR is by way of Standard Contractual Clauses approved by the European Commission. If the issuer’s EU/EEA entities agree with the US parent company to comply with the Standard Contractual Clauses, then “adequate safeguards” will be presumed. However, the Standard Contractual Clauses cannot be modified in any manner that would contradict the clauses or data protection rights of individual employees. Although there is discretion for companies to draft their own contractual clauses, such clauses would be subject to scrutiny in each EU/EEA member state, increasing any risk of local non-compliance. It also should be noted that the Standard Contractual Clauses require a great level of detail on the data processing practices and purposes, which can result in voluminous data transfer agreements and support for same.

Similarly, the issuer could enter into BCRs (i.e., binding commitments reflecting data protection safeguards implemented to comply with GDPR within a group of companies) with entities within its company group.  The required content of BCRs is provided in the text of GDPR, and may be specifically prescribed by the European Commission.

Challenges Remain

It should be noted that approaches B. and D. arguably cover and approaches C. and E. definitely cover only the transfer of personal data between the EU/EEA employing entities and the US issuer.  Therefore, under these approaches, the issuer may have to devise other methods to legitimize data transfers to the US-based broker/plan administrator. As mentioned, consent would be one approach, but has the issues described above.

One other approach would be to ask the broker/plan administrator to enter into Standard Contractual Clauses with the issuer, pursuant to which the broker/plan administrator would undertake to protect the personal data of the EU/EEA employees. This requires negotiations with the brokers/plan administrators and, possibly, an amendment to the services agreement.


There are a number of methods by which personal data for purposes of equity plan administration may be transferred from the EU/EEA to the US, with no single alternative satisfying all competing interests.

Compliance with GDPR cannot be evaluated solely in the context of the issuer’s equity grants. Rather, all collection, processing, use and transfer of data between the EU/EEA and US (and, of course, other countries) must be analyzed for compliance with applicable law/regulation. Therefore, it is important for equity plan professionals to connect with their internal data privacy experts and ensure that the measures taken to comply with GDPR also take into account personal data used in the context of equity plan administration.

Please make sure to connect with your equity plan counsel to reflect any new approach in the grant documentation provided to employees.

ANOTHER French-Qualified RSU Regime on the Horizon

If it seems that most of my blog posts are dedicated to France, then you are correct.

For this, we can blame the many changes that have been adopted to the French-qualified regime for RSUs over the last few years, most recently discussed in my post from April 2017.  And, alas, another change is on the horizon. Continue reading

Tax-Qualified Plans – Blessing or Curse?

When granting equity awards, one of the most important questions is the tax effect of such awards.  Granting awards that have a negative tax impact on the employee or the company is counter-productive and should lead companies to consider other ways to incentivize their employees.  On the other hand, should companies maximize the availability of favorable tax treatment for equity awards in certain countries?  This is not an easy question to answer.

Favorable Tax Treatment – The Company vs. the Employee

When we talk about favorable tax treatment, it can mean different things depending on the country and the qualified-tax plan.  The most basic distinction is whether the treatment is favorable for the employee, the company, or both.

  • For employees, favorable treatment often means that taxation can be deferred (usually until the shares are sold), the taxable amount can be reduced or characterized more favorably (e.g., as capital gain, rather than employment income), social taxes can be mitigated or avoided, or a combination of the foregoing.
    For the company, favorable treatment usually means that employer social taxes can be reduced or avoided, tax withholding/reporting obligations can be eliminated, or a tax deduction becomes available.
  • Companies will need to consider which of the above are most important to them.  In my experience, it is usually a combination of employer social tax savings and employee tax savings that prompt companies to implement a tax-qualified plan.

The prime example for this is France, where a tax-qualified plan can reduce the very high employer social taxes (up to 46%) that are due on non-qualified awards, but also allow for a tax deferral and potential tax savings for employees.  Of course, French-qualified awards are famously complex, due to the many changes the French legislator has adopted over the last few years (described in more detail in my prior blog post here).

By contrast, in Israel, a trustee plan (Israel’s version of a tax-qualified plan) benefits almost exclusively the employee, but has become so common that companies are almost forced to adopt one, due to competitive pressures. More recently, however, several of our clients have adopted trustee plans in Israel for the main reason of obtaining a local tax deduction, which has become more important in the wake of the Kontera decision, so there is now also a dual reason for such plans in Israel.

