Transcript: Around the World in 90 Minutes 2018
Tuesday, March 13, 2018
Back by popular demand, this panel of experts will cover key tax and legal updates around the world—as well as enforcement activity—and provide you with a clear action plan to address recent changes. Laws impacting global stock plans change at the speed of light; make sure you are current!
Featured panelist(s):
- Amit Banker, CPA, Partner, EY
- Valerie Diamond, Chair, Global Equity Services Group, Baker & McKenzie
- Mirjam Krawiec, Senior Manager, EY
- Brian Wydajewski, Partner, Baker & McKenzie
Belgium
Canada
China
European Union
France
Iceland
New Zealand
Poland
Singapore
Ukraine
United Kingdom
United States
Kathleen Cleary, Education Director, NASPP: Good afternoon, everyone. Welcome to today's webcast, “Around the World in 90 Minutes: Key International Updates.” Today's panel is going to give us a whirlwind tour of updates around the world and then provide a clear action plan so you can address these changes back at your own companies.
First, some quick introductions. My name is Kathleen Cleary and I'm the Education Director for the NASPP. Today, I'm very happy to welcome an esteemed panel of experts: Amit Banker, CPA and Partner with EY, Valerie Diamond, Chair of the Global Equity Services Group at Baker & McKenzie, Mirjam Krawiec, Senior Manager from EY and Brian Wydajewski, Partner with Baker & McKenzie.
The slide presentation for today's webcast is posted on our website, Naspp.com and you can download or print the slides, whichever you prefer. The deck is also loaded as a handout in the GoToWebinar panel so you can access it from there as well.
If you are logged into GoToWebinar—not just listening by phone, but logged in—you should also see the presentation slides moving as we go through the webcast. You will also have the opportunity to ask questions by typing them into the GoToWebinar panel. We do have a lot of material today, so we're going to hold the questions until the end of the webcast and if for any reason we don't get to your question, we'll follow up with you afterwards by email. Feel free to email me any time as well.
I believe on the second slide, our panelists have been brave enough to give you their contact information, so you can also reach out to one of them directly. We will be posting an archive of today's program within the next day or two and then a transcript will be posted in just a few weeks.
All right, let's dive into the webcast and I'm going to let Brian take it away with the countries we’re going to update.
Brian Wydajewski, Partner, Baker & McKenzie: Thanks so much, Kathleen. And thanks to everybody, for joining us today. As you see there are a number of different updates that we're going to try to touch upon today.
These are what we consider some of the more noteworthy developments since the last update presentation we did at the annual conference. If you need reference materials, we would encourage you to take a look at the materials from the annual conference for country developments that aren't reflected here today.
We’re going to hit a lot of tax developments as well as legal and regulatory developments. As Kathleen said, to the extent that you have any questions on anything that we cover here today, we're going to try to save some time at the end to address any questions.
To the extent that you're not comfortable with sharing your questions with the group, you can also reach out to us personally and we're happy to address your questions.
With that as a brief introduction, we're going to start our updates with Belgium and I'm going to pass it over to Mirjam.
Return to Index
Belgium
Mirjam Krawiec, Senior Manager from EY: Thank you, Brian, and hello everybody. The first update we wanted to bring to you is with regards to Belgium and the tax withholding and payroll reporting obligations.
Some of you may be aware that historically, the requirement for the local entity to record equity compensation within payroll was sometimes a bit of a mystery because the requirements would say it depends if the local entity is involved in the management or grant process of the awards.
A lot of organizations ask, “What exactly does mean? How do we define involvement in the grant process or the administering of the program?” Well, it appears that over the last six months, the Belgian tax authorities have actually started to scrutinize some of the level of the involvement. Hopefully, they’ll give a little more guidance for the future to the multi-national organizations that have Belgium subsidiaries.
It appears that the tax authorities are getting more involved and looking at the company to see if the local entity is involved in the selection of award recipients, and who will be receiving the award. What is the criteria? Are they distributing grant material to the local individuals? Are they helping them understand the award process, what they are receiving or what they are accepting? It appears all of those activities seem to fall under what they indicated historically as involvement in the grant process.
If a local subsidiary is part of those activities, that may mean that ultimately the local entity will be required to report the award income in payroll and apply any tax and potential Social Security withholdings.
As a takeaway for everybody, if you do have subsidiaries in Belgium, it would be our recommendation to reevaluate what level of involvement your local team has in the grant and ongoing administration of the equity award, so it can be clarified if your local entity has a payroll reporting and withholding obligation in Belgium.
Return to Index
Canada
Krawiec: The next update is with regards to Canada. This may not be news for many of you at this point, but the exemption historically was 50 percent of the income was exempt for federal tax purposes and 25 percent of the income was exempt for provincial tax purposes in Quebec, where certain criteria were met under the plan.
Options granted after February 22nd, 2017—for those awards where there may have been an increased exemption opportunity in Quebec—the 25 percent exemption would have been increased to 50 percent, again, if certain criteria are met. What I think is important and what we've seen historically is that it is key that for an organization to look at the program and plan to determine if the exemptions overall are applicable.
And if they are, that is great and let the individuals know that those exemptions will be applied within the withholding rates. And if they are not applicable, then potentially consider if changes can be made to the plan in order to benefit from the lower tax rates in Canada. Over to Valerie on China.
