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.
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.
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.
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.
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.
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.
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.
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.
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.
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.