Tapestry Alert: Worldwide Wrap-up - Tap-in to our global knowledge!

5 October 2023

Staying ahead of the curve on regulatory and tax compliance is a never-ending task for companies operating globally. To help you keep on top of recent developments, we will be hosting our final quarterly Worldwide Wrap-Up of 2023 next week, covering some of the most recent changes that should be on your radar. We have summarised some of these topics briefly below, but they will be covered in more detail, along with other recent developments, on our 11 October webinar.

China – share plan preferential tax treatment extended

On 22 August 2023, the authorities in China issued a circular extending the preferential individual income tax treatment provided for in Circular 164. This preferential treatment is available for equity-based incentives implemented by a listed company. For a foreign company, the plan will usually have to be registered with SAFE to benefit from the preferential treatment.  The preferential treatment was due to expire at the end of 2023 but will now continue to apply until the end of 2027.

Thank you to our China counsel MHP Law Firm for alerting us to this update.

Tapestry comment
This is a positive step as, since Circular 164 was first issued in 2019, it has been extended annually but the extension has not been announced until the end of the year and even then, only for the following 12-month period.  It is helpful to know that the popular preferential treatment is now in place until at least the end of 2027 and gives some certainty to local teams.

South Korea – share plan reporting proposed

In July, the Korean Ministry of Economy and Finance released proposed tax reforms. Under the proposal, local companies will be required to report transactions in which executives or employees of the company receive share-based compensation from a foreign parent (generally where the local employer is a subsidiary of a foreign company which owns 50% or more of the shares of the local company).
 
Local employers will be required to report the transaction details (e.g., details of grant, exercise, and payment of share-based compensation) by the 10th of March of the year following the taxable period to which the date of exercise or payment of stock-based compensation belongs.

If approved, the proposal will apply to share-based compensation exercised (or paid) on or after 1 January 2024.

Tapestry comment
We have already seen increased scrutiny of foreign share plans in South Korea with the tax authorities asking for more information on employee share plans and residents now being required to dispose of shares through a Korean securities company. Although this is still a proposed change, it follows the general direction of travel and there seems to be an anticipation that this reporting requirement will come into force.

Sri Lanka – foreign exchange rules partially eased

Historically, employee contributions could be remitted out of Sri Lanka either by the employee making an outward remittance via an Outward Investment Account (OIA), or by the local employer obtaining official clearance to make lump-sum remittances on behalf of employees. As previously reported (here), in 2021 Sri Lanka strengthened its foreign exchange rules.  The right to make remittances via an OIA was suspended, and lump-sum remittances were later suspended in 2022.  These restrictions have been extended several times.
 
In June 2023, restrictions on making remittances through an OIA were extended for a further 6 months, but in an unexpected development, the restriction on local employers obtaining clearance to send funds offshore on behalf of employees was not extended. This re-opens one route for employees in Sri Lanka to participate in contributory share plans. 

Tapestry comment
The restrictions on outward remittances have been creating administrative difficulties for companies trying to ensure local employees could continue to benefit from global share plan participation. It is especially welcome to have some good news in connection with foreign exchange, particularly as we have seen a couple of recent developments in other countries going the opposite way!

 

Thailand – tax changes for dividends and capital gains

On 15 September, the Thai Revenue Department announced changes to the taxation of foreign-sourced dividends and capital gains for Thai tax residents.

Previously, Thai tax residents who received income from foreign-sourced dividends and capital gains, would not be subject to tax on that income unless it was brought into Thailand in the same tax year that it was received.
 
Effective from 1 January 2024 onwards, foreign-sourced dividends and capital gains (e.g. proceeds from the sale of shares) will be subject to personal income tax in the year the income is brought into Thailand, irrespective of the year in which it was received.

Thank you to our Thailand counsel ILTC for alerting us to this update.
 
Tapestry comment
This is a major change in the tax treatment of income from foreign-sourced dividends and capital gains and will be difficult for individuals to react given the short time between the official announcement and the effective date. For any share plan participant who relies on dividends and proceeds of sale being brought into Thailand free of income tax, this will be of particular concern.

 

India FlagMarket practice updates – India and South Korea 

We will briefly touch on the current hot topics in India (TCS) and South Korea (exchange controls) and market practice developments we are seeing in relation to these issues, particularly in relation to the approach being taken by local banks and advisers in India.

Tapestry comment
We have covered the details of these topics in recent webinars but they continue to keep our clients busy: we will examine how these issues are being approached in practice. 

Global tax rates

We will also look at some recent tax updates. Our international advisers provide us with new rates to update OnTap as quickly as they become available. Recently announced changes include:

  • Albania – new tax rates took effect 1 June but delayed to 1 January 2024.
  • Kenya – increased tax rates took effect from 1 July 2023. 
  • Netherlands – proposed increase to personal income tax rates and bands. 
  • Rwanda – new progressive rates are due to take effect on 1 November 2023.

Tapestry comment
Although tax changes usually happen according to a set timetable (normally at the start of the relevant tax year), the in-year tax increase in Kenya and Rwanda are reminders that changes can happen at any time and companies should stay on top of tax developments. We will look at the above changes in more detail during the webinar.

if you have any questions, or would like to discuss any element of legal and tax compliance for your global incentive plans, do get in touch – we would be delighted to help!

Sarah Bruce, Margaret Rankin and Emilie Sylvester

Tapestry Alert: Worldwide Wrap-Up - Tap-in to our global knowledge!

July 2023

Staying ahead of the curve on regulatory and tax compliance is a never-ending task for companies. To help you keep on top of recent developments, here is our third quarterly Worldwide Wrap-Up of 2023, with some of the most recent changes that should be on your radar. We have summarised these topics briefly in this alert, however they will be covered in more detail along with other recent developments on our 26 July webinar.