Return to Index
China
Valerie Diamond, Chair of the Global Equity Services Group at Baker & McKenzie: Thanks, Mirjam. It wouldn't be an international update without an update on China, which we seem to be doing every single year. I’ll just say for those of you that don't have background on what the requirements are from a regulatory standpoint, the big issue in China is really in relation to the State Administration of Foreign Exchange (SAFE) obligation of non-Chinese public companies to register their programs with the SAFE officials and to establish a bank account to ensure that all the funds flowing in and out of China go through that bank account in relation to the share program.
This obligation applies with respect to "domestic" employees working in China which is generally thought to include all PRC nationals, and then depending on the particular SAFE provincial authorities, they may have a different view about whether expat-type employees working in China are also subject to these restrictions.
Generally speaking, the way this works is that the location where the issuer has a subsidiary in China is the location in which you have to do your SAFE filings. If you have multiple subsidiaries in China, then you're able to choose among those particular locations as to where you make your filing, and that particular SAFE location will then dictate what the requirements are on an ongoing basis.
The last point here, just on a broad level, is that if you are private company, generally speaking there is not a way to authorize equity grants in China. So, I will just caution companies that might be listening, if you're not publicly traded, then technically speaking there should not be issuance of shares or equity awards for employees in China—at least as long as they are "domestic" employees.
Next slide. By way of an update, I think at this point, the rules in the larger provinces—meaning Beijing and Shanghai—are fairly established, and you would think at this point there would be few changes and we would understand how to deal with these SAFE restrictions, but we still have issues.
I have current updates as to the things that people have been experiencing in the last six months. In Shanghai, they do require that companies renew their application at the end of every year. For anybody filing in Shanghai, one of the changes that occurred this last year is for companies using one of the three banks: Bank of China, Citibank or HSBC for their onshore SAFE account, rather than filing their application or their renewal application with Shanghai SAFE directly, they should file it through one of these banks.
I think the experience so far has been a little bit mixed in some situations over the past year. Companies filing with the bank have found that the bank was in many respects more efficient and approved the SAFE application faster than the Shanghai officials who tended to be backed up on approving these applications.
In other situations, I would say companies have found that the bank showed more scrutiny to the application and basically was afraid to approve anything that didn't exactly match the terms and conditions of the original SAFE approval.
Companies were delayed in obtaining the bank’s approval of their registration renewal for the year because the bank had questions about what was actually going on with the SAFE approval, and that took some time to resolve with a particular company.
I would just say if you have registered in Shanghai or potentially have a subsidiary for which you are planning to register in Shanghai, then do give some thought to whether or not you're going to use one of these three banks because that may or may not, depending on the situation, delay your application.
The other thing is that in general, Shanghai SAFE has been scrutinizing re-registrations and quota applications with a lot more detail. We've had a few situations this year where companies had applied for an approval for the amount of funds to come out of China in relation to their ESPP program and Shanghai did not give an approval for the full amount because the company was not able to show that they used that same amount in 2017. It's really important to look at how much of your quota you used for the year in applying for a new quota and explain why you need more in the coming year so that Shanghai will understand and be able to approve it.
There are also some delays related to people having changes in their vesting schedules that were not reflected in their original application, or if there was a disconnect between what was reported by the bank and what was reported on the quarterly report, that also led to some delays.
In general, I would say the SAFE approval process for renewing applications at the end of last year has been slow, there were a lot of delays because some of the locations did get backlogged. I think what happened is that a lot of companies waited until the last months of the year—December and even January—to file their renewal applications, whereas the officials would actually accept the applications in October. Learning to submit your application as early as possible is important.
There are also some changes going on with the quarterly reporting of funds in and out of bank accounts to SAFE. I think in Beijing and Shanghai, they are actually starting to scrutinize and ask questions about what is reported on those reports, so I think in past years, companies have submitted them and there might have been some inconsistencies quarter-to-quarter.
Now, there's questions being asked if they don't match up. Some other locations like Tianjin no longer actually requiring quarterly reporting, so it changes all the time.
Next slide. Just in terms of takeaways, if you're a new applicant, I would definitely be strategic about where to file. Obviously, you do need to file where you have a subsidiary, but you might want to think about whether or not you want to engage one of the three banks if you're in Shanghai in order to be able to submit your application through the bank rather than directly to Shanghai officials.
The other thing to keep in mind is that once you do make a filing, you probably need to suspend vesting, and you may not be able to include any pre-IPO or pre-granted awards in your approval application. Just be prepared to deal with that because you may be asked questions about it.
If you are renewing an application, you definitely want to look at what your prior approval was, what the terms were, whether or not there's any change, changes to the broker, changes in the vesting schedule and just make sure that the quota makes sense given how much money you passed through your bank account in the prior year.
I would try to submit your application early and then lastly, I would be sure to notify SAFE promptly if you have changes to your plan, to your broker, if you acquire equity awards in a transaction, if you have a spinoff, anything that changes what goes on with your share program, you should be notifying SAFE as soon as possible.
With that, I'm going to turn it over to Brian to talk about some changes in the EU.
Return to Index
European Union
Wydajewski: Thanks so much, Valerie.
There are two changes that we're going to talk about today when it comes to the European Union. The first one pertains to data privacy and for those of you that have been practicing in this area for many years, you know that going back to the mid-‘90s, the collection, processing and transfer of personal data has been governed under the EU data protection directive, which was really the first generation of legislation aimed at harmonizing all of the data privacy laws that were adopted throughout Europe following World War II.
In a nutshell, the basic premise of the directive is that the collection, processing and transfer of data only can occur for certain permitted purposes, provided that first there is adequate notice and disclosure provided to the data subjects.
