Global Stock Plans: Good News For Equity Awards In China, Denmark, And Sweden

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."

The Taxation Of Stock Options In Canada Is Likely To Change

In Canada, employees who exercise stock options receive enviable tax treatment. As in most countries, the spread between the exercise price and the market value of the shares on the exercise date is subject to tax at ordinary income rates. However, in a significant difference from the usual tax treatment, when the exercise price equals the fair market value of the stock at grant, employees are allowed to deduct 50% of the "option benefit" (i.e. the spread) when computing taxable income (Quebec residents can deduct only 25%).

The favorable tax treatment of stock options in Canada has kept them popular there, in contrast to the decreasing use of options in the United States, but it has attracted political opposition. For example, the New Democratic Party (NDP), a leader among Canada's minority parties, opposes the 50% deduction and would like it to end (see an article in Toronto's newspaper The Globe and Mail).

The Liberal Party, which won Canada's recent national election and forms the new government, does not go that far. Nevertheless, the Liberals have indicated that they do want to change the treatment of tax-preferred stock options. In statements made during the election campaign, the Liberal Party indicated that while it respects the useful role of stock options, it wants to place a limit on the amount of income from an option exercise that can be subject to the standard tax deduction. Amounts above the income threshold will not be eligible for the deduction, though the deduction will remain for lower amounts. While the income limit has not yet been finalized, the Liberals have stated that it will be at least C$100,000. (For some background and commentary on the government's proposed changes, see a memo from the Canadian law firm Torys.)

It remains unclear whether the Liberals' proposed limitation of the option tax deduction would truly raise additional revenue in the long term or merely serve to discourage the use of options. In general, the Liberal Party has made it clear that its top fiscal priority is lowering taxes on the middle class and raising tax rates for those with higher incomes, and that it wants new tax laws in place by the start of 2016. Other potential tax changes being eyed by the Liberal Party include higher rates on income above C$200,000 (from 29% to 33%), as discussed in a commentary from the website Advisor.ca.

What does the Liberal government's stance on option taxation mean for optionholders in Canada? An article in the Financial Post points out that employees with vested options may want to take quick action: it is possible that the change in tax law may be immediately effective (without any grandfathering) from the announcement date, which could occur as early as December 3, when parliament is recalled. The article's author says that exercising options before that date would "pretty much guarantee" the 50% tax deduction, assuming the tax changes will not be applied retroactively. (Of course, optionholders should also consider whether exercising options now makes good financial sense for them.)

For the tax treatment of equity compensation in Canada and related insights, see the Canada section of the Global Tax Guide at myStockOptions.com.

Here We Grow Again: myStockOptions.com Expertise Expands With New Articles On Diversification, IPOs, And Foreign-Asset Reporting For Employees With Equity Compensation

At myStockOptions.com, our array of award-winning articles on all aspects of equity compensation has grown. In recent weeks, we have welcomed new contributions from expert authors on three crucial topics.

Importance Of Diversification For Employees With Equity Awards And Company Stock

Through its author's personal example, a new article at myStockOptions.com presents the dangers of a concentrated stock position, discusses why diversification may be hard for employees with shares from equity compensation, and explores strategies for preserving your net worth. In Your Company Stock: The Importance Of Diversification, CFP Laura Tanner recounts her experience with stock compensation at a company where she used to work as a research scientist, and she explains the lessons she learned.

To read the article and find more insights into investment diversification for employees with stock options, restricted stock/RSUs, or ESPPs, see our section Financial Planning: Diversification.

Careful Planning For Pre-IPO Equity Comp When The Company Goes Public

Initial public offerings (IPOs) are on the rise. The high-profile IPOs of Facebook and Twitter are just two of many IPOs that have been launched over the past couple of years, including several in Silicon Valley. In the newest installment of our Stockbrokers' Secrets series, our pseudonymous financial advisor W.E.B. Bantling provides a pep talk about smart planning for pre-IPO stock options, restricted stock, or RSUs when the company goes public. At the time of the IPO, when the company finally pours long-awaited liquidity into those grants, planning considerations must be carefully weighed.

In the author's experience, clients at companies preparing for an IPO are often giddy with thoughts of the wealth and opportunities it will provide. Many of them have worked at these companies since the startup stage, and the IPO represents a long-awaited event that may be life-altering for both their company and them. However, the author always emphasizes five planning points that may help to manage employee expectations in an IPO situation. He shares some of this wisdom in the new article, Stockbrokers' Secrets: Financial Planning For Equity Compensation At IPO Companies, available in our section Pre-IPO: Going Public.

International Equity Awards And Company Stock: Tricky Rules Of IRS Reporting For Assets And Income In Foreign Financial Accounts

United States citizens and resident aliens are taxable on their worldwide income. The related IRS reporting rules are complicated, and mistakes can lead to costly penalties. In fact, the IRS has launched an aggressive initiative to identify taxpayers with unreported foreign income and/or assets in foreign financial institutions. Charges of tax evasion stemming from unreported foreign income have been brought against dozens of individual taxpayers, including bankers, lawyers, and advisors.

