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Baker & McKenzie LLP is an English limited liability partnership and is a member of Baker & McKenzie International, a Swiss Verein with member law firms.

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Presentation on theme: "Baker & McKenzie LLP is an English limited liability partnership and is a member of Baker & McKenzie International, a Swiss Verein with member law firms."— Presentation transcript:

1 Baker & McKenzie LLP is an English limited liability partnership and is a member of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a “partner” means a person who is a member, partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm. The Devil in the Details: Understanding Compliance Issues in France and the U.K. SF NASPP – November 7, 2007 Valerie Diamond, Baker & McKenzie LLP Rita Dickson, Oracle Corporation

2 ©2007 Baker & McKenzie 2 Agenda France Options and RSUs –Tax and Regulatory Issues for Qualified and Non-Qualified Plans –Administrative Approaches and Tips –Anticipated Changes for Qualified Plans United Kingdom Options and RSUs –Tax and Regulatory Issues for Qualified and Non-Qualified Plans –Administrative Approaches and Tips –A Few Words about Mobile Employees

3 ©2007 Baker & McKenzie 3 French Nonqualified Options / RSUs No special grant document required for tax purposes (but include international withholding language) Timing of Taxation: –Options – at exercise on spread –RSUs – at vesting/share issuance on FMV of shares (be careful about deferrals)

4 ©2007 Baker & McKenzie 4 French Nonqualified Options / RSUs – Taxation –At Exercise / Vesting Income tax (up to 40%) Employee social security contributions (up to 23%) Employer social security contributions (up to 46%) –At Sale of Shares Capital gains 27% (16% income, 8.2% CSG,.5% CRDS, 2% special and.3% add’l tax) if over annual indexed amount (currently EU20,000)

5 ©2007 Baker & McKenzie 5 French Nonqualified Options / RSUs - Withholding and Reporting No income tax withholding for French tax residents Employee social security withholding and payment of employer social security in month of exercise/vesting Income from exercise/vesting must be included in annual declaration of salaries by February 1 st of year following exercise/vesting

6 ©2007 Baker & McKenzie 6 French-qualified Options / RSUs Requires Written Grant Documentation - French sub-plan and agreement Timing of Taxation –For employee: No tax at exercise/vesting: deferral until sale of shares No social security contributions –For employer: no social security contributions

7 ©2007 Baker & McKenzie 7 French-qualified Options – Key Requirements –No grant during “closed periods” –Exercise price > 80% of the average of FMV during 20 trading days preceding grant date –Employee’s heirs have right to exercise options no more but also no less than 6 months after death of optionee –Limited adjustments permissible –Corporate officer restrictions -- Shares must be held for at least 4 years (as of April 27, 2000 – used to be 5 years) as from grant date –Reporting obligations to be satisfied by local employer and optionees LEGALLEGAL SOCIALSOCIAL TAXTAX

8 ©2007 Baker & McKenzie 8 French-qualified RSUs – Key Requirements –Mandatory minimum 2-year vesting period before shares can be issued –Heirs can request issuance of unvested shares within 6 months following death of awardee –Corporate officer restrictions! –No sale during “closed period” –Mandatory minimum 2-year holding period after vesting (before sale of shares) unless death/disability under French law –No sale during closed period –Reporting to social authorities by local employer LEGALLEGAL SOCIALSOCIAL TAXTAX

9 ©2007 Baker & McKenzie 9 French-qualified Awards – Closed Periods Neither French tax admin or AMF has explained how to apply to foreign companies –10 trading days preceding/following disclosure to public of financial statements of company (10k, 10q, earnings release?) AND –Date company management is aware of confidential info which if known would materially impact price of shares until 10 trading days after public disclosure

10 ©2007 Baker & McKenzie 10 French-qualified Awards - Corporate Officers Covers certain enumerated executives (at local entity For options –Prohibit exercise of options until expiration of corporate duties or –Prohibit sale of certain percentage of shares acquired at exercise until expiration of corporate duties For RSUs –Prohibit sale of certain percentage of shares acquired at vesting until expiration of corporate duties

