In this Tapestry global update we will cover:
- China – changes to SAFE registration process in Shanghai
- Ireland – share incentive reforms for SMEs
- Nigeria – tax authority guidance on taxation of share plan benefits
- Tax changes – Argentina and Taiwan
China – Shanghai SAFE registration procedure changes
The Shanghai office of the State Administration of Foreign Exchange (SAFE) is changing the procedure for the registration of share plans in Shanghai.
All foreign companies which operate share plans in China must register the plans with the local SAFE office and set up a dedicated foreign exchange account with a commercial bank to channel all funds under the plan. Under the new procedure, companies which have their foreign exchange accounts with HSBC, Citibank or Bank of China will be required to file the registration documentation through their bank. We understand that the procedure will apply to new registrations, re-registrations and amendments.
Under the proposed changes, Shanghai SAFE reserves the right to make any final decision regarding the SAFE application, with the bank acting as a ‘contact window’ between SAFE and the companies rather than having authority to make any approvals.
Although the pilot scheme was due to start in October, the plan has not yet been formally announced by Shanghai SAFE and it is not clear whether the banks have put in place the systems for receiving applications and what their specific requirements will be.
It is fascinating to see the Shanghai SAFE office involving commercial banks in the SAFE registration process, we assume to enable a streamlining of the process. It will be interesting to see how this pilot project works and whether it is rolled out to include other banks so that all applications will be processed by the company’s dedicated foreign exchange account bank. For now, it is early days and companies who are required to file their document through a bank rather than directly to SAFE should ensure prompt filing just in case the bank’s procedures are not up-and-running yet. Note that any application must still be submitted to Shanghai SAFE for final review and approval. Even if this is processed through the banks, companies should still involve their local advisers in the preparation of the registration documents as they are likely to be more familiar with the SAFE requirements for the registration.
Ireland – share incentive reforms for SMEs
In October 2016, we reported on the Irish government’s announcement that it was developing a new share based incentive arrangement for small and medium sized enterprises (SMEs), to be introduced in the Budget for 2018 (here). The new Key Employee Engagement Programme (KEEP) was included in the Finance Bill released on 19 October 2017, with the stated aim being to support SMEs in attracting and retaining skilled employees by providing an advantageous tax treatment on share options.
What is the new tax treatment?
The proposal is to move the taxation point for share options granted to employees in SMEs from exercise to sale. Currently, employees are required to pay tax as soon as they exercise a share option. For higher rate tax payers this can mean paying combined income tax, USC and PRSI (social security taxes) of over 50% on the share benefit. If there is no market for the shares, so the employees cannot sell shares to pay the taxes, they must fund the tax payment from other sources. By moving the tax point to sale, the benefit will be taxed at the lower capital gains tax rate of 33% and the tax can be funded from the proceeds of sale of the shares.
Are there any restrictions?
There are detailed restrictions under the KEEP rules, including:
- the shares must be new ordinary fully paid up shares;
- the option price at date of grant cannot be less than the market value;
- there is an overall limit on the total market value of shares granted under qualifying share options by the qualifying company to an employee or director:
- EUR100,000 in any one year of assessment
- EUR250,000 in any 3 consecutive years of assessment, or
- 50% of the annual emoluments of the qualifying individual in the year of assessment in which the qualifying share option is granted
4. the shares must be in a qualifying company, and
5. the share option can not be exercised more than 10 years from the date of grant.
What is the timing?
KEEP is expected to apply to share options granted between 1 January 2018 and 31 December 2023. The Irish government is seeking approval from the EU competition and state aid officials to ensure that the plan does not fall foul of EU state aid rules.
This is a long awaited response to criticism in Ireland that SMEs are at a disadvantage in attracting and retaining skilled employees. We applaud the recognition that employee engagement is promoted by offering share incentives, especially for innovative and entrepreneurial companies. By allowing employees to delay paying tax on the shares, they are able to maximise the benefit by choosing the best time to sell rather than being required to sell to cover tax.
Nigeria – guidance on taxation of share options issued
The Lagos State Internal Revenue Service (the LIRS) has released a guidance note on the taxation of employee share options in Nigeria (here).
Why was the guidance issued?
Under the Personal Income Tax Act, individuals are liable to pay tax on all ‘taxable income’ but the definition of taxable income does not refer to share plan benefits. The LIRS issued the guidance to clarify that where the share option is exercisable for free or below market price, the employee receives a benefit-in-kind which is taxable as income in the hands of the employee. The benefit will be the difference between the price paid (if any) and the market value of the shares. Dividend equivalents will also be taxed as income.
When is the tax payable?
The taxable event is the exercise date for a share option or the date on which the employee receives a payment under a phantom plan. The guidance note does not deal with other types of share plans but, by implication, the taxable event will be on purchase for a share purchase plan and on vesting for an RSU/free share plan. In valuing the shares, the share price for a listed company is the value for which the shares are traded on the stock market at the date of exercise. When the shares are sold, the increase in value will be treated as a taxable capital gain which is currently not subject to tax.
Does withholding apply?
The employer is required to withhold the income tax and to pay it to the tax authority. The employer must also report any share incentive plans when it files its annual return on employee remuneration.
The guidance note demonstrates the growing global trend for tax authorities to focus on the tax treatment of share plan benefits. In Nigeria there was a concern that employers and employees were unsure about if and when tax was payable on equity incentive benefits and different tax offices provided conflicting advice. Although the guidance does not change the timing of the payment of tax under an incentive plan, it clarifies the obligations for employees to pay tax and for employers to withhold.
Tax change updates
Argentina – social security cap revised
The employee social security contribution in Argentina is capped on the basis of a set monthly salary level. The cap is revised twice a year, in March and September. The revised cap, applicable from September 2017 to March 2018, is ARS81,918.55 per month. There is no cap on employer contributions.
Although the tax year in Argentina is a calendar year (1 January to 31 December), the employee social security contribution cap operates on a different time scale, with changes being announced in March and September. As always with tax and social security rates, it is important always to check that you have the most up-to-date information.
Taiwan – reduction in top individual tax rate announced
The Taiwan Ministry of Finance recently announced plans to reduce the top rate of tax for individuals from 45% to 40%. The proposed change is expected to take effect from the beginning of the new tax year on 1 January 2018.
The current top rate of 45% was introduced in 2015 and the proposal to reduce it back to 40% has not been finally approved.
If you have any questions, please do get in touch – we are delighted to help!