20 October 2021

This week the Court of Appeal of Ontario have overturned the previous decision on enforceability of termination provisions which we reported on previously here. 

Background
In July last year, the Ontario Superior Court of Justice (Battiston v Microsoft Canada Inc.) found that termination provisions providing that an employee lost their right to unvested awards upon termination without cause were "harsh and oppressive". The Court also held that the employer had not taken sufficient steps to highlight these provisions to the employee. 

On the basis of this decision, we were recommending that:

• companies review their termination provisions from a Canadian perspective to see whether they would be viewed as "harsh and oppressive"; and
• to review the acceptance process to ensure that sufficient steps had been taken to highlight these provisions to Canadian employees. 

Update
The employer appealed the decision. We understand that the Court of Appeal for Ontario focused on the finding that the employee had not received notice of the termination provisions. On 18 October 2021 the Court of Appeal overturned the original decision. The decision was based on a number of factors, including that the employee made a conscious decision to not read the documents, despite indicating that they had by clicking to consent. 

As a result, it is now considered more likely that tick box acceptance of general plan terms will be enforceable in Canda. 

Tapestry comment
This appeal has been underway for some time, so it is great to see a final outcome. Whilst the former employee now has 60 days to appeal, they may be unlikely to meet the high bar required for an appeal with the Supreme Court meaning this decision may continue to stand. 

This outcome means companies may go back to their previous approach of acceptance for Canadian participants (although you may want to wait the 60 days until we see whether the employee appeals the decision!). However, it is of course important to consider which provisions are worth drawing out to participants as a matter of best practice, and termination provisions may be considered by many as being a significant provision to draw out (particularly depending on the termination provisions in question). 

If you have any questions on this alert, please do let us know.

Lorna Parkin and Emilie Sylvester

13 October 2021

As part of its budget for 2022 (presented at the end of September), the Dutch government has proposed a change to the timing of the taxation of employee share options.

What are the current rules?

Under the current legislation, option plans are taxable on exercise, which can result in the employee having to sell shares to pay the tax. Although this is the standard moment of tax for option plans, issues can arise, especially for employees of private companies (e.g. start-ups), if the shares are not easily tradable, or if the shares cannot be sold, e.g. because the entirety of the shares being acquired are subject to a holding or lock-up period. This is mainly because it may not be possible to sell the shares in order to pay the tax, and the employee may not have sufficient cash available to pay the tax on exercise.

What are the proposed new changes?

Under the proposed new rules, if the shares are not tradable, employees will be able to choose whether to pay tax on exercise or to defer the taxable moment to the point when the underlying shares can be traded. If an employee defers the taxable moment, as long as transfer restrictions continue to apply, the shares will not be considered tradable and taxation will take place at the time the acquired shares become tradable. ‘Become tradable’ is defined as the moment on which any sale restrictions are lifted and the employee may sell the shares they acquired on exercise.

The value of the shares at the relevant taxable moment is used to calculate the tax that is payable. As a result, if the employee defers the tax point from exercise to when the shares are tradable, an increased amount of tax would likely be payable if the value of the shares increased during the deferral period. On the other hand, if the shares decrease in value over the deferral period, then a lower amount of tax would typically be payable. If the employee expects that the share price will increase after exercise, they may decide not to defer the tax point for this reason!

What are the impacts of the proposed changes?

The employee will retain the right to be taxed on exercise, even if the shares are subject to selling restrictions. However, the tax deferral automatically applies, so an election to opt out of the deferral must be made and recorded 'in a timely manner', and certainly before exercise. Note that, if the shares can be sold immediately on exercise, the shares will continue to be taxable upon exercise.

Restrictions apply to avoid long-term deferral of taxation. In particular, the deferral can be no longer than five years after the acquisition of the shares (for shares that are already listed) or five years after the IPO of a start-up or other private company.

When are the changes due to take effect?

The amendment is due to take effect on 1 January 2022. The new rules would apply to any options exercised on or after 1 January 2022 (regardless of when the options were awarded).

Tapestry comment
We are always delighted when rules are changed to make it easier for employees to benefit from share plans! This is an interesting change as, although it is common practice for options to be taxed on exercise, dry tax charges can be potentially problematic for employees of private companies where there may not be a market for the shares. We suspect that the change will be more useful to employees of unlisted companies for this reason, so this change is a welcome development for them. For employees of listed companies, the shares will likely immediately be tradable on exercise, unless for example they are all subject to a lock-up or other form of holding period. Companies may prefer employees to continue to pay tax on exercise as this may be easier for companies to administer for withholding tax purposes.