11 ©2007 Baker & McKenzie 11 French-qualified Awards – Employee Taxation differs for Options / RSUs Options: Sale after 4 years of grant but prior to 2 years from exercise –Under EU20,000 – currently exempt –EU15,000+ Spread up to EU152,500 – 41% (30%, plus 8.2 CSG,.5% CRDS, 2% special and.3% add’l tax) Spread exceeds EU152,500 – 41% for amount up to EU152,500 and 51% for amounts at and over EU152,500) Sale after 4 years of grant AND after 2 years from exercise –Under EU20,000 – currently exempt –EU20,000+ : spread and gain taxed at 27% rate

12 ©2007 Baker & McKenzie 12 French-qualified Awards – Employee Taxation differs for Options / RSUs RSUs Sale after 2 years vesting AND 2 year from share issuance –Under EU20,000 – currently exempt –EU20,000+ FMV of shares at vesting/issuance – Either 41% (30%, plus 8.2 CSG,.5% CRDS, 2% special and.3% add’l tax) or if less, employee’s marginal rate plus 11% social taxes Gain from issuance of shares – 27% rate Note: you do not get 27% on all income as with options and if sale prior to vesting/share holding periods, then entire amounts disqualified

13 ©2007 Baker & McKenzie 13 French-qualified Awards - Withholding and Reporting No Withholding for French Residents (tax or social insurance) except for excess discount Reporting: –February 15 th following year of exercise Individual Employee Statements Duplicate to French entity’s tax office (Direction des Services Fiscaux) –French entity’s annual shareholder meeting Grants and exercise by top 10 employees –Difference between reporting for options and RSUs

14 ©2007 Baker & McKenzie 14 French-qualified Options – Excess Discount Taxation If exercise price is less than 95% of average price over 20 trading days prior to grant (i.e., price between 95% and 80%), then “excess discount” is income Must report excess discount on pay slip for month of exercise and withhold social security contributions. Also goes on annual report of salary.

15 ©2007 Baker & McKenzie 15 Oracle’s Approach in France Oracle has approximately 1,430 employees in France Oracle grants options to approximately 50% of those employees in an annual focal grant Oracle grants French-qualified options, not nonqualified options or RSUs (but has inherited some of each) Options vest according to regular vesting schedule but are subject to restriction on sale of shares to meet 4 year holding period

16 ©2007 Baker & McKenzie 16 French-qualified Option Sub-Plan Oracle uses HSBC in France exclusively as its Plan Broker for French approved options HSBC keeps track of all holding periods and does all reporting for both the employer and employee A block is placed on the employee’s US brokerage account so they can see their vested shares, but cannot exercise them Employees cannot sell the shares for a period of 4 years from date of grant in order to qualify for the favorable tax rates

17 ©2007 Baker & McKenzie 17 Pricing of French-qualified Options The exercise price can be no less than 95% of the FMV of the previous 20 trading days and the grant cannot be dated 10 trading days before or after an “event”. An “event” would be an SEC filing, earnings release, material public announcement, etc. If 20-day average is more than 95%, the avg. FMV is used as exercise price unless it is less than 100% of the FMV on the date of grant, which is the price then used

18 ©2007 Baker & McKenzie 18 Oracle Grant Documents We require all French employees who receive options/awards to sign paper grant documents Grant docs, including US Plan, French Sub-Plan, tax information, links to HSBC for exercise information and paperwork, grant agreement and grant certificate are uploaded to US brokerage account and employee is instructed to download, print and fax to Stock Services only the signed Grant Agreement Oracle doesn’t allow a grant to be exercised until grant docs are accepted

19 ©2007 Baker & McKenzie 19 French Regulatory Issues EU Prospectus Directive – No filing required for options/RSUs. AMF does not consider non-transferable employee options or RSUs offerings of securities subject to Directive (not true of ESPP) Language - Recent decision of the French supreme court requires that employer show that employees understand English or translate documents into French to enforce against employee. Evidence can be daily exchanges of s in English. Recommend waiver in English/French

20 ©2007 Baker & McKenzie 20 French Regulatory Issues Framework (Age Discrimination) Directive – Age provisions for retirement probably not an issue Works Council – “consultation” generally not required, but differs if part of employment agreement or French management involved in implementation process Electronic Acceptance – May not be sufficient to satisfy writing requirement in event of dispute absent double click procedures (with refusal option) Data privacy – Social security number should not be transferred unless necessary for payment of social contributions which is arguably not the case for French-qualified awards. Processing and transfer of data to US requires declaration to CNIL unless US company adheres to Safe Harbor Program.

