On 11 March 2020, the Chancellor of the Exchequer (the UK Finance Minister) delivered his budget (financial statement) to the UK parliament.

There was little in the budget of direct relevance to share plans and the main topic today was, inevitably, the potential impact of the coronavirus on the economy and the introduction of measures to address this in the short term. 

Key measures:

Some of the announcements affecting employees and employers are set out below:

• Enterprise Management Incentive (EMI) schemes: A consultation has been launched to consider whether these tax-advantaged employee option schemes (currently only available to smaller businesses, and subject to certain criteria) should be made more widely available.
• Entrepreneurs’ Relief: This relief (which confers a 10% rate of capital gains tax for disposals by shareholders holding more than 5% of a company) was retained, but the lifetime limit was reduced from £10 million to £1 million.
• Social security: The earnings threshold for NICs (social security contributions) increased from £8,632 to £9,500.  These contributions are normally payable alongside income tax by employers and employees when share awards vest or are exercised.
• Corporation tax: The rate of corporation tax remains unchanged at 19% (and will not drop to 17% as had been previously stated).

Tapestry comment
It will be interesting to see whether any significant changes are proposed to the EMI scheme following this consultation.  Depending on any restrictions imposed by the UK’s state aid rules after Brexit, it might be that this scheme, and its generous tax benefits, could be made available to larger businesses. 

Entrepreneurs’ Relief has not been abolished as some commentators had predicted, however the reduction in the lifetime allowance makes it less attractive, particularly when considered alongside the changes introduced in 2018 which made it more difficult for shareholders to qualify for the relief.

If you have any questions on how these changes may impact your share plans, please do contact us and we would be happy to help. 

The Investment Association (IA) has released a report setting out its vision for driving long-term value in UK listed companies.

Background

The IA is a trade body representing the UK investment market, with 250 members collectively managing over £7.7 trillion worth of investments. It sets corporate governance best practice for UK listed companies and, through its corporate governance research service (IVIS), it assesses FTSE companies against the IA’s guidelines, the UK Corporate Governance Code and corporate governance best practice generally and flags any areas of concern for shareholders, to help inform AGM voting decisions.

The IA’s new report on Shareholder Priorities for 2020 supplements its other corporate governance work and outlines four key areas that the IA’s members have identified as key drivers for future-proofing, diversifying and increasing the long-term resilience and value of the UK’s listed market:

• Climate change
• Audit quality
• Stakeholder engagement and employee voice
• Diversity

The report outlines investor expectations in each area, the actions the IA intends to take to improve these areas and the approach IVIS will be taking in monitoring them.

Report highlights

1. Responding to climate change
Climate change poses a significant risk to businesses, society, the environment and, in the long-term, financial markets. Increasing regulation in this area, pressure to reduce emissions and extreme weather can affect supply chains and consumer demand.

Going forward, investors will expect:

• Proactive identification and management of climate-related risk; and
• Climate change-related disclosures in the company’s annual report – working towards full compliance with the Taskforce for Climate-related Financial Disclosures (TCFD) recommendations by 2022.

To support this, IVIS will introduce a new section to its ESG report highlighting whether the company has made climate-related disclosures in its annual report in relation to governance, risk management, strategy and metrics / targets – aligned with the TCFD recommendations.

2. Audit quality
Audit reform is a hot topic at the moment. The IA wants to encourage greater trust in a company’s audited information by increasing audit quality. It aims to do this by encouraging Audit Committees to challenge management and external auditors on their judgement and depth of analysis. The IA’s members are keen to hold further discussions with Audit Committees to understand barriers to improving audit quality and are willing to target votes on individual members of the committee and a company’s report and accounts where they are found lacking in this area.

To support this, IVIS will have a focussed section highlighting company disclosures on how the Audit Committee has held management and its auditors to account.

3. Stakeholder engagement and employee voice
Employees, customers, suppliers and local communities are key to a company’s success and long-term value. Stakeholder engagement and the employee voice is receiving increased focus following new reporting regulations on how directors have taken stakeholder interests into account and how companies have engaged with the wider workforce. The IA wants to take this one step further and see companies clearly identifying their wider stakeholders and reporting on how they have engaged with them and what impact that has had on board decision-making.

