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.
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.
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.
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.
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.
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.
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.