Secondly, that there’s adequate safeguards established to effectively ensure that the personal data is protected and kept safe. Under the existing data privacy directive, there are a number of bases for handling personal data. They range from consent of data subject to binding corporate rules that address the handling of personal data within corporate organizations to including model contractual clauses that have been blessed by the privacy authorities in Europe that really go to the handling of personal data between organizations in unrelated third parties. Then a final basis was originally the EU-U.S. Safe Harbor that had been negotiated but subsequently invalidated and replaced by the relatively new EU-U.S. privacy shield.
In the context of equity compensation and stock plan administration, companies and third-party service providers traditionally have relied upon the consent of award recipients for dealing with the collection and processing and transfer of the personal data of those award recipients. I would say for those of you who have worked with Baker McKenzie on global equity compensation matters, you're very familiar with the very robust data privacy provision that we traditionally have recommended to be included in award agreements or ESPP enrollment forms.
Briefly, that data privacy provision effectively consists of a notice that effectively provides information regarding the type of personal data that the company is collecting and also talks about how it's going to be used and shared and who the award recipient can contact for more information. Then it also consists of the consent itself. For a variety of reasons in recent years, I would say we've been advocating for companies to consider putting into place a very broad privacy consent at the start of the employment relationship, because the provision included in award agreements effectively provides consent after the fact.
By the time an award recipient gets their award agreement, there's already been data collected, processed and transferred, and for that reason, the consent really comes on the back end, where the privacy consent obtained at the start of the employment relationship really comes before the fact. Again, it's something that we've been advocating over the past couple of years and I think more and more global organizations have been adopting that approach.
Next slide, the big development—and it truly is a very big piece of legislation—is the General Data Privacy Regulation (GDPR) which is slated to become effective on May 25th of this year. GDPR really represents the first significant update to data privacy legislation in Europe over the past 20 years.
When I think of GDPR, I guess the easiest way I can explain it is that it is the original data protection directive on steroids. It effectively incorporates all of the lessons that have been learned by the data protection authorities throughout Europe over the past 20 years.
Again, it is a very robust piece of legislation, very far-reaching, and I guess in the context of global stock plans and stock plan administration, this is one small area that is impacted by GDPR. It really has a much broader application and creates much greater concerns for organizations that operate on a global basis throughout Europe.
Although GDPR has the same general premise as the original data protection directive, and again that is that the collection, processing and transfer of personal data only can occur for certain permitted purposes provided that you've got notice, disclosure and adequate safe guards in place, but as part of the robustness of this legislation, it really blows everything to a much greater extent.
For example, it is much broader in scope of coverage—it literally applies to every organization that touches the personal data of EU subjects, which is a significant change as compared to the original directive.
Second, it really creates greater obligations and duties on organizations that handle personal data, including requirements of designating privacy reps that will deal with the EU data protection authorities, requirements of appointing data privacy officers that will be on the ground and responsible for day-to-day matters.
There are very significant new reporting obligations when a breach occurs and a company becomes aware of a breach in terms of notifying the authorities, notifying the data subjects, addressing the type of information that has to be provided, addressing how quickly that has to be shared, again, a much greater change as compared to the original data protection directive.
It creates greater rights in favor of the data subjects and I mean that ranges from new requirements covering notice, review, correction of personal data, the ability to consent, the ability to withdraw consent which is concerning to a lot of organizations.
There are new causes of action created for data subjects to bring actions if there is a breach and effectively they incur damages as a result of that breach. Perhaps the most noteworthy change under GDPR is the level of fines and penalties that can be imposed on an organization that breaches the obligations under GDPR.
They are company changing penalties that potentially can be imposed on organizations that don't follow GDPR to the letter of the law, and we can tell you from talking with our colleagues in Europe, the privacy authorities throughout the various EU member states literally are gearing up for letter of the law compliance. Again, it's going to be a much different mindset than what existed over the prior 20 years under the original directive.
Next slide. I want to bring the conversation back to global equity compensation and stock plan administration, and as was the case under the original directive, organizations that are handling personal data of award recipients need to have a valid basis for collecting, processing and transferring that personal data across borders.
In the context of GDPR, just as was the case under the original directive, the consent of award recipients remains a valid basis. Unfortunately, the difference under GDPR is the level of notice and disclosure that is required to data subjects and in our case, award recipients, is much more substantial than what was previously the case under the directive.
One of the areas of discussion that has been coming up in recent months as we get closer and closer to the effective date is the validity of getting consent from employees and award recipients.
There has been a number of commentators in Europe and a number of regulatory authorities that have been raising questions as to whether you can really get a valid consent that would hold its water under GDPR given what they seem to view as the unequal bargaining power between the organization (that is the employer) and the individual employee that is giving the consent of the organization.
I think a lot of it at this stage is posturing; at the end of the day, I think consent will again be a core component of any company’s approach to handling personal data of award recipients in Europe.
One of the things we're seeing is that many organizations right now are effectively taking a “belt and suspenders” approach to ensuring that they have a valid basis for handling all of this data under GDPR.
Not only are they relying on getting employee consent and effectively enhancing the employee consent that they're getting, but many organizations are also relying on one of the other alternative bases for complying with GDPR; whether they're also using, binding corporate rules, whether they're also relying on model contractual clauses, whether they are buying into a privacy shield, essentially a lot of organizations these days are taking a multi-faceted approach, trying to build the case they have fully complied with GDPR and they have multiple abilities to rely on the GDPR under these different bases that are permitted under GDPR.