21 ©2007 Baker & McKenzie 21 Changes to French-qualified Awards – Expected end of November 2007 Oct French National Assembly approved amendment to social security treatment of French-qualified options and RSUs (non French Nonqualified Awards) Proposed amendments may be modified before put into effect New Social Security Charges –Employer: Due at Grant 10% of either 25 percent of the value of the underlying shares (i.e. a rate of 2.5 percent) or the fair market value of the option under IFRS 2 principles (i.e., 10 percent of the fair market value of the options) Same for Options and RSUs –Employee: Tax of 2.5% of value of shares at vesting (RSUs)/spread at exercise (options) Not clear when due. Maybe at exercise/vesting or at sale

22 ©2007 Baker & McKenzie 22 UK Unapproved Options and RSUs No special grant document required for tax purposes (but include international withholding language) Timing of Taxation (assuming resident and ordinarily resident UK): –Options: at exercise on spread –RSUs: at vesting/issuance on FMV of shares

23 ©2007 Baker & McKenzie 23 UK Unapproved Options / RSUs – Taxation At Exercise / Vesting –Income tax (up to 40%) –Employee NICs at exercise/vesting (earnings between £ per week 11%; over £670 per week 1%) –Employer NICs at exercise/vesting (12.8% - not capped) At Sale of Shares –Capital gains subject to taper relief 1-2 years – 50% taxable so rate effectively 20%) 2+ years – 25% taxable so rate effectively 10%) annual exemption – now £9,200 per annum –Change to 18% flat rate in April 2008 tax year

24 ©2007 Baker & McKenzie 24 UK Unapproved Options / RSUs - Withholding Duty to account to the Revenue for income tax and NICs within 14 days of the end of each tax month (ends on 5 th, so by 19th) if shares are readily convertible assets (i.e., public co.) Need to recover amounts due from employee within 90 days of taxable event to prevent grossing up charge (deemed tax on the tax) Withholding at employee’s marginal rate

25 ©2007 Baker & McKenzie 25 UK Unapproved Options / RSUs - Reporting Onerous reporting requirements include –PAYE Returns – Forms P14 and P35 – May 19 th following end of tax year (April 5) –Return of Benefits Form – P11D – report stock transfer to employees – July 6 th following end of tax year (April 5) –Annual Share Scheme Return Form – Form 42

26 ©2007 Baker & McKenzie 26 UK Unapproved Options / RSUs - Reporting Form 42 Requirement seems to be giving US companies the biggest headache –Filing by July 6th each year to report grants and exercises. –Detailed entries – 16 columns of details for each option exercise –Revenue is pursuing companies and threatening proceedings before Revenue Commissioners –Penalty for failure to deliver on time of up to £300 per reportable entry event up to Revenue Commissioner hearing and penalties not exceeding £60 per entry per day thereafter

27 ©2007 Baker & McKenzie 27 UK Unapproved Options - NICs Can pass or transfer liability for employer NICs (currently at 12.8%) to employees for option grants on or after April 6, 1999 Employees may deduct the amount of employer NICs paid from taxable income arising from option exercise If joint election form used, form must be approved by Revenue Possible to use electronic acceptance if prescribed language used

28 ©2007 Baker & McKenzie 28 New Anti-Avoidance Legislation 2006 anti-avoidance legislation extended to options – “Legislation will ensure that any reward of employment obtained by employees from avoidance schemes using options over shares and securities will be fully subject to tax through PAYE and National Insurance Contributions” Joint election form for employer NICs pass through must include anti-avoidance language on on or after April 6, 2007

29 ©2007 Baker & McKenzie 29 UK Employee Taxation Restricted Stock Units RSUs compulsorily settled in shares can be analyzed as options (rights to acquire shares). Hence, there is an ability to transfer employer NIC liability to employees if the RSU award can only be settled in shares (may need to specify in award agreement) But need to be especially careful in structuring RSUs for internationally mobile employees.

