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U.S. Equity Compensation Grants to Foreign
Employees: Structuring and Reporting Options
WEDNESDAY, JUNE 14, 2017, 1:00-2:50 pm Eastern
FOR LIVE PROGRAM ONLY
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FOR LIVE PROGRAM ONLY
June 14, 2017
U.S. Equity Compensation Grants to Foreign Employees
Ian Fraser, Partner
Simmons & Simmons, London, England
Bob Grayson, Partner
Tapestry Compliance, London, England
William D. Wright, Partner
Fisher & Phillips, Philadelphia
Craig P. Tanner, Counsel
Reed Smith, Palo Alto, Calif.
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
fisherphillips.com
U.S. Equity Compensation Grants to Foreign Employees
Presented for Strafford Publications, Inc. by:
Ian Fraser Phone:+44(0)207.825.4800
Email: [email protected]
Presented for Strafford Publications, Inc. by:
William Wright Phone: 1.610.230.2137
Email: [email protected]
fisherphillips.com
General Considerations
• Grant of equity interest by US company to:
Employees of foreign sub/affiliated company –
favored
Employees working directly for employer abroad –
not often used
• Equity interests include:
Options (nonqualified)
Equity appreciation rights
Restricted Stock Units (RSUs)
Restricted stock grants
6
fisherphillips.com
Important to Consider
• Local counsel and rules of foreign
jurisdiction
• Role of local entity; involvement can
inadvertently trigger:
Local labor laws
Local regulatory issues
Social insurance tax obligations
Classification of award as part of local
employment arrangement
7
fisherphillips.com
Overall Income and Tax Considerations
• Many jurisdictions tax equity awards similarly to the US
Income is recognized and taxed at the same time and in the same amount
Income is taxed upon "vesting" (substantial risk of forfeiture lapses)
Tax = FMV less value paid for equity interest
• Other differences may apply:
Timing and/or measurement of FMV may differ from US
Characterization of income may differ from wages
Income may/may not be subject to social insurance contributions
• Tax treatment may be affected by:
Local employer reimbursement to US parent for award cost
Residency status of employee
Level of involvement of local entity in administering the award
Whether award income is considered part of the local employment arrangement
8
fisherphillips.com
Specific Examples
• Restricted stock not used often in foreign jurisdictions It may be taxed at FMV upon grant even if subject to
restriction(s)
• Tax issues for employee: Withholding may be required at point of grant
Liquidity/cash flow issues - no cash from which to withhold
Shares cannot be sold to pay withholding due to the restrictions
Potential further tax charges as and when restrictions are lifted
Tax refunds may not be available if restriction is never lifted
• RSUs are preferred, since they are usually not taxed until award vests and shares are issued
9
fisherphillips.com
Employee Taxation & Withholding
• Worldwide income of US citizens and green card holders is subject to US income tax and social security taxes
• Tax treaties
Often provide relief from double taxation
Income tax and withholding is generally required only in the country services are rendered
Exception to tax in foreign country applies where:
o stay in the foreign country is < 183 days;
o income is paid by an employer with no permanent presence in the foreign country; and
o the economic cost is not borne by a company in the foreign country
10
fisherphillips.com
Employee Taxation & Withholding
• Exclusions of taxable equity awards from US income
Foreign earned income ($101,300 annually in 2016) may be excluded if certain tests
(bona fide residence or physical presence) are met – election required
Foreign housing allowance may apply (up to $16,2018 in 2016) – election required
Election of income exclusion preempts foreign tax credit or deduction for taxes paid on
excluded income
• Exclusion from mandatory foreign tax withholding
Where employee’s foreign income is subject to mandatory foreign withholding, no US
withholding is required
Pitfalls:
o Some foreign jurisdictions do not withhold on equity awards
o Employer/employee agreement where to withhold is not mandatory withholding
• Social Insurance (SS) withholding
Totalization agreements avoid double social insurance withholding
Foreign employment must be less than five years
Certificates in each country are required
11
fisherphillips.com
Tax Deductions of Foreign Equity Awards
• US entity deductions
Wages and equity awards for directly employed
foreign based employees are deductible
US entity may not deduct equity awards (or
wages) for employees paid by foreign subs
12
fisherphillips.com
Tax Deductions of Foreign Equity Awards
• Foreign sub deductions
Majority of jurisdictions allow deduction of NQO awards to foreign employees by foreign sub if:
o The employee provides services to the foreign sub, and
o Cost of shares on exercise is paid by the foreign sub to the parent (recharge agreement)
Some jurisdictions only allow a deduction when awards are settled in cash, or other special rules
UK generally allows deduction for amount of the value of the equity award i.e. difference between FMV at vesting and value paid for equity interest
Cash settlement in UK can result in loss of tax deduction
13
fisherphillips.com
Option Award Treatment
• Stock from parent to sub on exercise is a deemed cash capital
contribution to the sub
• No income or loss on exercise of the option
• Recharge payments reduce the deemed cash capital
contribution to the sub
• Recharge payment in excess of the spread of the option
exercised is a taxable dividend
• Parent may limit recharge amount to avoid dividend treatment
Many special rules apply
o A few jurisdictions allow deductions for options in a year other than
exercise (i.e., on vesting, or when the shares are sold)
o US parent has to plan when to receive recharge to avoid dividend
treatment
14
fisherphillips.com
Option Award Treatment
• From a UK perspective, tax deduction for the
UK sub is normally not dependent on the UK
sub incurring any costs in relation to the
awards, or entering into any kind of recharge
agreement with the US parent because it is a
statutory right
• Consider recharging amounts excluded from
statutory deduction
• Accounting implications (IFRS2)
15
fisherphillips.com
Thank You
Presented for Strafford Publications, Inc. by:
Ian Fraser Phone: +44(0)207.825.4800 Email: ian.fraser@simmons-
simmons.com
Presented for Strafford Publications, Inc. by:
William Wright Phone: 1.610.230.2137
Email: [email protected]
Speaker: Bob Grayson, Tapestry
Compliance LLP (Partner)
Topics:
Global Tax Advantaged Plans
Legal and Regulatory Issues
Remuneration Regulations
Global Plan Documentation
©Tapestry 2017
Tax qualified plans
Why have them?
Benefits and drawbacks
Tax – deferral and/or reduction
Complexity – set up costs; documents and processes
Considerations
Country specific
Specific requirements – less flexible
Number of people
19
©Tapestry 2017
Tax qualified plans – the big 5!
France
High Taxes
Very Franco centric
Political – no consistency
USA
Incentive Stock Options (ISOs)
Employee Stock Purchase Plan (ESPP or 423 Plan)
20
©Tapestry 2017
Tax qualified plans - the big 5!
continued
UK
SIP and SAYE
CSOP
Israel – s102 – Trust
Ireland – similar to UK
21
©Tapestry 2017
Spain
Latvia
Germany
Australia
Canada
Hungary
Other Tax qualified plans
Mobility?
Fairness?
Pressure?
22
©Tapestry 2017
Legal and regulatory issues in
relation to global grants
Some key issues:
Securities Laws
Foreign Exchange
Data Protection
Labour Law
Why should you care?
Fines and jail time
Reputation
Efficiency
HR Blowback
23
©Tapestry 2017
Legal and regulatory issues in
relation to global grants
Securities Laws – General rule:
Prospectus required
E.g. The Prospectus Directive (2003/71/EC)
(“EUPD”)
Employee Share Scheme exemption (EU)
Other (Non-EU)
o <150 participants;
o offers with a total value within the EU of less than €5 million;
o offers made to sophisticated investors; and
o offers of non-transferable securities
24
©Tapestry 2017
Legal and regulatory issues in
relation to global grants
Exchange controls – Remittances;
holding foreign assets; duty to repatriate;
nominee accounts
E.g. China SAFE
Any share plan which involves either a Chinese
national or a foreign national who has been resident
in China for at least a year and who is employed by
a Chinese subsidiary, must be registered with SAFE
25
©Tapestry 2017
Legal and regulatory issues in
relation to global grants
Data protection
Increasing regulation – e.g. new Data Protection
Regulation – “GDPR”
No “bundling”; specific and informed consent
Salary deductions
Can employees make deductions from their salary and use
those deductions for an employee share plan?
Illegal: Hong Kong, Luxembourg and Belgium
Consent from a government body required: Singapore
(Ministry of Manpower)
26
©Tapestry 2017
Radical idea – private pay
Financial crash – risk management
Capital Requirements Directive (CRD IV)
Alternative Investment Fund Managers Directive
(AIFMD)
Undertakings for Collective Investment in
Transferable Securities (UCITS V)
Global “remuneration regulations”
affecting equity plans
27
©Tapestry 2017
Key issues:
Bonus Cap
Non Cash
Deferral
Malus and clawback
Disclosure
Global remuneration regulations
affecting equity plans
28
©Tapestry 2017
There can be a lot of documents! E.g….
Translations
Country variations
Tax qualified plans
Cost and administration
What are you trying to achieve?
Documents for global plans and
how to avoid too many versions
29
©Tapestry 2017
Consider:
Global consistency is worth a lot!
Who reads what?