Next slide. In terms of takeaways when it comes to GDPR and how it impacts the global stock plan arena, I think the first takeaway is that organizations operating global equity compensation programs really should reach out within their organizations to their colleagues who are responsible for privacy matters to determine how the organization is going to handle GDPR. What overall approach will the organization use when it comes to GDPR? Then figure out how the stock plan administration piece dovetails into the company's overall approach.
Depending upon what the approach may be, it may be necessary for companies to effectively map out all of the data flow that happens in the stock plan arena, then figure out and confirm that they've got a proper basis for each step along the way for data being moved within the organization, so that they can rest assured that they are fully complying with their obligations under GDPR.
The other part of kind of coordinating with the privacy team within the organization is also taking a look at any type of data privacy related notices that may be provided to award recipients either on a broad basis or within different parts of the organization and looking at whether those notices need to be enhanced or tweaked at all so that they fully comply with GDPR. Then also looking at those consent provisions and in many instances some of those consent provisions also may need to be enhanced to conform with GDPR.
So, the first development in Europe dealing with GDPR is a very big development. The piece impacting stock plan administration is an important one, but it is a much broader issue that has to be examined within the entire HR function of global organizations.
Next slide. The next development we'll talk about—and Valerie mentioned China being a recurring topic of conversation during these updates—the EU prospectus directive and the securities requirement governing equity compensation is also one of those recurring themes. Fortunately, it is now going in a positive direction after going nowhere for many years.
For those of you who practiced in the global stock plan arena, you know that as has been the case for many years. Companies that make public offerings of transferable securities in Europe are subject to the requirements of the existing EU prospectus directive. In the context of equity compensation programs, traditionally the only arrangement that really has been captured under the directive has been employee stock purchase plans; it has been narrowly confined to a certain type of equity compensation arrangement.
Under the existing prospectus directive there are certain exclusions and exemptions in place that allow companies to make the offerings without the need for having to prepare a prospectus and get it approved by its home member state to actually make the offering.
Those exclusions range from the 150 individual-per-member state exemption that has been in place for a number of years. There's also the exclusion that applies to offerings with a value of less than 5 million euro across the entire EU.
There has also been—and this has been the teaser for many years—the employee share plan exemption which says that if you are making an offering under an employee share scheme and your company is either headquartered in Europe or your shares are listed at an EU-regulated exchange, then you don't need to file a prospectus to make the offering to employees in Europe.
Unfortunately, this employee share plan exemption only applies to companies that were headquartered in Europe and were listed on a European exchange. It didn't cover U.S. companies that are listed on NASDAQ or the New York Stock Exchange which was very frustrating for companies for many years.
Next slide. The development—and this was something that we touched upon at the prior update at the annual NASPP conference—becoming effective in July 2019 will be the new EU prospectus regulation. As part of that regulation, it incorporates a revised employee share plan exemption that effectively will cover any company making an offering under an equity compensation plan to employees in Europe.
It will also be available to U.S. companies that are only listed in the United States on one of the exchanges in the United States. It will not be limited to companies that are listed only in Europe. The beauty of this particular exemption is that you don't have to go to the securities regulator in your home member state to make any type of filing. Effectively, you simply meet the requirements of the exemption and as part of those requirements, you have to provide what we referenced as an “employee information document” as part of the grant materials you provide to award recipients.
I guess the best way that I could describe the information document is that it is effectively a very abbreviated U.S. style prospectus, which really provides just basic information about the issuer and the offering. It is a substantial change, as compared to the existing requirement under the current EU prospectus directive and, again, all of that is slated to become effective in July of 2019.
For those of you that have had to file EU prospectuses to offer participation in your ESPPs in Europe, the time is coming to a close where you have to continue with those requirements. It is finally going away, which hopefully will be welcome news for many organizations.
The other update that I'll mention in relation to the prospectus regulation is one of those exclusions I mentioned earlier actually is slated to change a year earlier than when the new employee share plan exemption comes into place. As of July of this year, that EUR 5 million exclusion is actually going to be reduced down to EUR 1 million so the utility of that particular exclusion will be greatly diminished as of July 21st of 2018.
The one thing that is possible—and I think this will happen in a number of member states as part of the prospectus regulation—the individual countries do have the discretion to increase that EUR 1 million exclusion upwards to a maximum of EUR 8 million, but it'll only apply to offerings in that particular country.
For those companies relying on this particular exclusion to avoid the obligations under the prospectus directive, be mindful of this particular change because it may impact what you're currently doing with your existing offering.
Again, it's not a popular exclusion and not a lot of companies use it, but there are a few using it and it's important if you're one of those companies to be mindful of this pending change.
That's it for the EU. I think our next development is France, and Amit is covering that one.
Return to Index
France
Amit Banker, CPA, Partner, EY: Yes. Thanks, Brian.
Good afternoon, everyone. This is Amit. Thanks for joining and listening to this webcast. We are going to talk about France and this is one of those locations that we continue to have almost annual changes. I think some of the stuff might look a little familiar, but this is the one I will talk through. Maybe just to step back for a second and talk about the background for France in particular.
When you look at the French taxation of equity-based awards and you're looking at awards like restricted stock units, if you go back a couple of years—anything past 2012—you had the French qualified regime that was available in France which is the pre-Macron regime. As long as you had awards granted and you had a basic four year period—a two-year period to vesting and then the two years sale period from vesting for a total of four years at a minimum—you would qualify for preferential treatment.
