5 October 2023
Staying ahead of the curve on regulatory and tax compliance is a never-ending task for companies operating globally. To help you keep on top of recent developments, we will be hosting our final quarterly Worldwide Wrap-Up of 2023 next week, covering some of the most recent changes that should be on your radar. We have summarised some of these topics briefly below, but they will be covered in more detail, along with other recent developments, on our 11 October webinar.
China – share plan preferential tax treatment extended
On 22 August 2023, the authorities in China issued a circular extending the preferential individual income tax treatment provided for in Circular 164. This preferential treatment is available for equity-based incentives implemented by a listed company. For a foreign company, the plan will usually have to be registered with SAFE to benefit from the preferential treatment. The preferential treatment was due to expire at the end of 2023 but will now continue to apply until the end of 2027.
Thank you to our China counsel MHP Law Firm for alerting us to this update.
This is a positive step as, since Circular 164 was first issued in 2019, it has been extended annually but the extension has not been announced until the end of the year and even then, only for the following 12-month period. It is helpful to know that the popular preferential treatment is now in place until at least the end of 2027 and gives some certainty to local teams.
South Korea – share plan reporting proposed
In July, the Korean Ministry of Economy and Finance released proposed tax reforms. Under the proposal, local companies will be required to report transactions in which executives or employees of the company receive share-based compensation from a foreign parent (generally where the local employer is a subsidiary of a foreign company which owns 50% or more of the shares of the local company).
Local employers will be required to report the transaction details (e.g., details of grant, exercise, and payment of share-based compensation) by the 10th of March of the year following the taxable period to which the date of exercise or payment of stock-based compensation belongs.
If approved, the proposal will apply to share-based compensation exercised (or paid) on or after 1 January 2024.
We have already seen increased scrutiny of foreign share plans in South Korea with the tax authorities asking for more information on employee share plans and residents now being required to dispose of shares through a Korean securities company. Although this is still a proposed change, it follows the general direction of travel and there seems to be an anticipation that this reporting requirement will come into force.
Sri Lanka – foreign exchange rules partially eased
Historically, employee contributions could be remitted out of Sri Lanka either by the employee making an outward remittance via an Outward Investment Account (OIA), or by the local employer obtaining official clearance to make lump-sum remittances on behalf of employees. As previously reported (here), in 2021 Sri Lanka strengthened its foreign exchange rules. The right to make remittances via an OIA was suspended, and lump-sum remittances were later suspended in 2022. These restrictions have been extended several times.
In June 2023, restrictions on making remittances through an OIA were extended for a further 6 months, but in an unexpected development, the restriction on local employers obtaining clearance to send funds offshore on behalf of employees was not extended. This re-opens one route for employees in Sri Lanka to participate in contributory share plans.
The restrictions on outward remittances have been creating administrative difficulties for companies trying to ensure local employees could continue to benefit from global share plan participation. It is especially welcome to have some good news in connection with foreign exchange, particularly as we have seen a couple of recent developments in other countries going the opposite way!
Thailand – tax changes for dividends and capital gains
On 15 September, the Thai Revenue Department announced changes to the taxation of foreign-sourced dividends and capital gains for Thai tax residents.
Previously, Thai tax residents who received income from foreign-sourced dividends and capital gains, would not be subject to tax on that income unless it was brought into Thailand in the same tax year that it was received.
Effective from 1 January 2024 onwards, foreign-sourced dividends and capital gains (e.g. proceeds from the sale of shares) will be subject to personal income tax in the year the income is brought into Thailand, irrespective of the year in which it was received.
Thank you to our Thailand counsel ILTC for alerting us to this update.
This is a major change in the tax treatment of income from foreign-sourced dividends and capital gains and will be difficult for individuals to react given the short time between the official announcement and the effective date. For any share plan participant who relies on dividends and proceeds of sale being brought into Thailand free of income tax, this will be of particular concern.
Market practice updates – India and South Korea
We will briefly touch on the current hot topics in India (TCS) and South Korea (exchange controls) and market practice developments we are seeing in relation to these issues, particularly in relation to the approach being taken by local banks and advisers in India.
We have covered the details of these topics in recent webinars but they continue to keep our clients busy: we will examine how these issues are being approached in practice.
Global tax rates
We will also look at some recent tax updates. Our international advisers provide us with new rates to update OnTap as quickly as they become available. Recently announced changes include:
- Albania – new tax rates took effect 1 June but delayed to 1 January 2024.
- Kenya – increased tax rates took effect from 1 July 2023.
- Netherlands – proposed increase to personal income tax rates and bands.
- Rwanda – new progressive rates are due to take effect on 1 November 2023.
Although tax changes usually happen according to a set timetable (normally at the start of the relevant tax year), the in-year tax increase in Kenya and Rwanda are reminders that changes can happen at any time and companies should stay on top of tax developments. We will look at the above changes in more detail during the webinar.
if you have any questions, or would like to discuss any element of legal and tax compliance for your global incentive plans, do get in touch – we would be delighted to help!
Sarah Bruce, Margaret Rankin and Emilie Sylvester