The Court Case
In December 2015, the Tel Aviv District Court issued a ruling (the “Kontera decision”) that could have significant implications for companies that have a cost-plus structure in Israel and grant equity awards to employees of the Israeli entity. Under a cost-plus transfer pricing method, the parent company (or another entity in the company group) compensates the local entity with a fee that equals its direct and indirect costs related to the service provided by the local entity (the “cost base”) plus a mark-up (usually, a percentage of the cost base). The total fee is treated as taxable income to the local entity. It is therefore critical that all expenses that comprise the cost base are deductible expenses for local tax purposes. If they are, then the taxable income will equal only the amount of the “plus.”
In most countries, companies can determine the amount of their intercompany service fees under the cost-plus approach without including the “cost” of equity awards in the cost base. This is based on the argument that, absent a recharge payment by the local entity, there is no actual cost incurred by the local entity. In this case, the amount of the “plus” is minimized and it is less critical to ensure that the amount of the notional equity compensation “cost” is a locally deductible expense.
However, the Tel Aviv District court rejected this argument in the Kontera decision: in a case where the Israeli entity was being compensated under the cost-plus method, the court ruled that the expense related to the grant of options to employees of the entity had to be included in the cost base. The “cost” to be included was equal to the accounting expense of the options, not the value of the shares issued to employees (minus the exercise price paid by employees). Continue reading
It is not uncommon for an equity plan or a leave of absence policy to provide that vesting of awards will be suspended during any unpaid leave of absence. The intent is clear: companies do not want their employees to continue to vest in and earn awards if they are not rendering services (e.g., because they are on a sabbatical). However, these types of provisions can be problematic.
Is Suspension Legal and Administratively Feasible?
First, by suspending vesting during an unpaid leave of absence, companies are assuming that such leaves are not protected by law. (Often, the provision goes on to provide that vesting during paid leaves will also be suspended, but only to the extent such leaves are not protected by law or by contract.) However, there may also be unpaid leaves outside the U.S. during which suspension will not be permissible. The provision also raises the question of what is considered an unpaid leave. Is it a leave during which the company does not pay the employee, even if the employee is paid by a government agency (for at least a portion of his/her regular salary)? If the employee is paid by the government (as may be the case in some countries for employees on maternity or parental leaves), it will be quite common for the leave to be protected under local law. Continue reading
As has been widely reported (see Baker & McKenzie client alert), the European Court of Justice (ECJ) invalidated the EU/US Safe Harbor Program which allowed transfers of personal data of EU/EEA residents to U.S. companies that registered under the program. Generally, such transfers are allowed only if a permissible ground exists, and the Safe Harbor Program was a convenient ground for many U.S. companies doing business in the EU/EEA. By invalidating the program, these companies are now forced to rely on other grounds, such as the data subject’s express consent or Model Agreements between the transferring and receiving entity.
What Does This Mean for Equity Award Administration?
In the context of equity awards, U.S. companies granting awards to employees in the EU/EEA have to collect, process and transfer the employees’ personal data (i.e., information by which an employee can be identified) to administer their participation in the plan. Usually, the equity award database is maintained in the U.S., so the data has to be transferred to the U.S. In addition, the data is often shared with third-party providers (e.g., stock plan brokers) which also maintain databases in the U.S. Continue reading
As we reported in our July 2, 2015 client alert, the new Australian share plan legislation received Royal Assent on June 30, 2015 and applies to all equity awards granted on or after July 1, 2015. Under the new tax regime, stock options are generally taxed at exercise only (not at vesting).
In this post, I want to explore the practical implications of the new legislation for most companies and examine the exceptions to the rule.
Grant Document Changes
Under the old tax regime that was in effect from July 1, 2009 until June 30, 2015, options generally were taxed at vesting which obviously was not a good result for companies nor for employees. As a result, many companies stopped granting options in Australia altogether. The companies that persevered (often private companies with no alternatives, such as RSUs, available to them) usually imposed special terms designed to avoid a taxable event prior to a liquidity event or at a time when options were underwater. To achieve this, they restricted exercisability of the options until a liquidity event occurred and/or until the option was in the money.
For options granted prior to July 1, 2015, these restrictions should continue to be enforced because the old tax regime continues to apply to these grants. However, for options granted on or after July 1, 2015, these restrictions are no longer needed. This means companies should revise their award documents and delete these restrictions (usually contained in the Australia appendix to the award agreement). Continue reading
As described in our client alert, the new French-qualified RSU regime (Loi Macron) finally became effective on August 7, 2015. I have discussed the benefits for the new regime in an earlier blog post.