What is critical to you to enforce?
Principles based, robust documents
Translations – why and what?
Documents for global plans and
how to avoid too many versions
30
Executive Compensation & Employee Benefits
U.S. Equity Compensation Grants to Foreign Employees: Structuring and Reporting Options
Presented by Craig P. Tanner
June 14, 2017
Reed Smith LLP
Implementation of Global Stock Awards Problem Countries
Securities
China EU Hungary Japan
Malaysia Philippines Russia Saudi Arabia
Tax
Australia Belgium Chile France
Japan New Zealand Russia Singapore
Currency Exchange
Brazil China Russia South Africa
South Korea Turkey Ukraine Vietnam
33
Reed Smith LLP
Recharge Agreement and Corporate Tax Deductions
• What is a recharge agreement? A binding agreement between U.S.
parent and subsidiary that the subsidiary agrees to reimburse the U.S.
parent company for the income or spread of the stock award provided
to their employees
• Tax deduction for non-U.S. employees. For stock award grants
made to employees of foreign subsidiaries, the “spread” is generally
NOT deductible for the U.S. parent company (no employer/employee
relationship) nor for the foreign subsidiary (no economic cost)
• Impact of recharge agreement. Implement an intra-company
recharge agreement to transfer the economic cost for the stock
awards from the U.S. parent company to the local subsidiary. Local
subsidiary may then take a deduction as employment expense
34
Reed Smith LLP
U.S. Parent
delivers $35 of
stock to
employee
Employee pays
$0
to U.S. Parent
Employee
provides services
to Local Sub
RSU Example
U.S. Parent
Employee
Local Subsidiary
Local Sub
reimburses U.S.
Parent for
“spread” of $35
pursuant to
Recharge
Agreement
35
Reed Smith LLP
U.S. Parent
delivers $35 of
stock to
employee
Employee pays
strike price of
$15
to U.S. Parent
Employee
provides services
to Local Sub
Stock Option Example
U.S. Parent
Employee
Local Subsidiary
Local Sub
reimburses U.S.
Parent for
“spread” of $20
pursuant to
Recharge
Agreement
36
Reed Smith LLP
Benefits of recharge arrangements
•Tax Saving Provide local subsidiary with opportunity to claim a
corporate tax deduction where it would not otherwise exist thereby
reducing the global effective tax rate
•Cash Repatriation Provide means for local subsidiary to
repatriate cash to U.S. parent company without incurring a
dividend withholding tax [If structured properly, the payment is not
taxable income to the U.S. parent company (Treas. Reg. Sec.
1.1032-3 / PLR 20104049)]
•Distribution of Expense U.S. parent company may allocate cost
to business unit receiving the benefit
37
Reed Smith LLP
Global Due Diligence
Key factors to consider when conducting due
diligence:
• Impact on profitability of local subsidiary
• Will recharges create loss for subsidiary?
• Decreasing profits of the local subsidiary may have unexpected
consequences:
Profit share plans Local bonus plans
• Recharges may not work well for groups with cost-plus transfer
pricing structures
38
Reed Smith LLP
Global Due Diligence
Impact on local subsidiary compliance obligations
• Implementation of recharges may trigger social tax
(employer/employee), reporting and/or withholding obligations that
would not otherwise exist
• No withholding positions are often based on the premise that if the
local subsidiary is not involved in grant practices the income is from
the parent company. Where recharges are implemented that
argument is not valid.
39
Reed Smith LLP 40
Countries in which recharge and local deduction may be implemented without
difficulty:
Australia Austria Hong Kong
Italy Spain Switzerland
Taiwan UK
Countries in which recharge and local deduction may be implemented but with
plan modification and/or tax consequences:
France Germany Japan
Mexico Russia Singapore
South Korea
Countries in which recharge agreements are prohibited:
Belgium Brazil Canada
China Netherlands
Snapshot of Specific Countries
Reed Smith LLP 41
Where to start when considering recharges?
1. Involve tax, treasury, legal, corporate, and local entities in discussion
2. Does the country allow reimbursement of stock award costs by local
subsidiary to parent company?
3. Does the country allow a tax deduction for the local subsidiary?
4. Consider the impact on employees:
A. Will there be a change in income characterization?
B. Will income tax and social insurance be triggered?
C. Will tax withholding or reporting be triggered?
5. Impact on local subsidiary:
A. How will the subsidiary’s profits be impacted?
B. Will managers’ and employees’ bonuses be impacted?
C. Will recharge result in new withholding and reporting admin?
6. Corporate Considerations
A. What is current tax planning for local subsidiary?
B. Are there any cost-sharing arrangements with the parent co.?