There are a couple of nuances to that as you had employer social tax review. It is due on 30 percent of the value at grant and that was a bit of an issue. For the employees, the taxation was really at vesting and it was subject to progressive tax rates, but there are no reductions to the amount subject to tax, irrespective of whatever holding period the employee ended up in.
For example, if you held on to the shares that you received from the awards for three, five or seven years, it really didn't matter. You are still subject to tax in France at the same progressive tax rates. You'll see why this becomes relevant in a second as we talk about the subsequent changes.
If you go on to the next slide, the changes introduced apply awards of 2015 and 2016—so any awards that are granted and fell under the Macron regime—for awards after August 7, 2015 and before December 30, 2016, as long as the plan or the sub-plan was approved by shareholders after that time or during that time, you would actually get beneficial tax treatment in France, i.e. reduced tax rates for the employees. But your vesting periods were reduced and vesting and holding periods were reduced.
An employee could receive equity awards in France and the qualified treatment and requirements the employers implemented were also more streamlined, i.e., you could actually use a one year vesting period and an additional one year sale restriction period so in total for a period of two years and the employees could obtain the beneficial tax treatments.
It is a positive sign moving from four years to two years. There are, of course, some nuances with the fact that you had to have the plan specifically approved by shareholders after those dates.
There were subsequent changes that apply to awards for the following year, which was the modified Macron regime, where you had the same vesting and sale restriction that applied, but your employer's social tax has allowed you at a 30 percent value at vesting.
If you look at the tax regime on a Macron regime, as well as the modified Macron regime, you got beneficial tax treatment both for the employee and employer with the fact that the employer's social taxes was allowed at vesting—there is no employer social tax due upfront—and employer still receives some beneficial tax treatment.
The modified Macron regime also added an additional layer of complexity with the fact that the employees would only receive beneficial treatment where you had gain limit. For gains up to 300,000 EUR, your limit for the year you would get the same Macron regime beneficial treatment. Where you would receive progressive rates and anything in excess of it, you ended up being subject to the older rules that were in effect prior to the Macron regime.
Under both these regimes, you also had beneficial treatment if you held on to the shares for a longer period of time. For someone who held on to their shares for two years or eight years, you had reduced taxation on that amount. So, it's a beneficial treatment overall.
If you go on to the next slide, the most recent update—and this is really applicable for the 2018 period—is the third modification to the Macron regime, where you have the same vesting and sale restrictions. You can still have the one year vesting period and additional one year sales period for a total of two years from the day of grant for qualified treatments.
The employer social tax is at 20 percent now, same as the Macron regime, but you do have some different tiers for the vesting gains. Up to EUR 300,000 per year, the entire gain is subject to a 50 percent reduction, subject to the holding period. For any gain in excess of EUR 300,000, it's subject to progressive tax rates with no reduction for the holding period applicable.
The key here is that this only applies to companies whose plan or sub-plan has been approved by shareholders up to December 31, 2017. This is somewhat similar to what we had in the prior couple of years with the Macron regime and the fact that you had to look at the effective date of the plan and their shareholder approval of that plan, which I know from what we have seen, a lot of company had issues with that particular requirement. Unless you are actually going back to shareholders of the company to get the actual plan approved, that particular requirement causes a lot of issues.
I think it applies most generally to companies that are going to go back to get the plan approved by shareholders in 2018 and going forward, it applies to you slightly differently.
The bottom line takeaway here is if you do have award recipients in France, you might want to take another look at the French qualified regimes. Compared to where the French regime was with the qualified benefits a few years ago, the benefits have been reduced but at the same time where you have extended holding period requirements or the employees elect to hold on to the shares for subsequent years, there are some additional benefits that are applicable.
The benefits in a lot of these cases do apply to the employees directly, so where companies evaluate qualified regimes looking to have a benefit for both the employer and the employees, this may not provide that exact same benefit or same approach, but it's something to look at.
We have seen a fairly significant reduction of qualified plans over the last few years with companies that used to have qualified looking at the plans and the requirements for the 30 percent regime that we just talked about and the fact you can track each of those different regimes separately. Many of the organizations that we work with have, in fact, pulled away from qualified plans.
But there are companies that actually looked at this and applied it to the effects, and in particular if you have a large French employee base receiving equity-based compensation, this is something to definitely look at and make sure you're evaluating as you consider whether or not you want to have a qualified plan in France.
If you move on to the next page, the other change in France relates to French qualified RSUs as well and social tax refunds. This is more of an update relating to the changes that we just talked about for French qualified plans. Given the changes that we were referring to and the fact that you had French qualified awards where employers used to be taxed for social taxes at grant.
The clarification we have is that the employer social taxes were due and subject to tax at grant, but in April 2017, the French constitutional court did rule and indicated the employer can claim a refund for any awards where they had paid social tax at grant, but the award had subsequently been forfeited.
In the past, prior to these clarifications, if you had paid employer social taxes because they were due at grant and the employee at some point in the future forfeited the award itself, you were still stuck having paid the employer social tax at grant. It is expected that this is applicable and available only for the last three years, but at the same time it could be something that's a significant benefit for organizations.
If you had a French qualified population and in particular, you had qualified awards that did fall under this regime, something to look at, depending on the population you had. If you paid employer social taxes in the past, this is something you might be able to look at and see if there's some potential refunds you can receive.