India FlagIndia - tax on outward remittances (TCS)
In our recent alert (here) we discussed the proposed extension of a tax which is withheld on outward remittances under the Liberalised Remittance Scheme (LRS). ‘Tax collected at source’ (TCS) now applies to transfers of funds under an employee share plan, as such transfers come under the LRS under the revised 2022 foreign exchange rules. Currently, the TCS is set at 5% and is only withheld on remittances over INR700,000. Changes to the TCS were due to take effect on 1 July, increasing the tax rate to 20% and abolishing the INR700,000 threshold. Fortunately, however, a last-minute reprieve was issued on 28 June (see here). Now, the TCS rate increase will only apply from 1 October and the threshold will continue to apply, meaning TCS will only be withheld if an individual makes outward remittances under the LRS over INR700,000 in any financial year.

Tapestry comment

The last-minute revision to the 2023 Indian Budget announcement was very welcome indeed! We are aware that industry groups in India are lobbying the Indian government to request that remittances under employee share plans are excluded from TCS. For the time being, however, the delay gives companies extra time to consider with their local payroll teams and authorised dealer bank, how plan operation will be affected if the full 20% TCS becomes relevant for participants from 1 October.

Indonesia - new securities rules for employee share plans
Indonesia’s Financial Services Authority (the OJK) has implemented new rules requiring non-Indonesian listed companies to formally obtain approval before offering securities for consideration under an employee share plan to Indonesian resident employees and directors. This process replaces the previous informal 'No-Action Letter'. Under the new rules, where a non-Indonesian listed company offers securities for consideration under an employee share plan, and the plan qualifies as a public offer in Indonesia (if the thresholds for exemption cannot be met), the company must now apply to the OJK to obtain a ‘Stipulation Letter’ exempting the plan from the public offer registration requirements. For more detail on the Stipulation Letter application process, see here.

Tapestry comment

Historically, many companies offering awards for consideration in Indonesia have been comfortable that they did not need to apply for a No-Action Letter, on the basis that the law was unclear and market practice indicated that the risk of the OJK enforcing any kind of penalty was low. The new rules formally requiring a Stipulation Letter have made the OJK’s expectations much clearer regarding the process for offering an employee share plan in Indonesia, which seems to have limited the ability of companies to take a commercial view for the same reasoning. Affected companies should now re-evaluate their position and the relative risk in light of this update, especially if they previously had obtained a No-Action Letter.

Republic of Korea - clarification on trading employee shares
South Korea’s Financial Supervisory Service (FSS) has recently clarified the procedure to be followed by Korean residents when trading shares of a foreign parent company acquired under an employee share plan (see here). Under existing foreign exchange rules, Korean residents may only trade foreign listed securities through a ‘Korean securities company’, however there was no guidance on whether this rule applied to the sale of shares acquired under an employee share plan. Therefore, Korean participants in a global share plan did not necessarily use a local broker or securities company to conduct the sale of shares under the plan. The recent announcement by the FSS confirms that the rules do apply to shares acquired under an employee share plan of a foreign listed company when the shares are sold by a Korean resident. We will discuss the developing practical effects of this during the webinar.

Tapestry comment

Although this is not new law, the abrupt change in the guidance has raised a number of practical issues for companies, employees and administrators. Although the compliance risk falls on the individual employee, companies will want to ensure the correct structure is facilitated for their participants and we are working with local counsel and our clients to navigate the full impact of the obligation and to how to communicate this to employees.

USA - timeline for clawback compliance extended to 1 December 2023
Shortly after our last World Wide Wrap-up in April, we sent out an alert (here) raising the possibility of an accelerated deadline for US listed companies to comply with the new SEC clawback reforms. It was anticipated that the date for companies to have a compliant clawback policy in place would be 8 August 2023 (rather than the long stop date of 27 January 2024 set out in the SEC rules), but the position remained unclear. In another last-minute reprieve (see here), the deadline was thankfully extended. The NYSE and Nasdaq filed amended proposed listing standards which were accepted by the SEC. The key change is that the effective date is now 2 October 2023, pushing the date for company compliance to 1 December 2023 (being 60 days after the effective date). 

Tapestry comment

The extension of the effective date was great news and provided much needed clarity on company compliance timings. There was a real concern that companies would struggle to put in place compliant policies by 8 August, so more time is helpful. However, the clock is still ticking, so we suggest companies act now (if they haven’t already) to be ready well ahead of the 1 December deadline.

EU/US - data privacy framework adopted
Following a year of ‘will-they-won’t-they’ news reporting, the European Commission finally granted an equivalency decision to the US on 11 July, approving the latest EU/US cross-border data transfer arrangement: the Data Privacy Framework. It has been a long time coming, with the first announcement published in March last year and acceptance by the US in October 2022. The equivalency decision means the EC has accepted that the Framework creates an adequate level of protection (i.e. comparable to that provided under EU law) for cross-border transfers of personal data. This will allow personal data to be transferred from the EU to companies based in the US, which have signed up to the Framework, without having to put in place additional data privacy safeguards.

Tapestry comment

The Framework replaces the Privacy Shield (quashed by the EU Court of Justice in 2020) which, in turn, replaced Safe Harbour (quashed in 2015), and commentators are already questioning whether the Framework is sufficiently different from its predecessors to avoid the same fate. The collapse of the previous data protection arrangements between the EU and the US caused disruption to the thousands of organisations who had to fall back on alternative transfer tools or to keep employees’ personal data in the EU. This is not always a workable option given the global nature of share plans and the internationalisation of share plan administration. For the time being, companies transferring personal data from the EU to the US will be glad to be able to rely on a relatively simple and legal basis.