In a new article at myStockOptions.com, compensation and tax expert Richard Friedman presents the rules and related issues of IRS reporting for assets and income that an international US taxpayer may hold in a foreign financial account—including those acquired through stock options, restricted stock, RSUs, or other equity awards. The article, International Equity Awards And Company Stock: The Confusing World Of IRS Reporting For Overseas Assets And Income, is available in our section Financial Planning: High Net Worth.

License Our Expertise For Your Employees

For companies, education is vital for ensuring that stock compensation motivates and retains highly valued employees and executives. All of our expert yet reader-friendly articles, FAQs, and other content are available for licensing by companies that want to improve their stock plan education and communications for participants. Content licensing is just part of the suite of corporate services that we offer.

Big Tax Changes In France Affect Stock Compensation

The election of a new government in France last year has had a major impact on the country's tax landscape, and stock compensation has not escaped. Enacted on December 30, 2012, the French Finance Act of 2013 significantly changed the taxation of qualified stock options and RSUs granted on or after September 28, 2012. For these grants, income received at exercise/vesting is taxed at progressive rates of up to 45%, though the payment of this tax is deferred until the sale of the shares. In addition to the payment of income tax at sale, however, any appreciation in share value after exercise is also subject to progressive income tax rates up to the maximum of 45% plus additional social taxes of 15.5%. This tax treatment is effective from 2013 onward for all sales, regardless of the date when the underlying equity award was granted or the date when the shares were acquired.

However, holding the shares after acquisition can help reduce the capital gains tax at sale. For capital gains on shares that have been held for two years or longer, a progressive tax rebate is available on the following scale:

• 20% rebate for shares held between 2 and 4 years
• 30% rebate for shares held between 4 and 6 years
• 40% rebate for shares held longer than 6 years

Note that the rebate applies only to the income tax portion of the tax on capital gains. It does not apply to the social taxes.

Other recent tax developments in France that may affect mobile employees with equity awards include the following:

• In 2012, France introduced a new surtax on all forms of yearly income, including equity award gains at exercise/vesting, dividend income on shares, and capital gains at the sale of shares. For a single taxpayer with annual income above €250,000 (for joint filers, €500,000), the surtax is 3%. For a single taxpayer with annual income above €500,000 (for joint filers, €1 million), the surtax is 4%.
• With effect from January 1, 2013, a wealth tax applies to any French tax resident with net assets worth at least €1.3 million. If the wealth tax is triggered, the first €800,000 of net assets is exempt. Beyond that point, the tax rate ranges from 0.5% (on net assets between €800,000 and €1.3 million) up to 1.5% (on net assets worth more than €10 million). Wealth tax and income taxes are capped at 75% of an individual's worldwide net income during the preceding tax year.
• The rate of the French exit tax has changed. The exit tax applies to people who (1) have been tax residents of France for at least six of the ten years before the exit date and (2) either hold shares worth over €1.3 million or own at least 1% of financial rights in a company that is subject to corporate tax. The taxable moment is the date before the date of departure from France. Latent capital gains are taxed as if the assets were sold on that date. For people who ended French tax residency before September 28, 2012, the rate of exit tax is 19%. For departures that occurred at any time on or after September 28, 2012, through the end of 2012, the rate is 24%. From January 1, 2013, the exit tax is assessed at normal progressive tax rates up to the maximum of 45%.

For more on the complex taxation of stock comp in France, and on the taxation of equity awards in over 30 other countries around the world, see the Global Tax Guide at myStockOptions.com.

Stock Comp In The News...

The hot media spotlight often glares upon stock grants or sales involving senior executives. Not surprisingly, the harshest light tends to be unleashed on big gains by executives at financial institutions—especially if the grants in question were made during the most painful periods of the financial and economic downturn. For example, see an article about Goldman Sachs in The New York Times that was subsequently picked up by news services worldwide, such as Bloomberg.

While the study reported by the Times discovered many interesting tidbits about the partnership structure at Goldman, what made headlines is the fact that close to 36 million stock options were granted to Goldman employees in December 2008 (10 times more than during the prior year). The exercise price of the grants is $78.78; at the time of the article's publication, the stock price had closed at near $175. The grants vest over three years at the start of 2010, 2011, and 2012, with restrictions on selling the shares at exercise. The newspaper also reports that Morgan Stanley and JPMorgan Chase, Goldman's two biggest rivals, did not make similar option grants when its shares were depressed. Other financial institutions have recently received similar media attention. On Feb. 1, an article in The Boston Globe reported on performance share awards valued at $33 million that were granted to the CEO and top executives at Bank of America. (For details of these grants, see the 8-K filed by the company on January 31, 2011.)

Of course, it is not just executives' gains at banks that attract attention. Recent stock sales by Howard Shultz, the CEO of Starbucks, from options that vested in 2002 and 2004, made headlines. However, Starbucks has also won international media attention by making broad grants of RSUs throughout the company. For example, 6,700 members of Starbucks employees in the UK, including baristas, will be eligible in 2011 for the RSUs (called "Bean Stock"), which are replacing the broad grants of stock options formerly made by the company. Half of each RSU grant will vest at the end of the first year, and 25% over the subsequent two years.

