Shareworks Global Intelligence Newsletter April 2021

April 1, 2021 Shareworks Marketing

Icon of a globe with a network connecting countries together with the wording "Global Intelligence Newsletter" underneath.

Shareworks Global Intelligence newsletter provides an overview of recent changes affecting employee share plans globally. 

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Country Updates

Canada: Anticipated Changes to Taxation of Stock Options

This summary is a follow up to the webinar held on March 24, 2021 regarding Canadian regulatory and tax issues for equity compensation.  The Income Tax Act (Canada) (the “Act”) provides employee option holders with a potential 50% federal tax deduction (the “50% Deduction”) on the taxable gain realized on the exercise of a stock option (typically equal to the fair market value (“FMV”) of the share at the time of exercise minus the exercise price). In general, the 50% Deduction is available for stock options granted with an exercise price equal to or in excess of the FMV of the underlying share at the time of grant, where the share underlying the option is a typical common share without preferential dividend or redemption rights.

Currently, there is no cap on the 50% Deduction, which can make employee stock options a valuable incentive and retention tool.

The uncapped availability of the 50% Deduction may, however, be about to change. Proposals originally introduced in 2019 and formalized with draft legislation published on November 30, 2020 (the “2020 Proposals”) will amend the Act to introduce a new annual limit on the 50% Deduction. The 2020 Proposals will apply to options granted on and after July 1, 2021. However, as of writing, the 2020 Proposals have not been tabled in Parliament, and so whether they ultimately pass in their current or a modified form remains to be seen.

Specifically, the new rules will impose an annual limit on the 50% Deduction for each “vesting year” of an underlying option agreement, which will be defined as the year in which the option agreement specifies the option is first exercisable. 

The per-vesting year limit is capped at CAD 200,000 (approximately USD 160,000) of the underlying securities to which the options relate, by FMV, as of the time the stock option agreement is made. In other words, the limit generally tracks, by vesting year, the first CAD 200,000 worth of securities valued as of the agreement date. Employers will generally have flexibility to maximize the 50% Deduction by structuring options to vest over multiple years. For example, an option in respect of shares with an FMV of CAD 1 million (as of the grant date) could preserve the 50% Deduction for all shares subject to the option by vesting in 20% tranches over five years (CAD 200,000 X 5 = CAD 1 million).

The 2020 Proposals exempt from the new cap options issued by a Canadian-controlled private corporation (“CCPC”) and non-CCPCs with annual gross revenues that do not exceed $500 million (a carveout intended to capture startup and emerging companies). If the entity issuing the security is part of a group that prepares consolidated financial statements, the $500 million threshold will apply on a group basis.

Finally, shares in respect of stock options that exceed the CAD 200,000 per-vesting year threshold will be considered “non-qualifying securities”. The 2020 Proposals include a new deduction for an employer equal to the gain realized by the employee on the exercise of an option for non-qualifying securities. The employer will also be permitted to designate, in writing, securities that otherwise would be eligible for the 50% Deduction (even under the new limits) to be non-qualified securities, such that the sale or issuance of these securities to the employee will be deductible to the employer and no longer eligible for the 50% Deduction.

This information has been provided by our collaborating law firm in Canada, Stikeman Elliott LLP (contact: Michel Legendre at mlegendre@stikeman.com)

 

Costa Rica: Global Income Tax

A proposed tax legislation in Costa Rica has introduced a global income tax model under which all income derived by individuals would be taxed under a progressive scale of rates from 10% to 27.5%. 

Although the proposed law does not expressively refer to employee share plans, it does encompass all taxable remuneration and salaries of all kinds. Assuming that employee share plans will be characterized in a manner similar to  salary, then such share plans will be considered to fall within the “renta global dual”, becoming subject to the progressive tax brackets (instead of the current flat rate of 15%).

It cannot be determined at this moment when the bills will be enacted. Assuming the Income Tax Law for individuals is enacted within the expected term, it will come into effect starting January 1, 2022.

This information has been provided by our collaborating law firm in Costa Rica, Consortium Legal (contact: Diego Salto Van der Laat at dsalto@consortiumlegal.com)

 

Russia: Amendments to Progressive Bands

After introducing a progressive system for personal income taxation in January 2021, the Russian State Duma has proposed to add additional tax bands to the existing tax structure, as outlined below.

Annual income (RUB)

Tax rate

0 - 204,000

0%

204,000 - 5,000,000

13%

5,000,000 - 10,000,000

15%

10,000,000 - 100,000,000

25%

100,000,000 - up

35%

If adopted, this proposal will be effective not earlier than tax year 2022.

