In this Tapestry global update, we will cover:
- Belgium – stock exchange transaction tax increase
- Canada – proposed additional reporting for non-resident trusts
- Denmark – change to tax-approved plans
Belgium – Stock exchange Taxation Tax (SETT) rate increase
What is the new rate?
The SETT rate increased from 0.27% to 0.35% in January 2018, subject to a cap per transaction of EUR1,6000.
How does it apply to share transactions exercised outside Belgium?
Prior to January 2017, SETT was only payable on share transactions (sales and purchases) executed through Belgian financial intermediaries. The financial intermediary was responsible for withholding and paying the SETT to the tax authorities. Under rules which took effect last year, SETT is now payable on any stock exchange transaction executed by a Belgian tax resident, even if the transaction is carried out by a foreign intermediary, such as a UK or US stock broker.
Does SETT apply to employee share plans?
Whether SETT is payable on a transfer of shares under a share plan will depend on the manner in which the shares are transferred:
- SETT is likely to be payable on any purchase of shares under an employee share purchase plan or on the exercise of an option (except where the shares are newly-issued). The tax base will be the price paid for the shares.
- Where shares are transferred for free under an RSU and the employee makes no payment, there will be no SETT payable.
- SETT will be payable when the shares acquired under a share plan are sold by the employee. The tax base will be the sale price received by the employee.
How is the SETT paid?
The foreign intermediary can arrange to withhold the SETT and to pay the tax to the Belgian tax authorities or to appoint a representative in Belgium to comply with the reporting and payment obligations. If the foreign intermediary does not make any arrangements, the employee must file a return and pay the SETT. The responsibility for ensuring that the SETT is reported and paid is on the Belgian resident taxpayer and financial penalties will be imposed for non-compliance.
The extension of the SETT to all stock exchange transactions has imposed both additional cost and reporting obligations on employees or the employer. The employer will need to decide whether to make arrangements for the reporting and payment of the tax or whether to leave this to the employee.
Canada – proposed additional reporting for non-resident trusts
Rules for the taxation of non-resident trusts (the NRT Rules) have been in place in Canada since 2013. Under the NRT Rules, the use of a non-Canadian trust to make awards or to deliver shares can result in the trust being obliged to file tax returns in Canada and to become subject to Canadian tax on its income.
The 2018 federal budget proposed additional reporting obligations on both resident and non-resident trusts which are required to file Canadian tax returns. The proposed new rules will require trusts to file a tax return, even if it has had no distributable income for the year, and to file a schedule reporting the identity of all trustees, beneficiaries and settlors of the trust, along with any other persons who have a measure of control over the trust or the decision making of the trustees.
The new rules, if passed, will come into effect from the 2021 tax year.
It seems likely that the new reporting rules will come into effect, increasing both the cost and complexity of compliance. Companies operating global share plans for employees in Canada and who make use of a trust to hold the shares, should already be compliant with the current NRT Rules but may wish to consider whether it would be appropriate or possible to restructure the plan to remove the trust arrangement. In addition to the additional reporting obligations, there is a risk that trustees will not be able to provide the detailed information, either because they do not have access to the information or because they do not have the relevant consents to provide the data to the Canadian tax authorities.
Denmark – tax-qualified share plan – extension of maximum value
What has happened?
In 2016, Denmark introduced a tax-qualified share plan – known as a Section 7P plan. Under legislation passed on 26 April 2018, the Section 7P plan has been amended to increase the value of the shares available to employees under a qualifying plan from 10% to 20% of annual salary.
How does a Section 7P plan work?
Under a Section 7P plan, taxation of share income is deferred until the sale of the shares when it is taxed at the lower capital gains rate (up to 42%) rather than as employment income (up to 56.86%). To qualify, the share plan must comply with detailed rules including that the favourable tax treatment only applies to a maximum of 10% of the employee’s annual salary as at the date of the incentive plan. Under the new rules, this amount can be increased to 20%.
Are there any restrictions on the 20% limit?
The new 20% limit will only apply to a share plan if at least 80% of employees are offered the right to participate in the plan. To calculate the 80% figure, certain employees can be excluded (e.g. employees with less than 3 years service, part-time employees and managers who are part of another company incentive programme). The company can choose which 80% of the remaining employees will be offered participation in the plan.
If the 80% employee target is not reached, the 10% salary rule will continue apply.
When does the new limit apply?
The 20% limit was proposed in the finance act in 2017 with the intention that it would take affect from 1 January 2018. Although the legislation was not passed until April, it applies retrospectively to plans put in place from 1 January in anticipation of the higher limit.
This is a welcome development. Increasing the cap to 20% and encouraging participation by a wider group of employees in company share plans, is to be applauded. However, our experience is that putting a Section 7P plan in place can be complicated, with the Danish tax authority scrutinising plans to ensure strict compliance with the rules. This extension of the plan may signal a greater policy commitment to employee engagement and we will be interested to see if this is implemented in practice.
If you would like to keep track of the legal and tax requirements around the world, our OnTap database covers over 100 countries and is kept up-to-date with all the latest legal and tax requirements to operate your incentive plans. We would be delighted to give you a demonstration.
Bob and Sharon