According to the message sent to employees by the CEO Mr. Schultz, Starbucks changed its equity grant to let more frontline staff receive it and to shorten the vesting. His statement reveals strong support for the power of broad-based stock grants at Starbucks: "we cannot build value for our shareholders unless we truly build value for our partners" (meaning employees). Plus, he noted that "RSUs are never underwater—so there is always inherent value to them."

For more about RSUs, from the basics to the technical details of taxation and financial planning, see the RSU section at myStockOptions.com. Also, for participants and stock plan staff at multinational companies such as Starbucks, our Global Tax Guide covers the tax treatment of RSUs and other equity awards in the UK plus over 30 other countries.

US At Odds With Global Trend Toward Higher Tax Rates For Stock Compensation

Amid many tax hikes in Europe and elsewhere, the United States seems essentially isolated among developed nations in its refusal to raise tax rates in 2010 or 2011 on various types of income, including stock compensation. Whether this means the US will eventually face a fiscal crisis, major tax increases later, or deep cuts in federal spending we will leave to other respected resources and articles.

To help international and cross-border employees with taxes on stock compensation, our Global Tax Guide tracks the tax rules for equity awards in 32 countries on six continents. Among the countries to raise tax rates during 2010 are the United Kingdom, which established a new top capital gains rate of 28% and a top income tax rate of 50%, and Canada, which ended the previously available election to defer tax on the portion of stock option income that you cannot deduct from taxable income. Countries where tax changes took effect at the start of 2011 include the following.

France made several alterations in the income, social, and capital gains tax rates that became effective in 2011. For example, the tax rate on income from the exercise of qualified stock options rose from 40% to 41% on gains above €152,500; the social tax due at option exercise and the vesting of restricted stock ("qualified free shares") jumped from 2.5% to 8%; and the exemption for capital gains ended, along with a rate increase on capital gains.

Ireland: From January 1, the special tax treatment for Approved Share Option Schemes will no longer apply for grants made on or after November 24, 2010. In addition, all income from both approved and unapproved share plans will be subject to Pay-Related Social Insurance (PRSI) tax.

Denmark decided to change its 8% "labor market contribution" (LMC) from a social security charge to a straightforward tax that took effect on January 1, 2011. This means that an exemption from the LMC is no longer available under tax-treaty provisions intended to prevent double taxation in social security. If you are a foreign employee working as a tax resident in Denmark and pay social security contributions to your home country, you now must pay the LMC in Denmark as well as your home country's social security charges.

See the Global Tax Guide on myStockOptions.com for more details on these changes, and to survey the tax landscape in all 32 of the covered countries.

From Russia With Love: Tax Break For Highly Skilled (Or Paid) Foreigners

As noted in the Russia section of our Global Tax Guide, foreign workers obtain Russian tax residence by spending 183 days in Russia during a period of 12 straight months (not necessarily a calendar year). This matters because being a Russian tax resident confers a significant benefit: the income of nonresidents, including income from equity awards, is generally taxed at 30%, but the rate for tax residents is only 13%.

However, under a change in Russian tax law effective from July 1 of this year, nonresidents get the preferential 13% tax rate if they are considered "specialists" (i.e. highly skilled employees doing specialized work). According to an article at the website of the Russian news agency RIA Novosti, this tax incentive is intended to encourage a "brain influx" of people with valuable skills. However, the article reports that "specialist" status is defined merely by income rather than by profession: all that foreign nonresidents in Russia need to obtain specialist status is a Russian salary of at least 2 million rubles per year.

See the Global Tax Guide on myStockOptions.com to read more about the taxation of equity compensation in Russia.

From The Global Tax Guide: New Countries & Recent Updates

The Global Tax Guide at myStockOptions.com summarizes the taxation of equity awards in 32 countries throughout the world. Our latest additions are Finland and South Africa. Important recent changes elsewhere in the Global Tax Guide include the following.

Formed earlier this year, the Conservative/Liberal Democrat coalition government in the United Kingdom changed the capital gains tax rates with effect from June 23, 2010. Capital gain is now taxed at 28% if the sum of your taxable gain plus all other annual taxable income is over £37,400, but the rate is only 18% if that sum is at or below £37,400.

In June 2010, the government of France proposed to raise the social tax employees pay at the exercise of tax-qualified stock options; this would probably also apply to income received at restricted stock/RSU vesting. The rate would rise from 2.5% to 8% for new grants. The government also wants to raise the social tax on capital gains and dividends from 12.1% to 13.1%, and to increase the highest tax rate on ordinary income from 40% to 41%.

A decision by the Supreme Administrative Court of Sweden may change the timing of restricted stock taxation from vesting to grant (but will not affect restricted stock units).

For details on recent developments in these countries and many others, see the Global Tax Guide at myStockOptions.com.