Assumptions

The shares used in a share plan are:

• fully paid ordinary shares in the company, including Depository Shares where these are listed on a recognised exchange;
• new issue shares, treasury shares or existing shares either purchased in the market or transferred out of an employee trust.

If the shares are in a private company (not listed on any market), a closely held company or listed on other exchanges, it can impact on the securities law position and the tax treatment.

If your plan uses other securities in the business, for example Contingent Capital (Co-Cos) or 'Bail-in Bonds' these are not covered but talk to us and we can show you how best to deal with your global compliance.

2     Who makes the offer, grant or award?

It is assumed that the offer, grant or award is being made by the parent company.

Different rules may apply to offers, grants or awards made by the local employing company, a trustee or by some other third-party. (For some countries, an offer by the local employing company or by a third-party is specifically covered in the securities law section.)

3     Who participates?

The offer, grant or award is only made to ‘Eligible Employees’. These are employees in the parent company and any subsidiary (over 50% owned by the parent). If employees are in a complex group structure with different levels of ownership, please discuss this with us.

This database will not be suitable for use if your participants are not employees, including:

• workers;
• consultants;
• franchisees or employees of franchised businesses;
• non-executive or independent directors (that is, they do not have an employment relationship with the company);
• employees of joint ventures which are 50:50 owned - ‘dead-lock’;
• employed by a partnership (including limited liability partnerships);
• employed through a professional employer organisation or agency.

If you would like to make offers, grants or awards to any of these types of workers, please contact us. We can discuss how best to approach legal and tax global compliance.

OnTap does not address any legal requirement to make the offer of awards more broadly (i.e. to other members of the workforce who are not employees). 

Anti-discrimination laws generally apply. Plans must, in practice, be operated taking into account any applicable anti-discrimination laws, which typically cover discrimination on the grounds of sexual orientation, age, disability, race, religion and ethnicity. For example, there is a risk that age discrimination laws may be breached if termination provisions are operated based on age, particularly in relation to 'normal' retirement ages.

OnTap assumes that employees are aged 18 or over.

For the purposes of the securities laws and exchange control data, employees are assumed to be ordinarily resident in the relevant country. Please note that securities laws can also apply to employees who are temporarily in a country at the time of offer, grant or award.

For the purposes of the tax data, the employees are assumed to be local tax resident and domiciled in the relevant country. This database is not suitable for mobile workers.

4     Which plans are covered?

Our database covers the most popular plans. Before you first use our database, please do let us see your plans and we will confirm that your plans are covered by the database. If you change your plans over time, you may introduce features which may not be covered by the database so please do contact us, we will be very happy to review and confirm.

The plans covered by our database are:

4.1    Cash Plan

• A cash plan can be structured in various ways. It can be a pure cash plan or it could relate to shares in various ways, for example, as a cash settled option plan (sometimes called a Stock Appreciation Right (SAR)) or a cash or phantom RSU.
• The participant is not entitled to and will have no rights to or interest in shares.
• The participant is only entitled to cash.

4.2    Deferred Bonus Plan

• An award is made in the context of a discretionary annual bonus plan;
• Before the award is made, the participant has no contractual right to an award and no rights as a shareholder;
• Part of the bonus is deferred and is awarded as a conditional right to acquire shares in the future;
• The deferral is mandatory, the participant has no choice;
• The award is conditional on the participant remaining in employment until a vesting date.

4.3   Free Shares (or Conditional Free Shares) - Restricted Stock Unit Plan (RSUs)

• Sometimes called a Performance Share Plan or Long Term Incentive Plans (LTIPs).
• Participants are granted a conditional right to be given shares for free on vesting. Vesting will occur after a period and sometimes if performance conditions are satisfied.
• Before vesting, some or all of the shares subject to an award may be held by the company or in a trust or new shares may be issued if and when the award vests.
• Before vesting, the participant has no rights to dividends, to vote on the shares or to call for the shares. These rights will apply after the award vests.
• On or shortly after vesting, the shares are issued or transferred to the participant.