To support this, IVIS will report on whether the company has identified its stakeholders and disclosed how it has engaged with them.

4. Diversity          
Diversity is another hot topic at the moment, particularly in relation to corporate governance (see our recent alert on new ethnicity reporting requirements). There is a growing body of research indicating that diverse companies are more productive and sustainable. The IA acknowledges that there has been significant improvement in gender diversity at Board level but believes there is still more to be done, particularly in terms of ethnic diversity and (in terms of gender and ethnicity) greater diversity below Board level.

To support this, IVIS will now report on ethnic diversity at Board level. It will also red top any FTSE 350 company with:

• Women representing 20% or less of the Board;
• Only 1 woman on the Board (unless there are only 3 directors in total); or
• Women representing 20% or less of the executive committees and their direct reports.

IVIS will amber top any FTSE SmallCap company on the same basis as above (except at a 25% level rather than 20%).

Timing

IVIS will start monitoring and reporting on these points this year, for companies with year ends on or after 31 December 2019. Colour-tops will not start in relation to climate change reporting until at least 2021.

Tapestry comment
The IA is an influential body in setting corporate governance principles and best practice guidance for UK listed companies. Its members, together, hold one third of the value of UK publicly listed companies, which gives the IA a powerful voice with which to influence company behaviour and hold businesses to account. UK listed companies in particular will be very interested in the outcome of this report, although IA recommendations often become best practice in the UK industry more widely, so it will be of interest to many companies.
 
It is no surprise to see that the IA views combatting climate change, increasing diversity, improving stakeholder engagement and high quality audits as critical to the long-term success of a company in 2020 and beyond. These are hot topics that many companies will already be engaging with, but the IA is now pushing them up the investor agenda in order to drive real change, in areas that investors see as critical to a company’s long-term success in the modern world.
 
As with all new corporate governance changes, there will be a journey towards compliance. Companies should consider the impact of the new IA focus coming out of the report, particularly in relation to new disclosure requirements. For many companies, these areas will be covered in this year’s IVIS reports, and companies currently preparing their annual reports should consider any changes they may want to make to take account of this. Companies should also consider the new approach to colour-topping gender diversity, particularly at below-Board level, the company’s approach to diversity generally, and whether any further improvements can be made. For example, research we conducted last year showed that 32% of the FTSE 100 now include diversity / gender targets in their incentive plans (a 17% increase on the previous year).
 
Companies who fail to make the improvements and disclosures identified in the report can expect to see increased shareholder dissent in the future – which, if significant, will be recorded and publicised on the IA’s Public Register of shareholder dissent.

Please do get in touch if you would like to discuss the possible impact of the IA’s report for you, or if you would like any help preparing your annual directors’ remuneration report – we would be happy to help.

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 first quarterly Worldwide Wrap-Up of 2020, 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 15 January webinar.

Argentina - currency controls
In our September Wrap-Up we alerted you to the re-introduction of currency controls in Argentina. The controls were tightened in October and, as outlined in our recent alert, have been extended indefinitely: monthly foreign exchange transactions by individuals remain capped at USD200, and the local entity sending monies offshore (including under a recharge agreement) is prohibited without Central Bank approval, which is unlikely to be granted.

Tapestry comment
Given the current economic position in Argentina it is unlikely that the rules will be removed, or substantially relaxed, any time soon. As a result, if you have not done so already, we recommend that any company with a share plan involving money leaving Argentina communicates the impact of these currency controls to participants, and considers what steps should be taken to re-structure the operation of their plan, if necessary.

Canada - cap on tax deduction
The implementation of the proposed cap on the stock option deduction (due to take effect from 1 January 2020 - see our September Wrap-Up), was initially delayed by the Canadian Federal election in October and has been further delayed by the Canadian finance minster, who recently announced that submissions received during the consultation period are still under review, further postponing the introduction of the cap.