Global tax rates
We will look at some recent tax updates, in particular those countries with a tax year commencing in July. Our international advisors provide us with new rates to update OnTap as quickly as they become available. Recent announced changes include:

  • Australia - employer social security rate increased to 11%.
  • Egypt - in-year tax change increased maximum tax rate to 27.5% from 1 July.
  • Mauritius - maximum tax rate increased to 20%. Solidarity tax abolished.
  • Nepal - maximum tax rate increased to 39%.

Tapestry comment

Although tax changes usually happen according to a set timetable (usually at the start of the relevant tax year), the in-year tax increase in Egypt is a salutary reminder that changes can actually happen at any time. We will look at the above changes, plus several more, in detail during the webinar.

If you have any questions, or would like to discuss any element of legal and tax compliance for your global incentive plans, do get in touch - we would be delighted to help! 

Sally, Sonia, Olivia

Tapestry Alert: South Korea - Exchange controls clarification on trading employee shares

Tapestry Newsletters

18 July 2023

South Korea’s Financial Supervisory Service (FSS) has recently clarified the procedure to be followed by Korean residents when trading shares of a foreign parent company acquired under an employee share plan.

Background

Existing foreign exchange rules in South Korea require that “when an individual resident desires to trade foreign listed shares, it shall carry out such trading via a Korean securities company”. It was not clear (and there was no guidance issued on the matter) whether this rule applied to a Korean resident employee trading shares of a listed foreign company when the shares were acquired under an employee share plan.

The recent announcement by the FSS confirms that the rules do apply to shares acquired under an employee share plan of a foreign listed company when the shares are traded (acquired or sold) by a Korean resident.

What does the announcement mean?

The announcement is a clarification of existing rules, not a new requirement. The regulations may have already been considered and complied with by your local team in South Korea, however this should be checked.

The requirement that trading must be made “via a Korean securities company” means that when a participant wishes to transact in (i.e. acquire or dispose of) shares under a share plan of a foreign company, the participant must comply with the following:

  • they must open a foreign securities investor account with a Korean securities company;
  • the relevant shares must be deposited with a foreign depository which is linked to the Korea Securities Depository (KSD); and
  • on a sale, a disposition order must be made through the Korean securities company.

This means that participants will likely need to open, and make their trade instructions via, a Korean securities company, if this arrangement is not already in place. It may be possible for an administrator to act as the participant’s agent to continue to take dealing instructions, but this will be subject to authorisation from the participant and agreement with the Korean securities company.

If an employee receives sale proceeds from selling their shares under a share plan of a foreign company without complying with the above requirements, they will breach the regulations (thankfully, however, there are no mandatory repatriation requirements and off-shore dividend reinvestment is still permitted).

To our local counsel’s knowledge, major foreign share depositories (which might be used by plan administrators) are likely already to be linked to the KSD, so the second bullet point above may already be met, however this should be checked with a company’s plan administrator. If the share depository account is not linked to the KSD, the relevant shares must also now be transferred to a depository which is linked to the KSD. We understand that depository accounts with Citibank, J.P. Morgan, HSBC, State Street Bank and BNY Mellon are linked to the KSD: see here.

Timing and enforcement

The announcement does not state an effective date, but as it was made in June, it is expected that enforcement of the clarification will likely begin this month (July).

Penalties for non-compliance apply to individuals when a trading amount exceeds USD10,000, in which case a penalty charge of 2% of the trading amount will be charged, with a maximum penalty charge of KRW50 million (approx. GBP30,000).

Tapestry comment

Whilst this announcement appears to clarify an existing rule, we recommend that companies take steps to check that the regulations are being met locally, as it seems likely that this will not be the case.

The obligations must be satisfied by individual participants, not the company or the local employer, however it would be sensible for companies to check whether their local teams are aware of these requirements and are able to help participants set up a foreign securities investor account with a Korean securities company. Alternatively, as noted above, we understand that it may be possible for companies to continue to use their existing administrator to act as the participant’s agent to deliver instructions to the Korean securities company - this approach may be preferable to ease administration for Korean resident participants, however this will need to be discussed with your administrator and advisers to ensure the agency approach is properly incorporated into the operation of the plan.

Companies should also check whether the share depository accounts being used by their administrator are linked to the KSD or not. Where a KSD linked account is unavailable or cannot be facilitated, companies are still permitted to operate phantom awards or cash settlement as an alternative structure, or participants could use their own local securities company entirely.

We understand that the press in Korea has reported that local securities companies have advised Korean residents of the need to comply with the guidelines. Companies should consider using local plan communications to alert employees of the obligation to comply with the trading rules.

Thank you to our counsel in South Korea, Shin & Kim LLC, for their continued support with these developments.

Sonia, Sally, Sharon and Lewis

 

Lewis Dulley

Tapestry Alert: India - TCS charge - changes delayed!

Tapestry Newsletters

3 July 2023

We recently sent out an alert informing companies that a Tax Collected at Source (TCS) of 20% was going to be applied to any overseas remittance of participant funds in India from 1 July 2023.
 
This was following:

  • an announcement that:
    *  the existing TCS rate of 5% was being increased to 20%; and 
    *  the previous threshold of INR700,000 for the TCS to apply, was being removed.
  • the overhaul of the foreign exchange rules, meaning that outward transfers under employee share plans are now being made under the Liberalised Remittance Scheme (LRS), to which TCS applies.

The planned changes had created much uncertainty and frustration for companies operating incentive plans involving outward remittances, such as purchase or matching plans.

On 28 June, however, the Indian Ministry of Finance issued a press release with some last-minute helpful changes to the updated regime, likely following concerns from local businesses and residents.
 