4.4   Nil-Cost Option Plan

• An option is granted to acquire shares of the parent company.
• The exercise price is zero (or a nominal amount like £1 or $1 to exercise the whole option).
• The option is non-transferable except in the case of death, when it can be exercised by the legal representatives of the deceased’s estate.
• The option can be exercised after a set period. If it is not exercised by the date before it is due to lapse it can be exercised automatically on behalf of the participant.
• The option can be exercised early in specified limited circumstances like redundancy, ill-health and death.
• The exercise of the option may depend on the fulfilment of a performance condition set at the date of grant. In some cases, the performance condition may be waived in circumstances which give rise to early exercise.

4.5   Option Plan

• An option is granted to acquire shares of the parent company.
• The exercise price may be at market value or at a discount to market value.
• The option is non-transferable except in the case of death, when it can be exercised by the legal representatives of the deceased's estate.
• The option can be exercised after a set period.
• The options may be exercised early in specified limited circumstances like redundancy, ill-health and death.
• The exercise of the option may depend on the fulfilment of a performance condition set at the date of grant. In some cases, the performance condition may be waived in circumstances which give rise to early exercise. The exercise may be conditional on saving for a period.
• No dividends or 'dividend equivalents' are paid under the option.

4.6   Restricted Shares/Restricted Stock

• Shares are given to a participant at the start but are subject to restrictions on disposing of the shares (or an interest in the shares) for a period of time. The shares are not subject to a risk of forfeiture once they have been given to a participant.
• The shares are transferred to the participant on the same day/at the same time as the agreement to grant/award the shares to the participant.
• The shares may be held by a third-party during the restricted period, like a trustee.
• The participant is entitled to the dividends.
• The restrictions may be lifted in specified circumstances like redundancy, ill-health and death.

4.7    Share Matching (Co-Investment) Plan

Purchase Shares

• Participants are offered the right to purchase shares.
• Prior to purchase the participant has no right to dividends or to vote on the shares. These rights will apply after the shares are purchased by/on behalf of the participant (with no delay between purchase and transfer).
• To fund the purchase of the shares, the participant is invited to make a contribution by way of deduction from after tax salary or bonus.

Matching Shares

• The contribution is matched by the conditional right to acquire shares for free on vesting. Vesting will occur after a period and sometimes if performance conditions are satisfied.
• Before vesting, some or all of the matching shares subject to an award may be held by the company or in a trust, or new shares may be issued if and when the award vests.
• Before vesting, the participant has no rights to dividends, to vote on the matching shares or to call for the matching shares. These rights will apply after the award vests.
• On or shortly after vesting, the matching shares are issued or transferred to the participant.
• The shares may vest early in specified circumstances like redundancy, ill-health and death.

4.8    Share (Stock) Purchase Plan or Employee Share (Stock) Purchase Plan

• Participants are offered the right to purchase shares.
• The terms of the purchase are usually beneficial for the participants in that there may be, for example, a discount or a cheap dealing facility.
• Prior to purchase the participant has no right to dividends or to vote on the shares. These rights will apply after the shares are purchased by/on behalf of the participant (with no delay between purchase and transfer).
• To fund the purchase of the shares, the participant is invited to make a contribution by way of deduction from after tax salary or bonus.

4.9   Stock Settled SARs:

• The RSU information, in combination with the option plan information, will give you a good indication of the relevant issues for most types of stock settled SARs.
• These are where participants are granted an option over a "notional" number of shares at a "notional" option price - usually market value.
• They are exercisable in the future. On exercise, no funds are required from the participant. Instead, the participant receives a number of shares equal to the difference between the notional option price and the market value at exercise (or a capped amount).
• However, the tax issues should be specifically checked with local lawyers.

5       Defined terms

The defined terms used in the assumptions are set out in the Glossary. Some of the terms used above are:

Award: This is a right under an incentive plan. Awards can come in many different forms: as options, conditional share awards/free shares, or upfront shares. The right is normally conditional on certain conditions being met.

Exercise: The exercise by a participant of an option. On exercise, participants are invoking their right to acquire the shares subject to the option.

Exercise period: The period during which a participant may exercise an option. Also sometimes referred to as an 'option period'.

Exercise price: Also known as the option price. The price at which an optionholder can exercise their option to acquire shares.

Grant: As a verb, giving options or share awards to participants. As a noun, the process of giving such rights.

Lapse: The legal term for a right to shares ceasing to exist.