Tapestry comment
Companies offering share options to employees in Canada will need to keep an eye on how this develops. The Canadian government has stated that the change will be implemented this year but it is unclear what changes will be introduced as a result of the current review process and what the actual implementation date will be.

China - beware the 6 month rule for leavers
As more companies choose to apply for SAFE approval to offer shares to employees in China, it is important to be aware of the details of the SAFE rules. One key condition is that when a participant ceases to be employed by an entity registered with SAFE, any outstanding awards need to be vested or lapsed (in accordance with the relevant plan rules) within 6 months and any vested shares must be sold and the proceeds returned to China. This rule applies even if the participant continues to be employed by another group company. An ongoing labour tribunal case, which has held that the employer is responsible for any loss suffered by employees where the employer cannot prove that the relevant condition was communicated to them, has highlighted the risk for employers who fail to warn employees of the potential impact of this rule.

Tapestry comment
We recommend that employees are informed of the 6 month rule, either by including it in a side letter, somewhere in the plan communications, or in a schedule to the plan rules.

Global tax rates for 2020 
For many countries, revised tax rates started on New Year’s Day. Often the rates are only announced in the last days of December, and in some cases the final figures are not available until well into January, or later. Our international advisors provide us with new rates to update OnTap as quickly as they become available, but here are some of the changes we are aware of so far:
Greece - reduction in top rate
Ireland - increased rates for employer social security
Lithuania - increase in top rate of tax
Malaysia - increase in top rate of tax
Turkey - new higher tax rate bracket added.

Tapestry comment
We will discuss the detail of these changes and others on our 15 January webinar. Many countries have made adjustments to tax bands and to social security caps. If you need specific advice for any jurisdiction, please let us know.

Greece - new tax favourable treatment for employee share options
Greece has introduced a new tax break for employees receiving shares under an employee share option plan. From 1 January 2020, any gains made following the exercise of options wil be subject to capital gains tax rather than income tax, if certain conditions are met e.g. specified holding periods. If applicable, tax will arise on the sale of the shares and be taxed at a flat tax rate. Different rules apply for unlisted shares of new companies, which will be subject to a longer holding period and a lower tax rate. It is not yet clear if the beneficial tax will apply to options granted prior to 2020, or if it will apply to other types of share plans.

Tapestry comment
This is a significant tax break for Greek employees as currently, share plan income is subject to income tax at up to 44%. Additional guidelines are expected in the coming months. We have seen several European countries granting this type of tax benefit for employee share plans. A similar benefit will apply to options granted to employees in Lithuania from 1 February 2020.

Indonesia - agreements must be in local language
A new regulation has been passed in Indonesia meaning that all agreements involving an Indonesian party must be written in Indonesian, and agreements involving a foreign party must also be written in the national language of the foreign party, or in English. The regulations provide for the contracting parties to decide which version should be given priority in case of a conflict.

Tapestry comment
The regulations do not include any penalties for non-compliance but they have to be read alongside a controversial  Supreme Court ruling in 2015, which deemed that any documents not translated into the Indonesian language would be null and void. As a result of that ruling, there was already a strong incentive to use translations where possible. 

UK - off-payroll working in the private sector
The UK government plans to extend legislation (known as IR35) which focuses on individuals who provide services through an intermediary (typically a personal service company) to an end-user client. Under IR35, the  intermediary is required to determine whether or not the worker would have been deemed to be an employee of the end-user client if the services were not provided through the intermediary. If so, the intermediary has to withhold income tax and employee social security (NICs) for the individual and also pay employer NICs.
In 2017, the obligation of determining whether the individual should be deemed to be an employee of the end-user client was passed to the client in the case of public sector employers. From  April this year, this obligation is due to extend to medium and large company end-user clients in the private sector as well. Public sector companies will also have extra responsibilities under the updated rules. The government announced this week that it is going to review the rollout of the extended IR35, with the review due to be completed by mid-February.