These included: 

  • Restoring an annual threshold: restoring the original annual threshold of Rs. 7 Lakh (the equivalent of INR700,000) per financial year, per individual – meaning that, for any overseas remittances up to Rs. 7 Lakh (INR700,000) per individual, per year, there will be no TCS charge; and
  • Delaying implementation: for any individual that exceeds this threshold, the 20% TCS will not take effect until 1 October 2023.

Tapestry comment

This is a very welcome (last minute!) revision to the 2023 Indian Budget announcement, so it is great to see the Government responding to the local concerns over this increase.
 
Whilst historically, TCS would not necessarily be relevant for share plans (as employee share plan remittances did not necessarily fall under the LRS regime), companies will now (despite the good news changes) still need to consider whether participants will exceed this annual threshold and, if so, whether there will be any local obligations to withhold the 20% charge. Though note that, for many, this threshold may never be met by participants under contributory plans.
 
We have seen that some companies and local banks have been taking different interpretations of the applicability of TCS to employee share plans. It is therefore recommended that companies engage with their local teams on these requirements to discuss their approach.  
 

 
We will keep you updated on any further amendments!
 
Sally Blanchflower, Emilie Sylvester & Lewis Dulley

Tapestry Alert: India - tax changes likely to restrict share plans

Tapestry Newsletters

21 June 2023

A recent change to the Tax Collected at Source (TCS) rate means that outward remittances from India under an employee share plan will be subject to a 20% withholding tax from 1 July 2023.

That sounds alarming! What is TCS?

TCS is a tax which is withheld from outward transfers of funds under the Liberalised Remittance Scheme (LRS), including transfers under an employee share plan. Any outward remittance under the LRS must be made through an authorised dealer (a licenced foreign exchange bank) and the TCS is withheld by the authorised dealer and paid to the tax authority. Currently, TCS is 5% and only applies to outward remittances under the LRS over INR700,000. But from 1 July 2023, the rate will increase to 20% and will apply to any outward transfer of funds. There are limited exceptions for medical and education costs (where TCS will remain at 5%), but as a general rule, TCS at 20% will be imposed on all outward remittances under the LRS. For outward remittances under a contributory employee share plan (e.g. a share purchase or matching plan or option plan), the amount of each remittance of employee contributions will likely be reduced by the TCS (unless the tax is collected from elsewhere). 

Remind me why the LRS applies to employee share plans?

Following a major reform of the Indian foreign exchange regime last year, all outward remittances from India under an employee share plan now come under the rules and limits set out in the LRS - and, as mentioned above, TCS applies to outward transfers of funds under the LRS. The LRS allows Indian residents to send up to USD250,000 offshore each year without the need for any further regulatory approvals. We covered the foreign exchange reforms in more detail in our alert (here).

So, how is TCS paid?

On 9 June, the Indian Finance Ministry promised that it will clarify how and in what manner TCS is to be collected, but we are yet to see any update. The mechanics are therefore unclear and might differ as to how they work in practice for each company, and for each plan type. The general rule is that withholding TCS is an obligation on the authorised bank rather than on the employer, so it is not withheld by payroll. Instead, the tax is withheld by the individual’s authorised dealer when the outward remittance is made. Technically, the withheld TCS can be reclaimed by the individual when they file their annual tax return, although we understand that getting a refund isn’t always easy or timely, and might be practically more difficult for some employees than others.   

Where does this leave contributory share plans for our Indian employees?

At the moment, it isn’t entirely clear but there is a very real concern in the share plan community that if TCS applies as anticipated, it will have a major impact on the viability of contributory share plans for Indian participants. TCS will likely reduce the amount of each outward remittance by 20%, with the knock-on effect of reducing the number of shares that an employee can purchase in each purchase period under a share purchase plan. Even if the TCS is repaid to the employee at the end of the tax year, they will still have lost out on the full benefit of the share plan. 

Tapestry comment

This is a disappointing change and is likely an unintended consequence of bringing employee share plans within the LRS, but we have not seen any suggestion that an exception from TCS will be introduced for share plans. We continue to discuss with local counsel if there are any workarounds that will mitigate the impact of the TCS. For example, if the employer or parent company lends the employees the funds (i.e. the 20%) to purchase the full entitlement under the share plan with the employee then repaying the loan when they receive the tax rebate. We are also waiting to see what clarity and guidance is provided by the Indian Finance Ministry, and how local practice develops on the issue. In the meantime, if you will be affected by this change then we recommend seeking specific advice in relation to the operation of your plans.

Sally Blanchflower and Sharon Thwaites

Tapestry Alert: US - Timeline for clawback compliance extended!

Tapestry Newsletters

12 June 2023

Good news! The deadline for US listed companies to comply with the new clawback reforms has been extended following last minute amendments filed by the NYSE and Nasdaq. 

Update

In our recent alert in May, we noted the proposed accelerated deadline for US listed companies to comply with the new clawback reforms. It was anticipated that the date for companies to have a compliant clawback policy in place would be 8 August 2023 (rather than the long stop date of 27 January 2024 set out in the SEC rules) but the position remained unclear. 
 
Last week it was confirmed that the deadline was extended. Both the NYSE and Nasdaq filed amended proposed listing standards with the SEC. The key change in the amendments was to propose an effective date of 2 October 2023, pushing the date for company compliance to 1 December 2023 (being 60 days after the effective date). The SEC approved these amended listing standards on 9 June.

NYSE amendment

In addition, the NYSE amendment revised the cure-period provisions. Initially, the NYSE proposal was requesting delisting procedures with no cure-period in the event of non-compliance with the new clawback rules, other than a cure-period for the delayed adoption of a clawback policy. The proposed amendment aligns with other NYSE compliance processes, e.g., for late SEC filings, and includes cure-periods up to 12 months (at the NYSE’s discretion).The Nasdaq proposed policy already included cure-period provisions.