We don’t yet know the format of the election that employees will need to make to opt out of the automatic tax deferral, however we will keep an eye on developments and keep you updated. Companies should keep a look out for this, given the impacts it will have on the processes for and timing of the taxation of options. Once this change takes effect, there will be two different ways of taxing options that are subject to restrictions, so companies will need to identify and record whether an employee wishes to follow the tax deferral route or if tax is to be paid on exercise (as is standard), and apply withholding accordingly.

We would like to thank our partner firm in the Netherlands, Graham, Smith and Partners, for alerting us to this change.

If you have any questions on this alert, please do let us know.

Sharon Thwaites and Sonia Taylor

8 October 2021

Staying ahead of the curve on regulatory and tax compliance is a never-ending task for companies. 
 
To help keep you up-to-date with recent global developments, we are holding our fourth and final Worldwide Wrap-Up webinar for 2021 to highlight some of the most recent changes that should be on your radar. We will be covering the below topics and more in more detail on our 13 October webinar.

Australia - employee share scheme tax and regulatory reforms
In July, the Australian government released draft legislation to implement reforms to the taxation and regulation of employee share schemes (ESS) announced in the 2021 budget. In brief, the draft legislation covers:

• the removal of the taxing point on cessation of employment for employee share-based awards;
• simplifying the securities law exemptions for both listed and unlisted companies including by creating a distinction between offers of free shares and contributory plans.

The draft legislation was subject to a period of consultation which ended on 25 August. There is currently no timetable for enactment of the new legislation but note that under the current draft, the removal of cessation of employment as a taxing point will only apply to awards granted on or after the start of the tax year following Royal Assent, so 1 July 2022 at the earliest.
Tapestry comment
Although this is only draft legislation, the proposals were widely welcomed by the business community in Australia and the general view is that the proposed changes will be enacted substantially as set out in the draft legislation. The overriding aim is to simplify the process of offering ESS plans and to make it more attractive to both employees and employers. We will be following the changes and will keep you updated.

China - Beijing SAFE additional reporting obligation
Any changes to the operation of the SAFE registered plan or any changes to the registered participation list must be filed as an 'alteration registration' with the local SAFE office within three months. In June, Beijing SAFE announced that it now requires companies to provide details of the accumulated grants of each relevant participant (i.e. a full breakdown of the number of shares granted to each participant) when this filing is made. 
Tapestry comment
This is potentially an onerous new burden as the information has to be compiled in time for the filing. This can create a timing issue for certain types of plans as the updated registration might not be able to be finalised until an enrolment window has closed. As always when dealing with a SAFE filing requirement, it is crucial to plan ahead and to be prepared for changes in the information required. 

China - new data protection law

China has recently introduced new data security legislation to supplement the existing Cybersecurity Law of China.

• The Data Security Law (effective 1 September 2021) establishes a fundamental and categorised data security system, applying to potentially all data processing activities.
• The Personal Information Protection Law (PIPL, effective 1 November 2021) is more focussed on personal information protection and safeguarding the rights of personal information subjects. PIPL has some similarity to the EU’s General Data Protection Regulation (GDPR).

The new data securities legislation imposes strict obligations on organisations in relation to the collection, processing, use and transfer of personal data.
Tapestry comment
This supports the general direction of travel globally that countries are seeking to implement stronger data protection laws and enforcement powers. It is important to be aware that generic consent clauses may not always be sufficient for local compliance. Companies may wish to undertake an audit of their internal privacy policies and consider what administrative and technical processes could be put in place to fill current compliance gaps and, on-going, to monitor compliance with PIPL. 

Netherlands - proposed change to taxable moment
The Dutch government has proposed a change to the timing of the taxation of options which are subject to selling restrictions. Under the proposal, employees can choose to defer the taxable moment of their options from exercise to the moment the underlying shares can be traded by the employee. If an employee chooses to defer the taxable moment, as long as transfer restrictions apply, the shares will not be considered tradable and taxation will take place at the time the acquired shares become tradable, i.e. when any sale restrictions are lifted and the employee may sell the shares they acquired on exercise. The employee retains the right to elect to be taxed on exercise.
 
The share option will have to be taxed no later than five years after the acquisition of the shares (for shares that are already listed) or five years after the IPO of a start-up.
 
The amendment is due to take effect on 1 January 2022.
Tapestry comment
We are always delighted when rules are changed to make it easier for employees to benefit from share plans! As always, the devil will be in the detail and we look forward to seeing how the proposal develops. 