The Cost-Benefit Analysis

Before companies decide to implement a tax-qualified plan, they should undertake a careful cost-benefit analysis.  In working with private companies, I have observed that they tend to almost reflexively adopt a tax-qualified option plan in the UK or a French-qualified plan.  This is usually based on advice from local advisors who claim that these plans are common place for companies offering awards in their jurisdiction and that, to remain competitive, awards have to be granted under these plans.

While it is true that tax-qualified plans in these countries can be especially beneficial for private companies and their employees, this advice often omits the administrative burden and cost of maintaining such plans.  Virtually all tax-qualified plans (with France and the UK being no exception) come with various special conditions (such as minimum vesting and holding period requirements) and ongoing filing obligations (such as special annual reporting requirements).  And while the initial preparation and implementation of the tax-qualified plan can be handled by an outside advisor, ensuring that the special conditions are met and completing the ongoing filings typically falls on the company which, in the case of many private companies, may not have sufficient resources to deal with these issues.

Another important consideration is the treatment of qualified awards in a corporate transaction.  This is again especially relevant for private companies which are more likely to be acquired before awards can first be exercised or vest.  If an acquisition disqualifies the awards from the favorable treatment, the qualified plan essentially would have been implemented for naught.

Of course, companies don’t have a crystal ball and whether or not an award could be disqualified depends on the type of acquisition, the treatment of the awards in the acquisition, whether holding periods have been satisfied at the time of the acquisition and many other factors.  Still, dealing with qualified awards in an acquisition is usually cumbersome and, in many cases, it will be necessary or advisable to obtain tax rulings to preserve the qualified status of awards.  For example, in Israel, it seems that any modification of an existing award granted under a trustee plan requires the approval from the Israeli Tax Authority to maintain trustee plan status.

Embarking on a New Tax-Qualified Plan? Answer These Questions First!

As companies decide whether or not to implement a tax-qualified plan in a particular jurisdiction, they should ask themselves the following questions:

  • What is the benefit of the tax-qualified plan?  If the benefit is purely, or mostly, for the employee, how does this affect employees in other countries who may not be able to receive the same tax benefits?  Are the employer social tax savings significant enough to warrant the implementation and maintenance cost of the plan, as well as the administrative burden?
  • Has everyone weighed in on the decision to implement a tax-qualified plan?  Operating a qualified plan will most likely have a significant effect on the stock plan administrator who will need to administer special terms, such as holding periods, and comply with ongoing requirements.  It can also have corporate tax and accounting consequences which should be socialized with the right people within the organization.
  • Who should pay for the implementation and maintenance of the plan?  If the main benefit of the plan is employer social tax savings, perhaps it is appropriate to allocate the cost to the local entity.
  • Do we have the administrative capacity to administer the qualified plan?  In this respect, it is important to understand all of the requirements and any ongoing filing requirements.  I would also consider creating a detailed checklist that can be used to track the requirements and obligations, which can be especially useful if there is turn-over at the company.
  • What does the future hold?  If a company is about to implement a new equity incentive plan, does it make sense to implement a qualified plan under the “old” plan, given that most qualified plans are tied to the parent plan and have to be re-done when a new plan is adopted?  If a corporate transaction is probable, what is the impact of such a transaction on a qualified plan?

At the end of the day, as always seems to be the case with global equity awards, the answer of whether a tax-qualified plan should be implemented is highly fact-specific and depends on the particular circumstances of each company.  The best advice is to not jump into implementation of a qualified plan, but carefully consider all of the benefits and requirements and seek input from multiple stakeholders.

To Learn More

In case you are planning to attend the 2017 GEO National Equity Compensation Forum in Rancho Palos Verdes from September 13-15, I invite you to attend the presentation on this topic that I will participate in, together with Jennie Anderson from Microsoft and Wendy Jennings from Cisco.  Jennie and Wendy are among the most experienced stock plan administrators in the industry and will no doubt have great tips when it comes to tax-qualified plans!  If you have not registered yet, please see our invitation here for a special discount offer.