Updated timings

  • 28 November 2022: the final recovery rules are officially published in the Federal Register, giving the US national exchanges and associations until 26 February 2023 to propose listing standards in compliance with the final rules. 
  • 22 February 2023: the NYSE and Nasdaq propose their new listing standards, which will take effect once approved by the SEC.
  • 13 March 2023: the new NYSE and Nasdaq listing standards are officially published in the Federal Register, giving the public an opportunity to comment on the proposed listing standards until 3 April 2023. Under the draft proposals, the SEC must approve or disapprove the proposed listing standard by 27 April 2023, or within such longer period up to 11 June 2023 (as determined by the SEC).
  • 3 April 2023: a collection of large US and international law firms submit a comment on the proposed listing standards requesting that the SEC not approve the adoption and effectiveness of the proposed listing standard until the 28 November 2023 deadline in order to allow listed companies time to implement compliant policies and any controls and procedures necessary to administer such policies.
  • 25 April 2023: the SEC extends the deadline for it to approve or disapprove the proposed listing standards until at least 11 June 2023, meaning companies would be required to comply by 8 August 2023 at the earliest. 
  • 5 June 2023: NYSE filed Amendment No. 1 to its proposed clawback listing standards with the SEC, delaying the effective date to 2 October 2023. 
  • 6 June 2023: Nasdaq filed an amendment also delaying the effective date to 2 October 2023. 
  • 9 June 2023: the SEC approves the amendments. 
  • 2 October 2023: this is the current new effective date as set out in the NYSE and Nasdaq amended proposals. 
  • 1 December 2023: a listed company has 60 days to adopt and file a compliant clawback policy from the 2 October effective date, meaning that NYSE and Nasdaq listed companies will need to have a compliant policy in place by 1 December 2023 (being 60 days later).  

Tapestry comment

This is great news and provides the clarity on company compliance timings that has been awaited. There was a real concern that companies would struggle to put in place compliant policies within the truncated timeframe, so more time is helpful. However, the issues outlined in our earlier alert remain relevant, so we suggest acting now (if you haven’t already) to be ready ahead of the 1 December deadline.

Thank you to our US counsel Chris Potash (from Harter Secrest & Emery LLP) for his continued support on these developments. 

If you need any assistance with your approach to clawback following the reforms, in the US or globally, please do contact us and we would be happy to help. 

Emilie Sylvester, Sally Blanchflower and Sharon Thwaites

Tapestry Alert: UK - HM Treasury publishes SAYE and SIP Call for Evidence

Tapestry Newsletters

6 June 2023

As announced in the Spring Budget 2023, the UK government (HM Treasury) has now launched its “Call for Evidence” on the tax advantaged share schemes Save As You Earn (SAYE) and the Share Incentive Plan (SIP). The Call for Evidence can be found here.

This follows the publication of an evaluation by London Economics (as commissioned by HMRC) of three tax-advantaged employee share schemes (being Company Share Option Plan (CSOP), SIP and SAYE). The aim of the evaluation was to provide a quantitative, qualitative and econometric analysis of these plans to understand how they are used and what impact they have on firms and employees. This can be found here.

What does the government want to know?

In the Call for Evidence, the government is seeking views on whether SAYE and SIP meet their policy objectives and whether there are ways to simplify and improve the plans.

In particular, the government is looking at usage of and participation in the plans, the level of flexibility that the plans can offer and how the plans compare to other incentives being offered. There are also questions on lower income earners and what barriers there may be for their participation.

The government has also asked for details on why businesses have chosen to implement (or not) a SIP or SAYE and their experience of doing so. The government also welcomes views on how businesses find operating a SIP or SAYE from an administrative perspective and what improvements could be made.  

What are the policy objectives of SIP and SAYE?

The Call for Evidence focuses on whether SIP and SAYE are meeting their ‘policy objectives’. These objectives include:

  • incentivising employees, including/especially those who are lower income earners;
  • supporting recruitment and retention;
  • promoting employee ownership;
  • creating a strong link between production of capital and labour;
  • aligning shareholder and employee interests;
  • rewarding hard work; and
  • incentivising savings and investing habits in employees and encouraging financial planning.

How and when to respond?

Responses should be sent by 25 August 2023 using the online survey which can be found here.

Tapestry comment

There have long been calls to improve and simplify SIP and SAYE. Industry bodies like ProShare have led the drive to ensure that the government recognises that certain requirements of the plans might now be outdated and these plans are not fully meeting their objectives. This Call for Evidence is a fantastic opportunity to provide views and recommendations on much needed improvements. Tapestry can think of a number of areas where these plans might be made more fit for purpose to focus on increased participation and utility. We expect the focus of responses to be on improving eligibility rules, offering more flexibility and shortening the length of any holding/exercise period, as well as securing the tax advantages these plans can offer.

This is a rare chance to really have a say in the objectives and design of these hugely important plans and Tapestry will take it with both hands! We will be submitting a response with our thoughts and strongly encourage all businesses to do the same. The more responses that are sent in, the more likely the government will see the need to make changes. 


If you have any questions, ideas or views on the Call for Evidence, please do contact us.

Chris Fallon and Becky Moore

Tapestry Alert: Indonesia - securities laws. New rules for employee share plans

Tapestry Newsletters

1 June 2023

Indonesia’s Financial Services Authority (Otoritas Jasa Keuangan or OJK) has implemented new rules requiring non-Indonesian listed companies to formally obtain approval before offering securities for consideration under an employee share plan to Indonesian resident employees and directors. This replaces the previous 'No-Action Letter' process.

