Here at myStockOptions.com, we keep a healthy world view. In addition to being fun and informative, this is also necessary at a practical level for the upkeep of our Global Tax Guide, which covers the tax treatment of equity awards in almost 40 countries.
Lately we have seen some good news and interesting developments for stock grants outside the United States. Specifically, favorable tax treatment for equity awards is being either extended or proposed in China, Denmark, and Sweden. In addition, there is an intriguing proposal for a new type of stock option right here in the United States.
China: Preferential Tax Treatment For Certain Unlisted High-Tech Companies
Deloitte has issued an update memo about equity compensation in China. The tax treatment of grants made by listed companies in China will now also be extended to grants made by certain unlisted high-tech companies. (The memo calls these companies "high-new technology companies," though we think the intended sense is "new high-technology companies.") The new guidance, issued in Circular 116, permits preferential individual income tax treatment for employees at qualified "high-technology enterprises."
Denmark: Taxation Of Equity Awards Becomes More Favorable
On July 1, 2016, the tax treatment of qualified equity awards in Denmark will revert to the tax rules that applied before November 2011, when the tax laws changed. Currently, income from equity awards is taxed as employment income when the recipient acquires the underlying shares. The new tax treatment will shift taxation to the time when the shares are sold. It will also tax the income as capital gain rather than employment income, meaning a lower tax rate for many employees (27% or 42% on capital gains instead of income tax rates, which can be as high as 56%). Among other requirements, to qualify for the new tax treatment the equity award must not be transferable, and its value must not exceed 10% of the employee's annual salary at the time of grant. PricewaterhouseCoopers notes that companies will have special reporting requirements, such as those involving purchase prices and shares, that must be made to Skatteministeriet, the Danish tax authority (see PwC's Recent Legislative Updates, May 2016).
Sweden: Government Explores New Type Of Tax-Qualified Stock Option For Startups
A committee set up by the Swedish government has recommended changes in the taxation of restricted stock and stock options, as explained in an update memo from Deloitte. Under the proposal for restricted stock, a grant with a sale restriction of two years or less would be taxed on the value at grant, not at vesting. Restricted stock grants with a sale restriction of more than two years, or with any type of forfeiture risk (even less than two years), would continue to be taxed on the value at vesting. The committee also recommended the introduction of a special tax-qualified stock option for small startup companies in which no tax would apply to the income at exercise. Instead, the optionholder would pay just capital gains tax upon the sale of the shares, at a rate of 25% or 30% instead of the employment income rate, which can be as high as 55%. This tax-qualified stock option would be available only to companies that employ no more than 50 people, bring in net annual sales of SEK 80 million or less, and have been in business for no more than seven years. Large tech companies in Sweden are urging the government to provide similar tax treatment for their option grants, as reported by Bloomberg last month.
United States: New Type Of Stock Grant Proposed
Under a new president next year and perhaps a new majority party in the House or the Senate, new types of tax-preferred equity compensation may be considered (along with potential tax restrictions on the current types).
The Expanding Employee Ownership Act of 2016 (HR 4577) is currently being mulled by the House Ways and Means Committee. By the standards of tax legislation, the full text of the bill is brief (8 pages), though it is no easier to understand than the typical legislative tract. As we read it, the proposed bill would introduce a new type of stock option in which employer securities received as compensation for services would be excluded from the employee's gross income if the stock were held for at least ten years. If the shares were held for more than five years but less than ten years, it appears that the the value of the shares received would still not be taxed but that the capital gains would be. The bill's co-sponsors are Rep. Dana Rohrabacher (R–CA) and Rep. Collin Peterson (D–MN). Rep. Rohrabacher, who was a speechwriter for Ronald Reagan during the 1980s, wrote in The Washington Times on May 26 that his motives for proposed this new type of stock option include its potential as a "way for employers to get more stock into the hands of employees and ensure they hold their shares."