One final comment I'll make for France. This is more of an update, similar to what we shared at the annual conference, the withholding tax implementation for 2019. Before we go to Iceland, the one thing that we have mentioned before is the employer tax withholding rules that have been contemplated for a few years now in France are, in fact, expected to be effective for 2019 and going forward.
It's something that a lot of organizations are looking at and trying to make sure they're considering how they are going to support it. Something to keep in mind and get your French colleagues and payroll teams involved, so that you can have these discussions. This is not just specific to equity-based compensation, but it definitely impacts equity-based compensation as well.
With that, we can move on to the next country which is Iceland. And Valerie is going to walk us through that one.
Return to Index
Iceland
Diamond: I will just say this discussion is going to be a little bit shorter than France and the EU. The good news here is that Iceland is a small country which historically has had a lot of regulation from an exchange control standpoint for companies trying to offer share programs.
There have historically been restrictions on holding shares in non-Icelandic accounts and remittances of fund restrictions, basically restrictions around holding foreign securities, which have made it a little bit difficult to offer share programs to people in Iceland. Not that that many companies have great populations in Iceland, but I think that companies have struggled with it a bit, over the years.
The good news is this has been starting to go away, beginning in 2016, when they took away a lot of the restrictions but still left this remittance cap in place in terms of the amount of funds that could be transferred with respect to the share issuances. The good news is that has now gone away entirely and I think now we're seeing more companies offering share awards to people in Iceland.
I would just say if you were unaware of these restrictions or if you had been granting cash awards, you may want to reconsider what you're doing because you probably can now offer shares. Also, if you did know about these restrictions and had the remittance caps built into your grant documentation, you can probably remove them from employee guides as to what their requirements are.
That's it for Iceland, I'm going to turn it over to Mirjam for New Zealand.
Return to Index
New Zealand
Krawiec: Thank you, Valerie. On New Zealand, a quick reminder. Historically, there was no tax reporting or withholding requirements on equity awards in New Zealand and that was obviously very convenient.
However, as of April 1, 2017, employers are required to include equity awards in their monthly reporting. You need to make sure that your local entities are being compliant with the monthly reporting requirement in New Zealand.
The other item that was implemented in New Zealand was essentially a choice of election to withhold income tax upon an equity award vesting. It's an interesting concept, where the employee is able to make an election and it's actually on a case by case, employee by employee basis, to choose to have the company withhold taxes upon vesting or exercise rather than the individual paying the taxes at their end.
Interestingly enough, we have not heard a lot of multinational organizations implement this process to date. Maybe by the next update that we'll do at the conference there might be more information available, if there are organizations starting to implement this process. To date we've had limited feedback from multinational organizations implementing this process.
The takeaway is just to make sure the company is being complaint with the reporting obligations and if you do want to provide your employees with some information around the new election, then draft something they can understand about what their requirements are and the implications.
Return to Index
Poland
Krawiec: Next slide, Poland. A quick update on Poland and taxation of equity compensation in Poland. I feel like over the last couple of years there've been a number of updates with just announcements around taxation in Poland and specifically with regards to preferential tax treatment.
Historically, companies listed outside of the EU or EEA essentially were unable to make use of benefits from any preferential tax treatment locally and their equity awards were essentially taxed like what we are most familiar with, options at the date of exercise or the date of vesting, et cetera. However, organizations that had headquarters in the listed companies within the EU had more opportunity to qualify their plans and make use of preferential tax rates.
The good news is that effective in 2018, those requirements have been broadened out a bit and it is really not only for listed companies within the EU, but more broadly companies that are based within the country and have a tax treaty with Poland.
It's an interesting requirement, but it seems like that they're broadening out the preferential tax treatment in Poland to allow for more entities locally to make use of the preferential tax treatment. The preferential tax treatment essentially is that the first taxation of equity awards, options and RSUs as well, is at the date of sale. There is also going to be a lower tax rate of 19 percent that essentially would be applied at that point in time, rather than a potential highest marginal rate of 32 percent.
A number of different benefits for the individual, however there are some requirements that need to be met as you would typically expect when a preferential tax treatment is available. We recommend that you look at your plan if you have participants in Poland to determine if your program would be qualified under those new requirements and essentially look for confirmation from the tax and Social Security authority to confirm the tax treatment for your awards.
That's basically the update on Poland. And now I will turn it over to Brian for an update on Singapore.
Return to Index
Singapore
Wydajewski: Thanks, Mirjam. And this update really falls into the category of head scratchers. For those organizations that offer employee stock purchase plans to employees, you are probably familiar with the requirement that in order to offer participation to certain employees in Singapore who are covered under the Singapore Employment Act—and broadly, I would say that that means any rank and file employee—you have to get the approval of the Ministry of Manpower for payroll deductions to be made from their paychecks to fund the purchase of shares under the ESPP. This has been one of those requirements that has been placed for a long period of time and was a routine matter for companies offering ESPPs in Singapore.
Confusingly, at the end of last year, the Ministry of Manpower added a new requirement that says a certain number of employees have to sign an acknowledgment form that the Ministry of Manpower created, which has to be submitted with the application package. This was a condition for the Ministry of Manpower's issuance of its approval for the payroll deductions.
The problem is really this: the way that companies traditionally went about getting Ministry of Manpower approval was to get that approval and then go out and conduct the enrollment process with eligible employees. Step one was to get the approval and then step two was to undertake the enrollment process.