Romania - additional securities disclosures abolished
Previously, for companies looking to rely on the employee share plan exemption under the EUPR, separate disclosure requirements were required under Romanian securities law (beyond the information specified in the EUPR). This requirement has now been abolished, so from 24 September 2021, the additional disclosures are no longer required and companies will only have to make the standard EUPR information disclosures.
Tapestry comment
This is a helpful and positive move by the Romanian securities authority. The background to the EUPR was to harmonise the securities requirements of all EU member states but unfortunately many countries have imposed their own filing or reporting obligations. This has resulted in additional costs and complications for employers making offers to employees in those countries. By abolishing the need for a separate disclosure regime, the Romanian securities are bringing the rules in line with the EUPR.

UK - increase in national insurance and dividend tax rates
The government has announced increases to both National Insurance Contribution (NICs, the UK social security) rates and dividend tax rates, in an attempt to boost the NHS (National Health Service) and fund reforms to the social care system. 

From April 2022, NICs rates will rise by 1.25% for both employees and employers.  From 2023, the additional 1.25% will be ring-fenced as a new health and social care levy.

Currently, dividends in the UK are taxed at 7.5% for basic rate taxpayers, with increased rates for higher and additional rate taxpayers. From April 2022, each of these rates will rise by 1.25%. The current £2,000 tax-free allowance for dividends will not be affected.
 
These changes will impact almost all individuals working in the UK, including those employed by overseas companies.
Tapestry comment
Most working individuals will be affected by these increases in some way or another. From an incentives point of view, the UK’s tax-qualified share plans could prove to be more popular than ever because they all provide ways in which individuals and companies can pay less or no NICs. However, it isn’t clear yet if the health and social levy will also be excluded under UK tax-qualified plans and we will be looking closely at the detail of the new levy when they are released.

We hope you can join us for our webinar on 13 October as we go through the key regulatory and tax updates from the last quarter, including those set out above and more, and how these may impact your share plan offerings

If you have any questions or would like to discuss your global legal or tax compliance, please do get in touch - we would love to help! 

Lorna Parkin, Lewis Dulley and Rebecca Campsall

8 September 2021

Yesterday, the UK Prime Minister Boris Johnson, announced increases to both National Insurance rates and dividend tax rates, in an attempt to boost the NHS (our National Health Service) and fund reforms to the social care system. 

These changes will impact almost all individuals working in the UK, including those employed by overseas companies.

National Insurance

The rates of National Insurance contributions (NICs, which is our social security) in the UK vary depending on employment status earnings. Most UK employees contribute 12% on weekly earnings between £184.01 and £967, and 2% on anything above that. Employers also contribute, generally, at a flat rate of 13.8% for their employees’ weekly earnings above £170. 

From April 2022, NICs rates will rise by 1.25% for employees and employers. 

From 2023, the additional 1.25% will be ring-fenced as a new health and social care levy. This levy will be paid by employers and all working adults, including those over the state pension age (unlike other NICs) and those who are self-employed. 

Dividend tax 

Currently, dividends in the UK are taxed at 7.5% for basic rate taxpayers (with increased rates for higher and additional rate taxpayers). Individuals also currently have an initial £2,000 tax-free allowance for dividends.

Dividend tax rates will rise by 1.25% from April 2022. The tax-free allowance for dividends is unchanged, however. 

Tapestry comment  
Most working individuals will be affected by these manifesto-bursting increases in some way or another and pensioners will be alarmed by both the door being opened to NICs charges in retirement, as well as the (temporary) abandonment of the so-called pension “triple lock”. Despite the recent review into capital taxes, there is so far no change proposed to capital gains tax (one of the few taxes the Government haven’t committed not to increase). So, we may yet see more rises and change elsewhere.

With that in mind, from an incentives point of view, the UK’s tax-qualified share plans may prove to be more popular than ever.

Under a Share Incentive Plan (or SIP) for example, shares are free from income tax and NICs if kept for 5 years. Dividends can also be reinvested in the SIP free of income tax and NICs, provided the “dividend shares” are then held in the plan for 3 years. Save as you earn plans (or SAYE) also allow for income tax and NICs savings, on the increase in value of any shares.

Elsewhere, Enterprise Management Incentives (or EMIs) and Company Share Option Plans (or CSOPs) also allow individuals to benefit from income tax and NICs and relief in certain situations.

Whilst the UK’s tax-qualified plans offer different benefits, they all provide ways in which individuals can pay less or no income tax and NICs. With the proposed rises to NICs, these plans should be looking more appealing to employers and employees alike. In addition, global employers will need to review their UK award documents generally and consider, in the long run, if references to social security will need to be updated to also refer to the health and social care levy. 

If you have any questions regarding these changes, or your share and incentive plans generally, please do contact us and we would be happy to help.