Market value: The market value of shares. This is usually determined by reference to the quoted prices on the relevant stock exchange. It is also sometimes called Fair Market Value. It may have a very specific meaning in a country for tax purposes. For example, for a UK listed company, it is usually calculated in a specific way called the mid-market closing price. 

Nominee: In a share plans context, a legal person (i.e. either an individual or a corporate entity) holding shares on behalf of participants post-vesting or post-exercise and facilitating the exercise of shareholder rights, e.g. voting, receiving dividends, sale of shares.

Option: A contractual right to acquire something (in our context, a share) at a future time or within a specified period at a price specified at the time the option is granted. Normally, once the option has vested, the participant can choose when they exercise their right to acquire the shares.

Performance condition: Conditions set at the time of grant which must be satisfied before an award can vest. Performance conditions can measure the performance of the company, the group, a subsidiary, a particular employee, or a particular business unit or group of employees. They can be financial or non-financial.

Ratings: These are Green, Amber and Red:

• Green: No filings or approvals required - the plan can be launched without making any securities or exchange control filings at any stage. However, there may be other important legal and tax issues to be considered like employee consultations and translations.
• Amber: These countries may require filings or approvals but of a fairly minor or routine nature, i.e. they can be done quite quickly and at minimal cost. There may also be some minor ways in which the plan cannot operate as designed.
• Red: These countries require major filings or approvals. These could take some time to complete and in some cases can be fairly expensive. There may be some significant respects in which the plan cannot operate as designed.

Transfer to participant: The actual transfer (delivery) of shares to a participant or the participant's nominee, which will be:

• at the start for restricted shares/stock; or
• following exercise of an option or the vesting of a conditional share award/free share award/RSU.

In some cases there may be a delay between exercise/vesting and the transfer, e.g. if the option is exercised on a non-business day or where new shares have to be issued. The value of the shares may change during this period and in most jurisdictions the taxable event is at exercise/vesting, even if the transfer takes place at a later time or date, but this is not always the case.

Vest: 'Vesting' normally means the participant becoming unconditionally entitled to receive the shares underlying the award (meaning there are no other conditions that need to be satisfied to receive the shares, whether performance-based, time-based or otherwise). The extent to which an award vests may depend on the extent to which the conditions have been met. Where an award is a conditional share award/free share award/RSU, the shares will normally be delivered to the participant on or shortly following vesting. Where an award is an option, 'vest' means that the employee becomes unconditionally entitled to exercise the option and acquire the shares subject to it (meaning there are no other conditions that need to be satisfied to receive the shares, whether performance-based, time-based or otherwise).

6       Savings arrangements and salary deductions

If there are any contributions from the participant it is assumed that the deductions are made from salary or bonus and remitted by the local employer to an authorised savings provider or to the parent company. References to ‘salary deductions’ or ‘deductions from salary’ on the database mean deductions for such contributions.

Our database does not cover the regulatory requirements of any third party recipient of the funds.

7       Financing facilities

We assume that any finance or brokerage facility provided to participants is provided by a licensed third party.

8       Local company contributions (Recharge) and deductions

• Depending on whether you select Recharge or not, the data will show the consequences of the local employing company making a payment or not. This is high-level information. We can provide specific tax advice if required.
• Transfer pricing issues are not covered. We can provide this on request.
• Cash Plans (Recharge): in a cash plan, if the cash is delivered by the employing subsidiary through payroll to the participant and the parent is not involved in any hedging arrangement, there may not be any recharge. On the other hand, if the parent hedges the liability and delivers the cash either directly or indirectly to the participant, then there may be a recharge. There may also be a recharge in relation to administrative costs. The company should therefore carefully consider where the cash will come from and how it will be delivered on settlement.

9       Data privacy

We assume that:

• if the plan is subject to the GDPR and UK GDPR, there is a valid basis for processing;
• if the plan is outside the scope of the GDPR and the UK GDPR, that the plan rules contain a provision stating that the participant consents to allowing information about them to be transferred between group companies, plan administrators etc., and to be transferred out of the participant's home country, and there is a statement to this effect in a communication received by the participant if they do not receive the plan rules; and
• any general data filing or registration required under local law has been done.