Total Reward Statements and Equity Awards

The Rise of Total Reward Statements

Starting a few years ago, many companies embraced the use of Total Reward Statements (TRS) in which they tried to summarize all of the different compensation items paid to an employee in one statement, ostensibly to make it easier for an employee to see, at a glance, how much money they were actually making.  A TRS usually includes base salary, bonus payments, commission payments and, of course, equity awards.

Because only the parent company has all of the information regarding the various compensation items, it is the parent company that prepares and issues the TRS (typically by posting it on an intranet site), even for employees employed by (foreign) subsidiaries.

Equity Award and Local Employer Compensation Information Do Not Mix

For these employees, however, mixing information related to equity awards with information on compensation paid by the local employer is a bad idea.  As you may have heard me or one of my colleagues say repeatedly: the equity awards always should be communicated, administered and generally be kept as separate as possible from the employment relationship.  This is to mitigate the risk of various claims the employee otherwise might raise, such as joint employer liability (i.e., that the foreign parent is another de-facto employer that can be sued over grievances related to the employment relationship), vested rights and entitlement claims or increased severance claims (i.e., that the equity award income has to be factored in when calculating severance or other termination benefits).  If the equity awards are considered part of the employment relationship, it can also lead to a requirement to translate award documents into local language or to consult local works council before equity award programs can be implemented, modified or terminated.

Consequently, even though equity awards are undeniably part of the total incentive package, ideally, they should not be mentioned in a TRS which also covers compensation paid by the local employer.  Instead, they should be communicated separately by the parent company (i.e., the grantor of the equity awards).

Of course, communicating the equity awards separately somewhat defeats the purpose of the TRS, so invariably, HR will not go for this advice and push to keep all of the compensation items in one statement.

In this case, consider making certain changes to the TRS to make it clear that the equity awards are provided by the parent company and are separate from the compensation paid by the local employer.  This usually can be done by including disclaimer language in footnotes or elsewhere.

In addition, pay attention to how the value of the equity awards is communicated.  I have seen several TRS which set forth a dollar amount for equity awards which is based on the current share price of the underlying shares, without further explanation.  This is misleading and can create unrealistic expectations for the employees in case the awards are unvested.  It is important to be clear that the awards will be of value only if they vest (and, in the case of options, the employee exercises the options) and that the income that may eventually be realized can differ greatly from the current (estimated) value, due to share price fluctuation.

With these additional disclaimers and clarifications, the risks described above of mentioning equity awards and “local” compensation in one TRS can be mitigated.

Not All It’s Cracked Up To Be

As a side note, I have heard from several companies that TRS are not all what they hoped them to be.  First, many companies find it very challenging and labor intensive to keep the statements up-to-date (unless an automatic feed is implemented, which is also challenging).  Second, it seems employee engagement quickly fades, most likely because even with a TRS, it is difficult to assess total compensation at a glance (especially if it is comprised to a large extent by incentive compensation subject to performance conditions).

So, maybe you will be able to talk HR out of using a TRS altogether!

Ready for Australian and UK Year-end Share Plan Reporting?

There are a few countries that require special annual reports for share plan transactions (in addition to regular annual payroll reports).  Australia and the UK are among these countries and are both on a fiscal year that differs from the calendar year.  The UK tax year ended on April 5 and the Australian tax year will end on June 30.

  • The UK Annual Share Plan Return (formerly known as Form 35, for tax-qualified awards, and Form 42, for non tax-qualified awards) is due to Her Majesty’s Revenue & Customs (“HMRC”) by July 6.
  • The Australian Employee Share Scheme (ESS) Return must be filed with the Australian Tax Office by August 14.  In addition, companies are required to provide their Australian employees with ESS statements by July 14.

Both returns (and the Australian ESS statements) can take a while to prepare (especially if companies need to report transactions for mobile employees and/or awards that were adjusted in a corporate transaction) and will need to be submitted electronically.

Please see our client alerts for Australia and the UK for more information on how to prepare the returns and make the submission.  We are aware that the HMRC website was affected by an outage during the month of May, so companies may have less time than normal to make the UK submission.

Our Sydney and London offices are available to assist with the preparation and submission of the returns.