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Equity-Based Compensation for Multinational Corporations

9th ed. (2007). 168 pp. (6" x 9"), softcover. $25 for NCEO members; $35 for nonmembers.

In today's global business environment, more and more companies with operations overseas use equity-based compensation to attract, motivate, and reward employees worldwide. The benefits are great for both the employer and the employee, but many difficult issues are raised. This book is designed to help companies and their advisors address those issues, select the plan or plans that will work for them, and start down the road toward implementation. It includes a country-by-country discussion of tax and legal issues for 45 countries. Most of the material is on stock options and related plans because they are the most popular form of equity compensation in this context. In the 9th edition, the technical chapters (such as the country-by-country survey) have been updated to bring them in line with current law and practice.

Contents

Preface
Implementing and Maintaining Compliance of Equity Compensation Programs Globally
Implementing a Global Stock Plan
Communicating Employee Ownership Across the Globe
TeamShare at Bristol-Myers Squibb
International Phantom Stock

Excerpts

From Chapter 1, "Implementing and Maintaining Compliance of Equity Compensation Programs Globally"

This chapter, written by leading attorneys specializing in international equity compensation, begins with a general discussion of the issues involved and then has a country-by country discussion of the rules in 45 nations. Below are excerpts from each of the two main sections.

Most countries permit a local tax deduction when the parent company is reimbursed the cost of the benefits under the plan (which generally is the spread realized upon the exercise of a stock option or purchase right, or the fair market value of the shares when the restricted stock or RSUs are granted or vest). Such a charge-back suggests that the local subsidiary is entitled to a tax deduction because, theoretically, it caused the parent company to grant stock awards to its employees in exchange for the reimbursement.

Although it may allow local subsidiaries to obtain beneficial tax deductions, a charge-back presents other complications. An independent-minded subsidiary generally is inclined to resist a charge against its operating budget because the global program is viewed as a benefit provided by and, in part, for the parent company, not the local subsidiary (e.g., aligning the interest of the employees with that of the parent’s shareholders). The charge-back also increases the likelihood that benefits provided under an equity compensation program will be considered a part of “regular salary” and will become an “acquired right” that would then need to be included as part of an employee’s retirement or termination benefit calculations. Finally, companies may need to weigh the benefit of the charge-back and corresponding local tax deduction against potential negative tax consequences to the employees.

When offering an equity compensation program, companies should address the following issues relating to the taxation of the local entity:

• the tax consequences to the local subsidiary of extending the program to the local employees; and
• the tax consequences of the local subsidiary’s reimbursement of the parent company for the income realized by local employees.

Japan

• Labor Concerns. To mitigate the risk of potential entitlement claims, employees should acknowledge that any employee stock plan benefits are provided at the discretion of the company. The right to terminate the plan should be reserved in writing, and the plan documents should be prepared separately from the contract and work rules. Employee contributions to a stock purchase plan should be remitted to the parent company without delay. If the subsidiary is involved in the administration of the accounts where the payroll deductions are held, approval from the Labor Standards Inspection Office is required. In addition, an agreement between an employee representative and the subsidiary may be required in order for payroll deductions to be permitted for a stock purchase plan.
• Communications/Translation. For clarity, the translation of plan documents for employees is recommended, but it is not legally required. Government filings must be in Japanese.
• Securities Compliance. Offers of securities to employees of local subsidiaries that are directly and wholly owned by the parent company are not subject to notification and registration requirements. Otherwise, the necessity for disclosure and registration filings is determined based upon the aggregate price of securities offered and the number of offerees. For grants that are more than ¥10,000,000 (approximately US$80,900) but less than ¥100,000,000 (approximately US$809,000), if the issuing company is a reporting company (e.g., previously filed or was required to file a Form 7 or is listed in Japan) or the number of employees offered is 50 or more, a securities notification (Form 6) must be filed. For grants of ¥100,000,000 or more, if the issuing company is a reporting company in Japan or the number of employees offered is 50 or more, a securities registration statement (Form 7) must be filed. In addition, annual and semi-annual filings are required once a Form 7 has been filed.
• Foreign Exchange. Foreign exchange restrictions do not apply to employee stock plans. For purchases within 20 days that are greater than ¥100,000,000, an ex post facto report must be filed with the Ministry of Finance.
• Data Protection. Disclosure is required for the collection and processing of personal data. Personal data may not be transferred to third parties without the prior consent of the employee.
• Employee Tax Treatment. The employee is taxed on the spread at the time the stock options or purchase rights are exercised. The employee is subject to tax on the value of shares when restricted stock or RSUs vest. Capital gains tax is applicable at the time of sale. In addition, differing types of capital gains tax treatment are allowed, depending on individual situations.
• Social Insurance Contributions. There are no social insurance charges, provided that benefits received under the employee stock plan are not interpreted to be regular wages in exchange for labor.
• Withholding and Reporting. Withholding and reporting requirements do not apply if the local employer remains uninvolved in the payment of plan benefits and the parent company is not reimbursed for the cost of the benefits under the employee stock plan.
• Employer Tax Treatment. Although the law is vague, a deduction probably is allowed if the subsidiary buys the underlying shares from the open market and sells them to employees. Any benefit directly attributed to the local subsidiary’s officers or directors cannot be deducted.

From Chapter 2, "Implementing a Global Stock Plan"

As is the case with securities laws, exchange control regulations vary widely from country to country. Some countries’ exchange control regulations are very restrictive, while others do not have any regulations surrounding the inflows and outflows of foreign currency. In many jurisdictions, exchange control rules are not problematic and, at most, require the filing of a report for statistical purposes. It is good practice to notify employees regarding any such reporting obligations, although a financial institution such as a bank through which the transaction may be processed will often make a report on employees’ behalf. In other countries, exchange control rules are more complex and problematic. In South Africa, for instance, approval must be obtained from the exchange control authority before the offering of a stock plan in that country. In other countries, approval needs to be obtained before exercise. In some jurisdictions, it is the employer’s responsibility to obtain the approvals, and in others, such as South Korea, it is the employees’ responsibility (although the employer may obtain the approval on behalf of the employees). In some countries where the exchange control requirements are particularly onerous, using a cashless exercise approach is usually the only practical way of addressing the regulatory hurdles for a stock plan. Additionally, the exchange control laws effectively prohibit an employee stock purchase plan (ESPP) from being offered. Finally, certain countries require employees to repatriate the proceeds of the sale of their shares and any dividends received, which, in some cases, requires the employer to take certain reasonable steps to ensure that employees repatriate such proceeds and dividends, if any.

How to Order

• Use our online order form for secure, instant ordering (the book is listed under "Stock Plans Ownership Outside the U.S.").
• Or phone the NCEO (510-208-1300) with your credit card in hand.
• Or, if you already have an order form, fax or mail it with your payment (credit card information or check).

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Copyright © 2007 by The National Center for Employee Ownership (NCEO) (phone 510/208-1300; email nceo@nceo.org; WWW http://www.nceo.org/). All rights reserved.