Given this change of getting employees to sign the acknowledgement form, companies effectively need to go to employees before they can even consider enrolling in the ESPP and sign this form so that the company can go in and get Ministry of Manpower approval. Effectively, it puts the cart before the horse. We've reached out to the Ministry of Manpower on a couple of occasions and try to explain logistically the problems that are created by this particular requirement and unfortunately, they have refused to change this particular process.
At the end of the day, what this development has left us with is, number one, either not offering ESPP participation to employees that are covered under the employment act or, number two, allowing those employees to participate but not allowing them to contribute through payroll deductions. Either they cut a check to the company to fund their purchase of shares under the ESPPs, they authorize direct debits from their checking accounts to fund the purchase of shares under the ESPPs or they authorize direct debits from their checking accounts to fund the checking accounts to fund the purchase of shares under the ESPP. Many companies are not willing to go through the extra effort and jump through additional hoops to offer ESPPs to employees in other countries.
This development effectively hurts the rank and file employee in Singapore because from what we've seen so far, a lot of companies are just saying it's not worth a headache. We're simply not going to offer the ESPP to employees covered under the Employment Act. So unfortunately, this is not one of the more positive developments we've seen over the past six months.
Next development is Ukraine and I think Valerie is going to touch upon that.
Return to Index
Ukraine
Diamond: Thanks, Brian. I think going back to the more positive developments in the Ukraine, this is a following on the trend in Iceland. I would say we're seeing some of the exchange control restrictions being loosened in the last year or so.
The Ukraine has always been a very difficult place to grant equity awards. There's been a number of licenses that were required and it put both the company and the employee at risk if those were not in place with respect to share offerings.
There have been three restrictions. There's been restrictions on actually holding shares and setting up a bank account abroad which was obviously a big challenge for most of our US clients who were offering their share programs but used a US-based broker with an account where the shares are held here in the US.
There's also been licensing restrictions that deal with the foreign investments, meaning taking funds out of the Ukraine and transferring them here to purchase foreign securities.
And lastly, there's been license requirements related to the remittance of funds out of the Ukraine.
The challenge with the last two licenses, the investment license and the placement license, is that those were things that the employee had to get in place. It put companies in a “Catch-22” if they wanted to offer share programs to employees in the Ukraine. They could do it but there were technically all these restrictions that employees were supposed to abide by, and it was very, very difficult for them to do it.
I think the good news here is that we've seen a number of changes, first in terms of doing away with the restriction that you cannot hold shares in a foreign or offshore bank account all together. Now, it's technically permitted for employees in the Ukraine to hold their shares in an offshore brokerage account here in the US.
There are, however, still some restrictions on these investment and placement licenses that I mentioned. The employees are still going to need to obtain an investment license to transfer funds out of the Ukraine to purchase stock and it's limited, up to $50,000 for the purchase of stock.
But the good news there is that the restriction is something that can obtained online. It's a much easier process than before, where it was virtually impossible for people to get it.
Then there's still, as I said, an obligation to have a placement license and that's a little bit more difficult and has to do with the remittance of funds out Ukraine. If you are an employee and you need to pay an exercise price, for example, you would need to technically have both an investment license and a placement license. The investment license could be easily obtained by this electronic process but the placement license is a little bit more difficult.
What does that mean for companies? I think the takeaway here is that if you're going to be granting equity awards in the Ukraine, it might make sense to have options that are restricted to a cashless exercise-only or to grant RSUs. In both of those circumstances, the employee would not have to send funds offshore to pay the price related to the share programs and it would be perfectly fine to deposit the shares into the offshore accounts with respect to the RSUs.
The employees could hold those shares remotely and you wouldn't have any funds transferring out for which they would absolutely need to get these licenses in place. That's probably the best thing to say. It's still challenging to offer an ESPP in the Ukraine if you want to be technically correct with the employees.
I guess the other thing to mention here is that there's still is some strange tax rules or at least a lack of clarity where there's a potential, for example, if you grant RSUs, that the person would be taxed at vesting and then again at sale, with no adjustment to the basis at the time that they sell the shares. It might be something where you grant RSUs or options but you restrict them to a cashless exercise / forced exercise so that there is no difference in the price between when they vest and they sell, or very little for purposes of dealing with this potential double taxation problem.
If you're going to grant equity awards in the Ukraine it is better, but you need to be mindful about these licensing restrictions and also the tax rules. That might be why, where clients have very few people in the Ukraine, I see them granting cash awards just to avoid all these additional requirements.
With that I'm going to turn it over to Brian to talk about Brexit.
Return to Index
United Kingdom
Wydajewski: Thanks, Valerie. This might be the briefest development of today but, number one, the actual departure date from the European Union has been set and will be March, 29th of 2019, just a little more than a year away.
Exactly what that means in terms of the legislative landscape in the United Kingdom remains to be seen. At this time, the United Kingdom has not released any formal or frankly informal guidance as to what the different laws that touch upon equity compensation may look like in a post-Brexit United Kingdom.
So, I don't have a lot of information to share with everybody at this point in time. Clearly, we will start to see a lot more activity coming out of the United Kingdom and as we have a better sense of what those various rules are going to look like, we'll be sharing them with everybody. That's it for the United Kingdom.
Return to Index
United States
Banker: All right, the last one we have in terms of the updates is the US. I am sure you've heard some of the updates on this already, so we'll try and keep this one specific to the two items we have here
There are many more changes that are much more far reaching beyond equity that I'm sure we are aware of. Specifically, two things that this group might be most interested in. First, we thought we’d just talk basically about the Section 162(m) changes. By way of background, historically there's been a limitation on corporate tax deductions for anything in excess of a million dollars. But there's also been the specific exception for performance-based compensation.