This information has been provided by our collaborating law firm in Russia, ALRUD (contact: Elena Novikova at enovikova@alrud.com)

 

South Africa: Budget 2021 Individual Income Tax Measures

Effective from March 1, 2021, individual income tax thresholds have been increased by 5%, resulting in the following bands. The tax rate structure remains the same.

Annual taxable income (ZAR)

Tax rate

1 - 216,200

18%

216,200 - 337,800

26%

337,800 - 467,500

31%

467,500 - 613,600

36%

613,600 - 782,200

39%

782,200 - 1,656,600

41%

1,656,600 - up

45%

 

This information has been provided by our collaborating law firm in South Africa, Edward Nathan Sonnenbergs (contact: Megan McCormack at mmccormack@ensafrica.com)

 

United Kingdom: Budget 2021 Tax Measures

The UK budget for the upcoming financial year starting on April 6, 2021 contains only minor changes to personal taxation. 

Effective from April 6, 2021, the tax-free personal allowance will increase to GBP 12,570 from GBP 12,500; the higher rate threshold will increase to GBP 50,270 from GBP 50,000. These thresholds will be frozen until April 5, 2026.

National Insurance (employee social security) thresholds are also due to increase by 0.5%, effective from April 6, 2021. The primary threshold will increase to GBP 184 per week from GBP 183; the upper earnings limit will increase to GBP 967 per week from GBP 962. 

This information has been provided by our collaborating law firm in United Kingdom, Pinsent Masons (contact: Fleur Benns at fleur.benns@pinsentmasons.com)

 

Upcoming Filing and Reporting

China: SAFE Quarterly Reports

April 3, 2021
Affects: Local Company

Companies that have obtained SAFE approval for their equity plans in China are required to file quarterly reports with their local SAFE office within three business days following the end of the relevant quarter.

This information has been provided by our collaborating law firm in China, Martin Hu & Partners (MHP) (contact: Kevin Xu at kevin.xu@mhplawyer.com)

 

Singapore: Equity Reporting

April 15, 2021
Affects: Local Company

Under the Qualified Employee Equity-Based Remuneration Schemes (QEEBR), qualifying employees may elect to defer payment of the tax due at exercise of stock options and vesting of share awards, including RSUs, for up to 5 years, subject to an interest payment. Under the tax deferral scheme, the applicant must meet certain criteria.

A plan that meets the applicable requirements of the QEEBR legislation is automatically qualified (i.e., no approval is required).

Employees must submit an application form to defer their tax gains to the Inland Revenue Authority of Singapore, and the employer must certify on the application form that the stock plan under which the stock option and/or share award is granted qualifies for the QEEBR Scheme. The form must be submitted to the Singaporean tax authorities by April 15.

This information has been provided by our collaborating law firm in Singapore, Low Yeap Toh & Goon LLP (contact: Low Siew Joon at infolaw@lytag.com.sg)

 

Hong Kong: Equity Reporting

April 30, 2021
Affects: Local Company

Employers must report the number and fair market value of shares granted to their employees during the assessment year. This is done in the Annual Employer´s Return (Form IR56B) and must be filed before 30th April.

This information has been provided by our collaborating law firm in Hong Kong, Vivien Chan & Co (contact: Patty Chan at patty@vcclawservices.com)

 

India: Tax Deducted at Source Certificate and Certificate of Taxable Income

May 31, 2021
Affects: Local Company

Employers in India must issue a Tax Deducted at Source (TDS) certificate on Form 16 to employees by May 31 following the end of the financial year. Form 16 sets out any tax withheld by the employer in the previous year, including withholdings under equity plans.

In addition, Form 12BA (Employer Certificate of Taxable Income) must also be issued to employees by April 30 of the assessment year. 

This information has been provided by our collaborating law firm in India, Little & Co. (contact: Priyanka Pol at priyanka.pol@littlecompany.com)

 

Upcoming Events

Global Equity Organisation (GEO) Australia Virtual 2021

May 25-27, 2021

Australia Virtual — an event dedicated to Australian equity compensation, coming to you virtually 25-27 May 2021.

With sessions specifically designed for the Australian remuneration industry, both for the small and medium-sized company as well as those with larger national and global operations, Australia Virtual 2021 is an opportunity to get all the latest share plan industry information from the convenience of your office or home.

More info: https://www.globalequity.org/geo/AUS2021

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Shareworks Global Intelligence Newsletter March 2021
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