The new rules will apply to all offers to participate in an employee share plan of non-Indonesian listed companies from 30 December 2022.

Background

An offer of securities in Indonesia for consideration will be considered a public offer and will be subject to registration requirements with the OJK, unless the offer can fall within the private placement exemption.

The private placement exemption will only apply where the offer is limited to employees of the relevant group and the following conditions apply: (a) offers that are not separated by at least 12 months should be aggregated; and (b) the offer must be made to fewer than 101 persons and securities sold to fewer than 51 persons; or (c) the total amount of the offer does not exceed IDR5Billion.

For companies operating employee share plans in Indonesia that do not meet the private placement criteria, the offer will be considered a public offer and be subject to lengthy and costly registration requirements with the OJK.

However, the laws surrounding employee share plans in Indonesia are unclear, and a practice of companies applying to the OJK for a No-Action Letter developed. These No-Action Letters provided the applying companies with comfort from the OJK that their employee share plans were exempt from the usual public offer registration requirements. The application and issue of No-Action Letters was a well-established process, however, it was never formally codified in the legislation.

What’s changed?

The OJK will no longer issue No-Action Letters. Non-Indonesian listed companies offering securities for consideration under an employee share plan that qualifies as a public offer in Indonesia will now need to apply for, and obtain, a ‘Stipulation Letter’ to be exempt from the public offer registration requirements.

Companies looking to obtain a Stipulation Letter must ensure that they submit an ‘Application Letter’ and an ‘Information Memorandum’ to the OJK prior to the offer being made.

The OJK have specified that the Information Memorandum must, at least, detail the following:

  • date of the offering or date of distribution;
  • certain OJK-mandatory template phrases;
  • information concerning the parties conducting the offering, including:
    • name, address, telephone, e-mail address and/or facsimile;
    • the current main business activities, including descriptions relating to the products and/or services produced, as well as business prospects;
    • capital structure and ownership structure, or the equivalent, in the event that the offeror is not a limited liability company;
    • summary of important financial data;
    • investment risk factors;
    • corporate structure, in the event the offeror is a member of a business group;
    • management and supervision structure; and
    • parties who can be contacted in order to implement the offer.
  • amount of securities and mechanism for plan implementation;
  • summary of plan requirements;
  • participant eligibility criteria;  
  • the period of the securities offering and purchase;
  • calculation basis for securities issued under the plan;
  • any offer price;
  • payment currency;
  • any annual investment cap;
  • payment methods;
  • securities depository;
  • provisions on voting rights, dividends, transfers of securities, and other rights attached to securities, including rights upon liquidation;
  • mechanism for cancelling the shares allocation as well as the redistribution of cancelled shares;
  • source of shares to be offered;
  • any vesting period; and
  • benefits from the implementation of the plan for eligible participants.

The Stipulation Letter must be issued prior to the public offer being made. Failure to obtain the Stipulation Letter prior to the public offer being made may result in potential criminal and/or administrative sanctions.

The OJK has also indicated that any previously issued No-Action Letters may no longer apply, and the OJK may require, in certain circumstances, that a Stipulation Letter is applied for. We understand that the OJK will write to those companies affected, but currently, they are yet to do so. This is a developing situation, but in the view of local counsel, they expect that companies who have obtained a No-Action Letter will be required to apply for a Stipulation Letter if they are yet to fully implement their employee share plan before, or they amend their existing employee share plan after, 30 December 2022. However, this should be clarified in each case as the laws surrounding employee share plans in Indonesia are not clear prior to this date.

Next steps and timing

Companies offering employee share plans in Indonesia will need to carefully consider if their offer can fall within the private placement exemption, and, if not, they will now need to consider applying for a Stipulation Letter to formally exempt their offer from the public offer registration requirements.

As above, companies offering employee share plans that do not qualify as a private offer will need to submit an Application Letter and Information Memorandum prior to the offer of securities in Indonesia. While the OJK has not yet set definitive timelines for how long it will take for them to issue a Stipulation Letter, local counsel is of the opinion that companies should submit their applications at least 8-10 weeks before the offer is made based on the timeline previously applicable to obtaining a No-Action Letter. That said, given this is a relatively new process, the OJK may be experiencing increased applications which could cause a delay in the Stipulation Letter being issued, so the earlier that companies submit their applications the better.

Tapestry comment

Historically, many companies have been comfortable that they did not need to apply for a No-Action Letter on the basis that the law was unclear and market practice indicated that the risk of the OJK enforcing any kind of penalty was low. The new rules formally requiring a Stipulation Letter have made the OJK’s expectations much clearer regarding the process for offering an employee share plan in Indonesia, which seems to have limited the ability of companies to take a commercial view for the same reasoning. These companies should now re-evaluate their position and the relative risk in light of this update.

Companies preparing to make an offer in Indonesia, that cannot take advantage of the private placement exemption, will need to begin preparing their Application Letter and Information Memorandum for submission to the OJK. We note that although local counsel estimates it could be at least 8-10 weeks for the OJK to issue a Stipulation Letter, the preparation of the Application Letter and Information Memorandum, as well as any necessary translations, may mean a longer lead time is needed. Given this uncertainty on timings, companies may decide to delay implementation in Indonesia, or take a risk-based approach and continue with their offering and retroactively apply to the OJK for a Stipulation Letter. Companies taking the latter approach should note the potential criminal and administrative consequences of doing so, and for additional comfort companies may want to consider inserting additional language in their plan documents that the offer is contingent on the OJK issuing a Stipulation Letter.


Thank you to our Indonesian counsel, SSEK, for their continued support on these developments.