Historically, it has applied to the CEO and the next three highest compensated employees of US public companies, so that significant exception is really where the change occurs and we'll talk about it in a second.
The change that has been introduced is specific for tax years beginning after 2017 where Section 162(m) no longer provides for the performance-based exemption that was historically available. There are a few areas of changes, but the most pronounced is where the performance-based compensation exemption is no longer applicable.
In terms of the actual transition relief, where there are written, binding contracts in place at November 2, 2017, that were not materially modified, there would be some transition relief provided.
Just be aware of that to the extent that you are looking to try and rely on that for certain specific individuals, you need to really look at the contract in detail. It does need to be in writing. There are some of the specific points around that, so it's something to look at in the event that you do have any contracts under that clause.
The definition of the covered employee group has also been expanded, so it's going to be the CEO, the CFO and then the top three highest paid officers.
The other significant change is that a previously covered employee would remain, so in essence, once you are in that covered employee category, you would continue to be in that bucket, including for any payments after termination. Some significant changes there as well.
In terms of covered employer, the definition of that has also changed and expanded to include foreign corporations whose stock is traded by ADRs and entities with publicly traded debt. Basically, the companies that are covered have expanded.
The covered employee group has expanded and of course the performance-based compensation exemption is no longer applicable, so several significant changes in the space.
If we go on to the next page, what does it really mean? For tracked and covered employees, it means that the population is going to be different than what you might have seen in the prior years. Most importantly this could potentially be a significant change in the amounts that are previously deductible.
I think what we've seen with many organizations is that they’re really looking to try and understand what the impact is and in terms of the non-deductible amounts, looking at any applicable grandfathering rules and seeing if there are any awards that could be grandfathered.
Just very high level is what we covered today. If you do have a situation as we’ve commented here, you probably should look at this very closely, given the significance that we have some with large organizations on these changes.
One final comment, and this is something that I'm sure people are looking at as well, is while this is resulting in some loss of deductibility in terms of compensation amounts, the overall corporate tax rates went down quite significantly. There are some offsets in terms of the overall costs or the costs to the organization when you look at all of the changes in totality.
Moving on to the next page regarding the supplemental withholding tax rates I believe most people are aware of this as well. The withholding tax rates, particularly supplemental withholding tax rates have changed. Any supplemental wages below the 1 million threshold have moved down from 25 percent to 22 percent. And the supplemental wages in excess of the 1 million number have evolved from 39.6 percent to 37 percent.
Most companies have already implemented these changes, particularly on the supplemental withholding tax rates. A lot of the payroll systems have already been updated for this, so this should hopefully not be a surprise. But we are still getting a fair number of questions, in particular with the supplemental rates and what it means overall from a tax reform perspective for individual.
To the extent that you are providing any communication to the employees, it's something that you might want to highlight; looking at the supplemental rates as one step, and then also maybe directing the individuals to talk to their tax advisors to just evaluate what the impact of tax reform is on the individual cases, so that they are aware of any taxes potentially due or any funds potentially expected at the end of the year.
Now we have some time, if there are any questions, or please reach out to us and we'd be happy to talk about them offline.
Cleary: Absolutely, and of course you can always send your questions to me as well, I will be sure to get you answers. We also have the Q and A forum on the website, which is a great place to post a question and have your colleagues respond.
We'll give everybody a minute or two to submit questions and I do have one that's been waiting that we can address. Maybe we'll direct to Brian or whoever would like to comment, it's on GDPR: "Can you recommend a website or particular resources to consult for updates for employee plans, most specifically stock plans, with regard to GDPR?"
Wydajewski: There is not a particular website, but our privacy practice here at Baker McKenzie has been working with us very closely to try to come up with solutions, not only in the stock plan arena but from a broader HR perspective. We're happy to connect you with our colleagues and practice leaders of our privacy practice.
Cleary: Thank you. Maybe we'll give everybody just another minute or so to see if questions come in. In the meantime, if you don't have questions, I hope that you did get the answers you needed to address the updates in all the countries we discussed today.
We mentioned earlier, the panel was very brave, despite the fact that I cautioned them about not giving out their email addresses (just kidding), and those are on slide two, so feel free to reach out to them or to me at any time, if you think of a question later as you're absorbing this material. If you missed any part of this webcast, I noticed people were dialing in later or had to leave early, so if you missed any part or if there's a particular part that you needed to listen to again, I will be posting the archive as soon as it’s ready, should be in the next day or two. And we will post a transcript within the next few weeks.
It looks like we've got another question, “Have there been changes to the taxation of options in Chile?" We didn't cover it today. I don't know if we're prepared to answer that or would prefer to answer it offline?
Banker: Yes, we can take that one offline and provide some comments back.
Cleary: OK, perfect. I believe we addressed that in the update at the conference, so we will take it offline for this particular member. Thank you for the question and we'll get back with you.
If there's nothing else then let me just say a huge thank you to Amit, Valerie, Mirjam and Brian for all their time preparing for and presenting this webcast today. It's not easy to keep up with all these changes and try to put together the highlights, so I really appreciate all of their time putting together the presentation, as well as presenting today.
I'd also like to thank our audience for joining us today. I hope you'll all listen next month on April 18th for “The Power of Choice,” so you can learn all about choice plans.
If there are no further questions, thank you everyone. That ends our webcast for today.
Return to Index