Chris Fallon, Sarah Bruce & Tom Parker

July 2021

Staying ahead of the curve on regulatory and tax compliance is a never-ending task for companies.

To help keep you up-to-date with recent global developments, we are holding our third Worldwide Wrap-Up webinar for 2021 to highlight some of the most recent changes that should be on your radar. We will be covering the below topics in more detail on our 14 July webinar

Australia - removal of tax on termination
Currently, when an individual leaves employment and retains any unvested shares under a tax-deferred Employee Share Scheme (ESS) in Australia, taxation will generally be triggered at that time. The 2021 Budget announced the removal of the tax trigger at cessation of employment (see our alert here). This change will now likely apply to ESS interests issued from the next Australian income year (1 July 2022). 
Tapestry comment
Whilst the removal of early taxation for leavers is beneficial for ESS, and brings the tax treatment in line with many other jurisdictions (making global compliance much easier), the rules only applying to issues following implementation of the change means the benefits may not be recognised for some time. 

Brexit - GDPR decision adopted
On 28 June, the EU Commission adopted an adequacy decision (see our alert here) confirming that the UK’s data protection rules are fit for EU purposes. This means the UK will not be treated as a third country for the purposes of the EU General Data Protection Regulation and allows the continued free flow of data between the EU and UK. 
Tapestry comment
The deadline for adoption of the EU adequacy decision was 30 June so we were literally checking this one every day! It was a relief to receive the adequacy decision in time and see that 'business as usual' applies (at least for the next 4 years). It also means that EU companies do not have to adopt (potentially!) cumbersome alternatives when transferring data to the UK. 

Canada - cap on deductions for stock options takes effect
The cap on the tax reduction available for option-holders finally took effect on 1 July, limiting the scope of tax benefits available to participants, but possibly allowing for a corporate tax deduction for employers (see more here).
Tapestry comment
This change has been in the pipeline for a while and most companies will have likely factored this into their planning and communications. The availability of the tax deduction has made options popular in Canada and the cap may result in a desired switch to other award types (although employees can still take advantage of the beneficial tax treatment up to the CAD200,000 cap). 

Germany - tax advantage increase
Germany has recently introduced the following tax advantages available to employee shareholders:
Discounted or free shares offered to employees of small or medium sized start-ups (less than 12 years old): income on compliant shares will not be taxed until the earlier of sale, termination of employment or 12 years from the date of transfer to the employee.
Tax break: the existing tax break for free or discounted shares (where shares are offered to all employees) has been increased from EUR360 to EUR1,440 per year.
Both of the above came into effect on 1 July 2021.
Tapestry comment
The low value of the tax break previously available in Germany, and the high administration costs, meant this tax advantage was rarely utilised. Increasing this threshold, and implementing a tax regime for start-up businesses, will hopefully see a growth in take-up, and it is great to see governments recognising and supporting the benefits of employee share ownership. 

Ireland - new share plan reporting
The Irish Revenue has released a new electronic return for reporting all share-based remuneration (specific share plan reporting already applies to option plans and approved share plans). The template for the Form ESA can be downloaded from the Revenue’s website and must be filed by 31 August 2021 (for tax year 2020). Moving forward the return deadline will be 31 March (see more here). 
Tapestry comment
We are not that far from 31 August! Companies should begin to prepare for this filing (including registering to make e-filings through the Revenue's online system), particularly if reporting in Ireland will be new, to ensure you have the information to hand before the deadline looms. The scope of the filing means employers with larger scale and/or more complex share incentive arrangements in Ireland must be (unfortunately!) prepared for a more time-consuming reporting process. 

UK - tax new year?
For historic reasons, the UK's tax year for individuals begins on 6 April. This is different to most other jurisdictions (which have a 1 January tax year). In June, the (aptly named) Office of Tax Simplification (OTS) announced it was conducting a review as to whether to move the end of the UK tax year for individuals from the current 5 April to either 31 March or 31 December. To minimise disruption, the review will focus on the 31 March date (which is the government tax year end date and the date used for corporation tax rate changes). For more on what we thought was surely an April Fool's joke (!) please see here. 
Tapestry comment
A report from the OTS is expected this summer but note the OTS is only an advisory body and any changes to the tax year will ultimately be decided by the government. We will be watching with interest and you can be sure that we will let you know the outcome of the review. 

We hope you can join us for our webinar on 14 July as we go through the key regulatory and tax updates from the last quarter, including those set out above and more, and how these may impact your share plan offerings. 

If you have any questions or would like to discuss your global legal or tax compliance, please do get in touch - we would love to help! 

Hannah Needle, Sonia Taylor and Emilie Sylvester