If you want to discuss any of the points above or want help with your share plans or other incentive arrangements, please do get in touch.

Lewis Dulley

Tapestry Alert: UK - HMRC launch new SAYE bonus rate mechanism

Tapestry Newsletters

31 May 2023

As expected, after its announcement in June 2022, HMRC (the UK tax authority) has updated the mechanism for calculating the bonus rate applicable to savings arrangements for UK tax advantaged SAYE plans (sometimes called Sharesave, or Save as you Earn).

Remind me – what is the ‘bonus rate’?

Essentially, it’s interest.

Participants in a UK SAYE plan must enter into a linked savings arrangement with an authorised savings carrier to save a specified amount per month over a 3 or 5-year period. Under the savings arrangement, the participant will potentially become entitled to a tax-free bonus - essentially this is interest which accrues on their savings, and is paid at the end of the savings period. The bonus is calculated based on a rate which is fixed at the start of the savings contract.

The “early leaver rate” is just that – it is a different (lower) bonus rate which applies where a participant leaves within the 3 or 5-year savings period (but after making 12 monthly contributions).

What will happen when the new mechanism comes into force?

The bonus rate is currently nil and has been set at this level for many years (since 2014). The bonus rate is set in accordance with an automatic mechanism which, until June 2022, was linked to market swap rates. 

With effect from 18 August 2023, bonus rates will now be calculated with reference to the Bank of England base rate (the ‘Bank Rate’), which HMRC states will give greater certainty and transparency for users. However, the new mechanism will only apply to new invitations made to the SAYE after this date and not to existing savings contracts.

Provided the Bank Rate remains at 3.25% or above, it is likely that bonuses will become payable. Given that the Bank Rate is currently 4.5% (and currently showing no signs of going down in the immediate future), bonuses are likely to apply to savings contracts entered into from 18 August this year for the first time in almost a decade.

How will the new mechanism work?

The detail as to how the mechanism works and the expected bonus rates which will apply, depending on the relevant Bank Rate, can be found at: bonus rates automatic mechanism.  The good news is that this document sets out the rates will which apply to SAYE savings contacts, so it is easy for companies and participants alike to see what the impact of a change in Bank Rates may mean for new contracts. 

Will users of a SAYE have to work out which rates will apply?

No, HMRC will identify the correct rates to use and employers and participants can refer to these in: Change in bonus rates for Save As You Earn (SAYE) Share Option Schemes. (It is expected that HMRC will update this to include the rate which will apply from 18 August 2023 following the confirmation of the Bank Rate in early August 2023).

Using the information currently available in the appendix of bonus rates automatic mechanism, however, if the Bank Rate as at 18 August 2023 remains at 4.5%, the relevant rates will be as follows:

How should the bonus rates be applied?

To calculate the monetary value of the bonus to be paid at the end of the contract, the resulting bonus rate is to be multiplied by one monthly contribution. This figure is rounded to two decimal places. 

For example, assuming that the Bank Rate remains at 4.5%, if an individual has a 3-year bonus contract with monthly contributions of £500.00, the bonus rate of 0.8 would be multiplied by one contribution to calculate a bonus of £400.00.

New prospectus

HMRC have issued a new prospectus (the document which governs the terms of the savings contracts), which comes into effect for savings contracts entered into from 18 August 2023 onwards. This template refers to the ‘bank rate mechanism document’ throughout, which means that the prospectus will not require to be updated to reflect any changes in the bonus rate in the future.

If bonuses do become payable, what will this mean for UK SAYE?

The obvious implication is that, going forwards, participants will normally become entitled to receive interest on their savings, in the form of a tax-free bonus whenever the Bank Rate is at or above 3.25%. Note the interest is paid by the savings carrier as a term of the savings contract – it is not an additional payment by the employer group.

However, there is another potential benefit too. Where a bonus is payable, it can also be included in the amount of the savings the participant will make over the life of the savings arrangement. This amount is called the ‘expected repayment’ and is a feature of the SAYE regime itself, so applied equally under the previous bonus mechanism.

The ‘expected repayment’ is used to calculate the number of shares subject to the SAYE option. A bigger expected repayment therefore ultimately increases the number of shares subject to an SAYE option. This means a participant can buy more shares and maximise the value they are receiving from the SAYE plan.

Tapestry comment

Existing plan participants should note, however, that the change will only apply to savings contracts entered into on or after 18 August 2023. Any change in the mechanism for calculating the bonus rates will not, of itself, impact existing contracts in any case as the rate has already been specified at nil.

A simplification of the bonus rate calculation mechanism is likely to be seen as good news, especially after a number of months of waiting to see what the new mechanism would be. The increased transparency over rates is to be welcomed – the previous mechanism linked to market swap rates was very difficult for most participants (and others) to understand. Now, the rate is clearly linked directly to the Bank Rate and HMRC has published the applicable bonus rates, so there is no need to run complex calculations.