Tapestry comment
Assuming the roll out of IR35 takes place as planned, this  is an important topic that all employers should be mindful of. The majority of companies will need to be aware of their responsibility to determine the employment status of a worker for tax purposes and how to actually do this. Companies should ensure that tax teams have this on their radar and take the appropriate measures to prepare for these changes, ensure workers are informed about determinations and establish a process for dealing with any worker disputes. Where the contract or work practices change in any way, it is important for companies to review the IR35 rules to check whether they should apply. We will be keep you informed of any changes following the government’s review.

USA - national securities exchange in Silicon Valley
The Securities and Exchange Commission recently approved the creation of a new national securities exchange located in Silicon Valley: the Long-Term Stock Exchange. The LTSE has an increased focus on long-term goals and innovation. In line with this, its rules place limits on executive bonuses where they are in relation to short-term accomplishments, as well as rewarding long-term shareholders with increased voting powers in correlation with the time they hold the stock.

Tapestry comment
Because of its intended focus on longer-term planning over short-term results, the LTSE may provide a unique opportunity for later-stage, private start-ups with dual-class structures to list their shares. However, potential new public companies may find the requirements more burdensome than those of the NYSE and Nasdaq, e.g. the outstanding share and market capitalisation requirements are higher than on the well-established exchanges. With thanks to our US counsel, Harter Secrest & Emery LLP, for their assistance with this entry.

USA - Reminder for Annual ISO and ESPP Reporting
The annual deadlines are fast approaching for delivering participant information statements and filing IRS information returns to report exercises of incentive stock options (ISOs) during 2019 and transfers during 2019 of certain shares of stock obtained by participants under employee stock purchase plans (ESPPs). Compliance with the participant information statement requirement is made by providing Form 3921 (or substitute) to participants who exercised ISOs and Form 3922 (or substitute) to participants who transferred certain shares of stock obtained under an ESPP.  Forms 3921 and 3922 (or substitutes) must be provided to relevant participants by 31 January 2020. Forms 3921 and 3922 are also used for IRS information returns, which must be filed with the IRS by 28 February 2020 for paper filings, or 2 April 2020 for electronic filings.

Tapestry comment
Tax reporting is an essential part of compliance and the US is a very high risk and, for most of our clients, an important jurisdiction.  Please let us know if we can help you with these filings.

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 quarterly Worldwide Wrap-Up, with some of the most recent changes that should be on your radar.

Argentina - currency controls

Argentina re-instated currency controls on 1 September. The new controls are not as complex as the system in place until late 2015, but there is now a ban on companies purchasing foreign exchange or transferring money abroad without the prior approval of the Central Bank. Individuals are able to purchase foreign exchange without restrictions up to a monthly cap of USD10,000. Any amounts over the cap require permission from the Central Bank. The new controls were initially intended to remain in place until the end of the year but there is growing expectation that the controls will be extended into 2020.
Tapestry comment
We all remember the complications caused by the previous currency controls in Argentina and can only hope that the current rules are lifted at the end of the year. In the meantime, employers will need to consider how these restrictions will impact on transfers under a recharge arrangement and transfers of salary deductions. Even without the monthly cap, employees’ savings in peso will buy fewer units of foreign currency and companies operating contributory plans in Argentina may want to look at how best to communicate with affected employees to explain the consequences on their share plan participation.

Canada - cap on tax deduction

As reported in our July Wrap-Up, the Canadian government has proposed that a 50% tax deduction, which currently applies to income received under an employee stock option plan, will be subject to an annual cap. Under draft legislation released in the summer, the cap will apply to shares granted from 1 January 2020. The proposed change will cap the tax relief for employees of ‘large, long established, mature firms’ at an annual amount of CAD200,000, based on the value of the shares at the grant date. Any amount over the cap will be subject to tax at the full progressive tax rates. Canadian employers will be able to claim a deductible benefit for the amount above the cap. The draft legislation remains subject to review and is not expected to be passed into law until after the federal election in October.
Tapestry comment
We will update you if anything new emerges out of the review or if the legislation is passed in advance of the election. Companies offering share options to employees in Canada may want to look at making grants in advance of the 1 January 2020 start date before the potential cap is introduced.