Unfortunately, the news is not all good. This is because the law provides that qualified RSUs can be granted under the new regime only under a plan that has been approved by shareholders after the effective date of the law (i.e., after August 7, 2015). Of course, we do not expect that any of our clients will ask their shareholders to approve a new plan or re-approve an existing plan just to grant French-qualified RSUs. This means that it is currently impossible for the vast majority of our clients to rely on the new regime (with the exception of only those companies that coincidentally just approved a new plan or had shareholders approve amendments to an existing plan). For these companies, until and unless their shareholders approve a plan, the conservative advice is to either not grant qualified RSUs or grant them in reliance on the old regime (with 2-year vesting and 2-year additional holding period, as well as employer social tax due at grant at a rate of 30%). Continue reading
Although the requirements to obtain approval for an equity plan from the State Administration of Foreign Exchange (SAFE) in China have relaxed over the past few years and, consequently, the approval process has become more predictable and faster, it still requires significant resources (both financially and from a staffing perspective to administer the ongoing requirements).
Therefore, many companies (especially those with a lower headcount in China) are still looking for strategies to avoid the SAFE requirements. And while there is never a perfect solution, most of these companies choose to grant cash awards. Cash awards can mean different things, so let’s look at the different alternatives. Continue reading
As I had discussed back in January 2015, changes to the moribund French-qualified RSU regime had been proposed by the French Government which would have made granting French-qualified RSU awards again much more beneficial to both the company and the employees. Alas, the wheels in France turn slowly and we are still waiting for the law to be adopted.
What has happened in the meantime is as follows:
The French Parliament actually adopted the proposed law at the end of February 2015. The law was then sent to the French Senate for further debate. Unfortunately, at the Senate level, the law was amended and the reduced vesting/holding periods now only apply to so-called SMEs. These are small and medium size companies which employ fewer than 250 persons and which have an annual turnover not exceeding € 50 million, and/or an annual balance sheet total not exceeding € 43 million. Continue reading
For several years, it has been challenging to grant equity awards to employees in Russia. The tax treatment of options and ESPP is uncertain and it is possible that tax is due at grant and at exercise/purchase. The securities requirements are similarly unclear and there is a risk that equity awards are subject to an onerous securities registration requirement, unless all transactions related to the awards take place outside of Russia. And, since 2013, due to changes to the currency control laws, it has been questionable whether shares and cash payments related to equity awards could be issued into non-Russian accounts.
Notwithstanding, with appropriate structuring of grant terms and award administration, many companies have continued to grant equity awards in Russia.
Data Privacy Laws Add Another Level of Difficulty to Equity Awards in Russia
Now comes the latest threat from a somewhat unexpected corner: data privacy laws. On July 21, 2014, Russia enacted a new data privacy law which requires that companies process all personal data related to Russian nationals in Russia. This means that companies which collect and/or process the personal data of Russian nationals would have to ensure that the databases used for such purposes are located in Russia. The effective date of the law was September 1, 2016, but has since been accelerated to September 1, 2015. Continue reading
Just when we thought French-qualified awards were headed for extinction due to the ever decreasing tax benefits, there is change in the air!
In November, a draft law was presented (the “Loi Macron”) which proposes a number of changes to the requirements and tax treatment of French-qualified RSUs, most of them favorable. The draft law does not propose any changes for French-qualified options.
As currently drafted, the law provides the following:
- Minimum vesting period reduced from two years to one year from the grant date;
- Holding period after vesting (currently minimum of two years for RSUs that vest within four years of grant date) is optional, but shares cannot be sold for a minimum period of two years from the grant date (effectively requiring a minimum one-year holding period for RSUs that vest on the first anniversary of the grant date);
- Employer social tax liability moved to vesting and due at a rate of 20% on the value of the shares issued at vesting (currently 30% on the value of the shares subject to the RSUs at grant – no reimbursement if RSUs forfeited prior to vesting); and
- Gain at vesting taxed as capital gain (currently taxed as salary income).
It is almost the end of the calendar year, and in addition to wrapping up gifts and holiday parties, it is time for multinational companies to consider the necessary tax and regulatory filings for global stock plans triggered by the close of 2014.
As you consider the steps your company may need to take to start the new year right, please see our Global Equity Services Year-End / Annual Equity Awards Filing Chart, which contains key filing and reporting requirements for 2014 and 2015.
Happy Holidays from Baker & McKenzie – wishing you prosperity in the New Year and favorable equity regulations around the globe!