There will be a number of things to think about in this context:

  • Will a company need to amend its plan rules?
    A company would not normally need to amend its UK SAYE plan rules in relation to any change in bonus rate calculation, as this is not generally set out in the rules. Again, amendments are unlikely to be needed if bonuses start becoming payable, as rules are usually drafted flexibly to accommodate payment of bonuses, in line with the legislation. However, it will depend on exactly what has been included on certain points – so specific advice should be taken. A company may also need to update its pro-forma grant minutes (e.g. to consider whether bonuses will be included in the ‘expected repayment’ to maximise the number of shares employees can buy). Now that the new bonus mechanism has been confirmed, companies may now start to consider whether any updates are necessary.
  • Will the employee communications need to be updated?
    If bonuses become payable again, then almost certainly, yes. Given there has been no bonus payable for many years, plan communications such as brochures, FAQs and invitation documents/application forms are unlikely to cater for this adequately at the moment. Now that it is known that rates may rise above nil with effect from 18 August 2023, companies and administrators may consider turning their attention to this as soon as possible. 
  • What if our company is due to send new SAYE invitations to employees before 18 August 2023?
    Companies may consider holding off on issuing the invitations until after the new bonus regime comes into effect to ensure that these participants can benefit from any resulting bonuses.
  • What do companies need to do about their international SAYE arrangements?
    Whilst it does depend on how the plan rules are drafted, any change in UK SAYE bonus rates may not automatically apply to an international SAYE plan. A company which wants to track its UK SAYE plan will therefore need to check its plan rules and savings paperwork for the international arrangement to see whether changes would need to be made. Legal advice would be needed – the position will be company specific.

If you have any questions, please do contact us and we would be happy to help.

Suzannah Crookes & Margaret Rankin

Tapestry Alert: US - SEC discuss accelerating timeline for clawback compliance

Tapestry Newsletters

5 May 2023

The deadline for US listed companies to comply with the new clawback reforms looks to be sooner than anticipated following recent SEC discussions. 

Background

On 26 October 2022, the US Securities and Exchange Commission (the "SEC") adopted final "clawback" rules under Section 954 of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010. Pursuant to these rules, US national exchanges and associations (i.e., the NYSE and Nasdaq) must adopt listing standards that require listed companies to develop and implement a "clawback" policy. Under such policy, in the event of certain accounting restatements, any incentive-based compensation received during the three fiscal years preceding such restatement must be recovered from current and former executive officers to the extent that the amount received exceeds the amount they would have otherwise received under the accounting restatement. 

The rules also require that the listing standards become effective no later than 28 November 2023, and that companies adopt a compliant policy within 60 days following the effective date of the new listing standards. 

Timings

  • 28 November 2022: the final recovery rules are officially published in the Federal Register, giving the US national exchanges and associations until 26 February 2023 to propose listing standards in compliance with the final rules. 
  • 22 February 2023: the NYSE and Nasdaq propose their new listing standards, which will take effect once approved by the SEC.
  • 13 March 2023: the new NYSE and Nasdaq listing standards are officially published in the Federal Register, giving the public an opportunity to comment on the proposed listing standards until 3 April, 2023. Under the draft proposals, the SEC must approve or disapprove the proposed listing standard by 27 April, 2023, or within such longer period up to 11 June 2023 (as determined by the SEC).
  • 3 April 2023: a collection of large US and international law firms submit a comment on the proposed listing standards requesting that the SEC not approve the adoption and effectiveness of the proposed listing standard until the 28 November 2023 deadline in order to allow listed companies time to implement compliant policies and any controls and procedure necessary to administer such policies.
  • 25 April 2023: the SEC extends the deadline for it to approve or disapprove the proposed listing standards until at least 11 June 2023. 
  • 11 June 2023:
    • this is the current deadline for the SEC to approve or disapprove the proposed listing standards.
    • At the date of sending this alert, there has been no clear indication of exactly when the SEC may approve the NYSE and Nasdaq proposals, or whether the deadline will be further extended, but we understand that recent informal conversations between the SEC and US practitioners suggest that the SEC is leaning towards treating 11 June 2023 as the final date for the listing standards to become effective (though practically this will likely become 9 June 2023, since 11 June is a Sunday). 
  • 8 August 2023: once approved by the SEC, a listed company will have 60 days to adopt and file a compliant clawback policy. If the SEC do approve the listing standards on 9 June 2023, this means NYSE and Nasdaq listed companies will need to have a compliant policy in place by 8 August 2023 (being 60 days later).  

Considerations

Companies listed on the NYSE or Nasdaq should consider the timings above and bear in mind that, aside from drafting the clawback policy itself, they will also need to:

  • obtain any necessary internal approvals for the new policy;
  • identify affected persons and arrangements;
  • update grant documentation / portal processes to make sure the relevant individuals are subject to the policy; 
  • consider interaction with any existing wider group malus & clawback provisions;
  • consider implications of recovery under non-US laws;
  • implement mechanisms that will allow for the recovery of impacted incentive-based compensation when required (e.g., holding periods); and
  • attach a copy of the policy with their Form 10-K or 20-F filing with the SEC each year.

If a company does not adopt a policy by the deadline, it will be required to notify the exchange within 5 days of the effective date to explain the status of the delay, and issue a press release disclosing the failure to adopt a policy. 

Tapestry comment

We appreciate the uncertainty on timing of implementation, and the uncertainty of whether the SEC will approve or disapprove the NYSE/Nasdaq listing standards as proposed, is making it difficult for companies to assess exactly by when they need to be ready to implement their compliant clawback policy. 
 
Whilst we understand that the compliance date may be delayed until November depending on the outcome of the SEC discussions, companies should look to have a contingency plan in place in the event 8 August does become the final date for company compliance. Companies might therefore decide to  draft/finalise a policy now on the basis of the current proposals so that, in the event of any SEC amendments to the proposed listing standards, quick changes can be made and any timelines can be met internally and externally. We will keep you updated on any developments on the deadlines.  
 
It is important to also consider:

  • the process for filing the clawback policy, and note that, if a company continues to fail to provide a compliant policy, the SEC can begin delisting procedures – so it is not a deadline you want to miss! 
  • the future disclosure requirements in connection with any accounting restatements that actually occur. 

Thank you to our US counsel Chris Potash (from Harter Secrest & Emery LLP) for his continued support on these developments. 

If you need any assistance with your approach to clawback following the reforms, in the US or globally, please do contact us and we would be happy to help. 

Emilie and Sally