China - Shanghai to allow foreign workers to receive local share options

The Shanghai municipal government has released guidelines to allow foreigners employed by regional headquarters of multinational companies to receive stock options over shares listed in China. The municipal government is working with the State Administration of Foreign Exchange (SAFE), who are expected to publish details on the conversion of foreign currency into local currency to buy options and to repatriate any capital gains from the options. The aim of the policy is to encourage multinational companies to establish their local headquarters in Shanghai and it is expected to benefit around 1 million foreigners working on mainland China. It is unknown when this process may become available.
Tapestry comment
It is currently difficult to include non-Chinese nationals in a Chinese company's  share plan. This new policy would allow some companies to offer share options to ex-patriates based in China as part of their incentive package. The detail will reveal how much flexibility there is, but it is an interesting development and one that we will be watching.

Greece - capital controls end

Capital controls in place since June 2015 have finally been completely lifted by the Greek government. Although the controls have historically been relaxed several times, individuals and companies continued to be subject to limits on the amount of money they could send abroad. From 1 September, all controls have been removed.
Tapestry comment
This is great news! A significant and positive step for Greece as its economy recovers from the financial crash. For companies operating employee share plans in Greece, the lifting of the remaining currency controls removes any continuing barriers to employees participating fully in global share plans. An interesting contrast to Argentina!

Lithuania - tax break for share options

Lithuania is introducing a new tax break for employees receiving shares under an employee share plan. From 1 February 2020, the value of share options granted to employees will not be subject to personal income tax or social security if (i) there is a minimum 3 year vesting period and (ii) the shares are issued for free, or where the exercise price is below fair market value. Tax will not be payable until the shares are sold. The new rules will apply to stock options granted from 1 February 2020.
Tapestry comment
This is a significant tax break for Lithuanian employees as currently, share plan income is subject to income tax at up to 27%. The social security point is not new as under current rules, income under an option plan is already exempt from social security if the options cannot be exercised for a period of at least 3 years after grant. Additional guidelines are expected in the coming months. This is a reminder that Eastern European countries often have tax-qualified plans or tax exemptions which are worth considering.

USA - California - what is an employee?

California has signed into law controversial legislation (known as Assembly Bill 5 or AB 5), which aims to change the definition of an ‘employee’. AB 5 puts into law a Californian Supreme Court decision which established a revised test as to when someone is an employee or a contractor. The distinction is important as employee status can entitle workers to additional employer-funded benefits. The new rules will particularly impact on the self-employed status of workers in high-profile gig economy companies such as the ride-hailing groups Uber and Lyft and the food delivery service Door-Dash. Gig economy companies have said that they will oppose the new legislation and fund a campaign to have it overturned. For the time being, the new rules do not automatically change the status of workers, but may make it harder for companies to classify workers as contractors rather than employees.
Tapestry comment
The growth in the gig economy, with increasing numbers of people working as self-employed or contract workers, has created a model where flexibility for some is seen as insecurity and loss of benefits for others. The new Californian legislation will be of general application to people working in industries which rely on the use of contract workers. From a share plan perspective, non-employees are generally specifically excluded from the benefits of share ownership - share plans will usually be limited to employees and both tax and regulatory rules which provide tax breaks or securities exemptions for employee share plans may not extend to non-employees, including contractors. Whether gig economy workers do become employees is clearly a complex issue (and potentially costly for employers) and one which may affect the future target population of a company's share plans.

Staying ahead of the curve on regulatory compliance is a never-ending task for companies. With global legal and tax requirements ever-changing, it is increasingly difficult to avoid a misstep in every jurisdiction.

To help you keep on top of recent developments, here is our quarterly Worldwide Wrap-Up, with some of the most recent changes that should be on your radar. 

Australia
The Australian Government is currently considering reforms to the securities laws exemptions for unlisted companies. The proposed reforms include increasing the award cap from AUD5,000 to AUD10,000 per employee and allowing employees to participate in share purchase plans.
Tapestry comment
At present unlisted companies face several challenges when trying to operate share plans in Australia. With fewer restrictions, these reforms would noticeably improve the environment for unlisted companies. The outcome of this consultation is expected towards the end of 2019.

