Granting equity can be a powerful tool for attracting and retaining global talent. In an earlier article in this series, we discussed the key tax considerations that need to be understood before rolling out your equity plan globally. One additional part of the tax analysis involves understanding tax favorable employee equity programs or arrangements that may be available in foreign jurisdictions. For example, here are some commonly used tax favorable programs in: Australia, France, Israel, and the United Kingdom.
Determining the feasibility of offering a tax favorable program in a particular jurisdiction will generally require a cost-benefit analysis with respect to:
- The tax savings that may be realized by the local employees (and the employer, where applicable);
- How easily the terms and conditions of the tax favorable program can be satisfied; and
- The additional administrative costs involved with offering the program.
We have listed below some of the common benefits and challenges associated with implementing tax favorable programs globally.
1. What are the Potential Benefits of Tax Favorable Equity Programs?
Tax favorable programs around the world come in many different forms, and the value of the tax savings can vary significantly. Some of the most common ways that tax savings can be realized include:
- Partial income tax and/or social tax exemption, as either a percentage of the equity benefit or a capped amount;
- Deferral of income and/or social tax otherwise payable on the equity benefit until a later point in time (typically the date of sale);
- No income and/or social tax(es) applying to the equity benefit, with only capital gains tax when the shares are ultimately sold (typically at lower tax rates);
- Full exemption from employer and/or employee social or other local taxes;
- Lower overall rate of taxation applying to the equity benefit; and
- Use of an employee’s pre-tax earnings to purchase shares.
Tax favorable equity programs in some countries may provide a combination of the above benefits. For example, where particular conditions are satisfied, benefits may include the use of pre-tax contributions for share purchases in addition to the deferral of taxation until the time of sale of the shares.
With Morgan Stanley at Work’s Global Intelligence application, companies can easily identify if a particular share award or equity program has a tax-advantageous program available in a particular jurisdiction, along with the associated tax benefits.
2. What Conditions May Apply to Tax Favorable Programs?
Assessing the conditions to obtain tax favorable treatment is an important next step. Some conditions are not particularly burdensome and easily satisfied, while others may render the tax favorable program in a particular location impractical or not sufficiently attractive to employees and/or the company to justify. Relevant factors for determining the suitability of such arrangements can include the size and nature of the local workforce and the company’s ability to devote resources to the administration of the plan in that location.
Below is a list of common types of requirements for tax favorable arrangements to apply (noting that each program will have its own specific conditions):
- Minimum vesting, exercise and/or employment period restrictions;
- Minimum holding periods, including sale restrictions that may have to be administered by or on behalf of the company;
- Non-discrimination or broad-based offering requirements;
- Establishment of a trust; and
- Specific tax elections or agreements with employees.
3. What are the Costs of Tax Favorable Equity Programs?
It is also necessary to consider the costs and administrative burdens on the company to determine feasibility of a country specific tax favorable program. Below are some typical cost and compliance considerations associated with offering tax favorable programs:
- The need to apply for a local tax ruling and/or register the program with the tax authorities;
- Special tax reporting for the tax favorable program;
- Preparation of a plan-specific award agreement and/or stand-alone plan or sub-plan;
- Set up and maintenance of specific trust and/or brokerage arrangements to ensure relevant conditions such as holding restrictions are complied with; and
- Ensuring proper compliance processes are in place if employer withholding and/or reporting is triggered in the event of a “disqualifying disposition” (i.e., where the employee sells the shares before the end of a holding period or fails to meet another applicable condition).
The Global Intelligence application can help you assess the attractiveness and feasibility of offering one or more tax favorable arrangements globally in determining an optimal overall equity compensation strategy for your company.
When it comes to managing a global equity plan, having an equity compensation provider with detailed knowledge of local tax rules and regulations is critical. Morgan Stanley at Work offers a suite of solutions for administering your global equity program, including a comprehensive application with tax and regulatory information across 170+ jurisdictions updated regularly by a network of global law firms.
Contact us to learn more about Morgan Stanley at Work and the solutions we offer to help you offer equity globally.