10       Withholding

If there is uncertainty in relation to whether or not withholding for tax or social security is required in a jurisdiction, the database adopts a cautious view and assumes that withholding is required. This position will protect the employer from any action by the local revenue in the event that the revenue determines that the employer should have withheld the tax. However, if in fact withholding was not required and the employer does withhold, this may adversely affect the employee. For example, the employee will suffer a cash flow disadvantage and may be adversely affected if the share price rises between the date of withholding and the time when tax may have been due by self-assessment. Withholding can be affected by local law, this may include restrictions on what personal tax information can be made available to share plan administrators, the parent company and other third-parties by the local employer.  

11     Taxation of awards

The exact structure of an award is crucial to the way that award is taxed. For example, if beneficial ownership does not transfer to the participant until a vesting date sometime in the future, tax is usually deferred until that future date. On the other hand, if beneficial ownership transfers at the time of award, tax is often due at the start. However, this clear distinction between ownership passing at the start and at the end can become blurred by several factors, including a restriction on the ability to sell the shares and by clawback. If the shares are in some way restricted - in that they cannot be freely sold - then sometimes the tax is reduced or deferred to reflect that restriction. If the awards are subject to clawback then, depending on the terms of that clawback, this may be seen as a forfeiture provision which may reduce or defer the tax until the clawback period falls away. Companies have subtly different clawback terms and may impose subtly different restrictions on shares. It is important, therefore, that, if companies want detailed and specific tax advice for their plans, then local counsel needs to be instructed about the detail of how the specific plans work. The database can only give generalised tax advice.

When calculating an individual’s taxable income there are many detailed factors which may be relevant including:

• What event triggers the tax? For example, is it vesting or settlement? This fixes the date the share price is used to calculate the tax due.
• What is the method for establishing the share price on that date. For example, is it the closing price or the mid-market price or something else?
• Are there any rules about how the foreign exchange rate is set? For example, do you have to use a particular central bank FX rate and do you have to use the same rate to calculate the gain made as is used when shares are sold to pay tax?

Most companies use a globally consistent method to calculate individual taxable amounts. In some countries there may be no particular rules and so companies should use a reasonable and consistent method. OnTap covers the first of these factors but does not cover the second and third factors for all countries.

Tax reports in OnTap assume that awards are not part of any tax avoidance arrangement or granted with any tax avoidance purpose, and the main purpose of the awards is commercially driven, rather than being the securing of any tax advantage.

12     Financial Services Companies

Many financial regulators have issued rules and/or guidelines which regulate remuneration in the financial services sector. These are additional rules and/or guidelines which generally do not apply in other sectors.

Some general principles of these regulations include: risk management; mandatory deferral; mandatory holding periods; mandatory payment in equity or other instruments; mandatory inclusion of 'malus' and 'clawback' provisions; and general good governance and oversight.

For example, the EU has issued a range of legislation which regulate remuneration, including:

• The Capital Requirements Directives and Regulations;
• The Undertakings for Collective Investment in Transferable Securities Directive (UCITS V);
• The Alternative Investment Fund Managers Directive (AIFMD);
• The Solvency Directives and Regulation;
• The Investment Firms Directive and Regulation; and
• The Markets in Financial Instruments Directive II and Regulations (MiFID II).

This is a complex area. OnTap does not cover these issues but Tapestry advises many firms on their compliance with financial services remuneration rules and guidelines, and can provide specific advice.

13     Dealing Restrictions

Many jurisdictions have laws, regulations and/or guidelines which impose restrictions on dealing in, or transactions relating to, shares, securities and other instruments or arrangements linked to the value of underlying instructions, in order to avoid actual or perceived market abuse or manipulation. Rules may prohibit dealing or transacting whilst in possession of inside information, or in certain specified periods in a company’s financial year (e.g. in the run up to a results announcement). Companies may also adopt their own codes of practice in relation to this.

For example, the EU has issued the Market Abuse Regulation, and the UK operates a similar regime.

Under these rules, certain actions relating to incentive awards may not be permissible at certain times or in certain circumstances, or may be subject to seeking relevant consent or approval. Disclosure requirements may also apply.

OnTap does not cover these issues, but Tapestry advises many firms on their compliance with these regimes and can provide specific advice.

14     Disclaimer

The information we provide in the database is general commercial information only and is subject to the Terms and Conditions.