Canada
The Canadian Government is considering limiting existing tax relief for employees of ‘large, long established, mature firms’ who exercise options under an employee share plan. The proposal is a cap on the deduction available to CAD200,000 based on the value of the shares at the grant date. Further details will be released in summer 2019 and the actual change in the law may not come into effect for some time after that. Guidance is expected on exactly what type of companies will be in scope (as the aim is to not change the relief for employees of start-ups/fast growing companies).
Tapestry comment
This proposal may make options less attractive in Canada - especially to those employees with substantial awards that exceed the cap. Canada is one of many countries that wants to ensure it is an attractive place for people to start and grow a business without it being just high earners who reap the benefits of measures aimed at incentivising all employees. We will keep you up to date on how this develops.

Hong Kong
Salary deductions for the purpose of acquiring shares in an employee share plan are technically not permitted in Hong Kong. However, recent practice would indicate a change in practice as the Hong Kong Labour Department has recently allowed one of Tapestry’s clients to use salary deductions in the context of their plan.
Tapestry comment
Whilst this may signal a welcome change in practice, the law still prohibits salary deductions. Therefore, if you want to make salary deductions, you may want to consider approaching the Hong Kong Labour Department directly on this issue, although we recommend local advice is sought before doing so.

Luxembourg
From 21 March 2019, non-resident tax payers in Luxembourg can request to be treated the same as resident tax payers, subject to conditions.
Tapestry comment
The ability to be treated as a resident tax payer may prove to be beneficial to companies dealing with mobile participants, however this administrative benefit comes with the obligation to report on all worldwide income.

Saudi Arabia
From 1 April 2019, changes to Saudi securities laws took effect. These changes simplified the securities regime so that companies can offer shares to employees without having to follow the ‘authorised person’ requirements. Companies will be subject to a quarterly reporting obligation, but overall this change will mean companies find it easier to offer awards here.
Tapestry comment
Since this new regime came into effect, Tapestry have seen a number of clients take advantage of it. In some cases, companies which have historically only used cash in Saudi Arabia are now switching to using shares in their awards.

Singapore
From 1 April 2019, there is no longer any need to get approval from the Ministry of Manpower to make salary deductions in Singapore. Salary deductions will now be permitted provided that: (a) the employee willingly consents in writing; and (b) the employee must be able to withdraw consent at any time, without any penalty.
Tapestry comment
This is a really helpful change in Singapore which will allow for increased company flexibility and possibly an increase in the use of purchase plans there. Companies will no longer have to go down the route of obtaining Ministry of Manpower consent which was a complex and time consuming process.

UK
The UK’s departure from the EU is currently anticipated to be 31 October 2019 (“Brexit Day”). The UK is enacting legislation which will convert the prevailing EU law at the moment of Brexit into UK law so that, broadly, the same rules and laws will apply on the day after Brexit Day as on the day before.
A withdrawal agreement which governs how the UK will leave the EU and the basis for the longer term UK/EU relationship has also been reached. This agreement provides for a transition period which will apply from Brexit Day until 31 December 2020. During the transition, the UK will effectively be treated as a member of the EU for most EU laws. However, the UK has yet to formally ratify the withdrawal agreement meaning the UK could leave the EU without any agreed terms if the withdrawal agreement is not approved by the UK Parliament by Brexit Day. There is currently no consensus in the UK Parliament on the Brexit process. This has led to the resignation of Prime Minister Theresa May and means the UK will soon have a new Prime Minister who may attempt to renegotiate the terms of the withdrawal agreement. If it or another withdrawal agreement is agreed before 31 October, Britain will leave the EU on the first day of the following month. Otherwise the UK will leave the EU on 31 October even if a withdrawal agreement has not been agreed (a “no-deal” Brexit). 
Tapestry comment
Considering the current political climate in the UK - how, or even if, the UK will leave the EU is still very much unknown! If you have any concerns on how Brexit could impact your compliance obligations, please do get in touch.