30 ©2007 Baker & McKenzie 30 UK Approved Options Requires Written Grant Documentation – UK sub-plan and agreement Timing of Taxation –For employee: No income tax or NICs at exercise: deferral until sale of shares if exercise more than 3 years from grant or “good leaver” Capital gains tax on sale –For employer: no NICs contributions if exercise more than 3 years from grant or good leaver Does not affect ability to obtain automatic corporate tax deduction

31 ©2007 Baker & McKenzie 31 UK Approved Options – Key Requirements Revenue approval process and need to set up plan in accordance with Revenue rules Ongoing compliance – most changes need to be approved by the Revenue, including option adjustments £30,000 (based on exercise price) individual limit and monitoring limit Additional reporting Limited ability to adjust options upon corporate transaction

32 ©2007 Baker & McKenzie 32 UK Approved Options – Good Leaver Tax free exercise if “good leaver” (even if not 3 years from grant date) when exercise occurs within 6 months of termination of employment due to: –Injury –Disability –Redundancy –Retirement after an age specified in the plan which is 55 or greater –Death (if exercised by personal representative within 12 months of death) Can build in pass through of employer NICs if employee exercises early and not as good leaver

33 ©2007 Baker & McKenzie 33 UK Approved Options – Additional Reporting No income tax or NICs withholding if exercise after 3 years of grant or as good leaver. However, if early exercise, then withholding as with unapproved options Return of Benefits Form – No reporting if exercise after 3 years of grant or as good leaver. However, if early exercise, then reporting as with unapproved options Annual Share Scheme Return – Form 35 (for approved options only): –Must report grant, exercise, lapse, cancellation and replacement of options by July 6 following end of tax year (April 5) –Any amendments to the plan must be reported as well

34 ©2007 Baker & McKenzie 34 Oracle’s Approach in U.K. Oracle has approximately 3,200 employees in the U.K. Oracle grants options to approximately 50% of those employees in an annual focal grant Oracle grants U.K. approved options, not nonqualified options or RSUs (but has inherited some of each, as well as EMI options)

35 ©2007 Baker & McKenzie 35 Oracle’s UK Approved Sub-Plan Sub-Plan must be submitted to and approved by UK Inland Revenue before options/awards can be granted under the approved scheme Employee cannot hold more than 30K£ in outstanding options/awards at time of grant in order to qualify for an approved option grant Employee must hold shares for a minimum of 3 years before exercising/selling to receive favorable tax treatment – no social insurance taxes on exercise

36 ©2007 Baker & McKenzie 36 Calculation of Approved Option or Portion of Option US Exercise Price divided by GBP closing price on grant date = Grant Price in £ Calculate GBP value of all other “approved” options outstanding each time a new UK option is granted. The difference between the total £ value in options outstanding and 30K£ can be granted as an approved option. If over 30K£, the option must be grant as an “unapproved” option. Often times the option must be split between approved (GA) and unapproved (GU). We use the same grant number with the GA/GU prefix to tie the grants together to total on option on the grant date

37 ©2007 Baker & McKenzie 37 Coding and Taxation of Approved Options Oracle codes UK Grants with a GA/GU prefix at time of grant for easy distinction at time of grant and exercise for calculation of limit and taxes due 0% tax withheld on approved options if exercised 3 or more years from the date of grant 40% % taxes withheld if option is exercised prior to 3 yr. holding period In addition, tax rates differ for Leavers (“good leavers”, “bad leavers”, etc.)

38 ©2007 Baker & McKenzie 38 Oracle’s Grant Documents We require all UK employees who receive options/awards to electronically accept grant documents, including a NIC Election Form Grant docs, including US Plan, UK Sub-Plan, tax information, grant agreement and grant certificate are uploaded to US brokerage account and employee is instructed to electronically review and accept Oracle doesn’t allow a grant to be exercised until grant docs are accepted and NIC Election Form is returned transferring ER-NIC responsibility to EE

39 ©2007 Baker & McKenzie 39 UK Regulatory Issues EU Prospectus Directive – No filing required for options/RSUs. FSA informal view is non-transferable employee options or RSUs likely are not offerings of securities subject to Directive. Case-by- case analysis. Framework (Age Discrimination) Directive – Provisions that give additional benefits to grantee based on age (and/or years of service) (such as retirement provisions based on age 55) likely discriminatory and should be removed Electronic Acceptance – Note that Revenue must approve electronic acceptance and cashless exercise procedures if UK approved options

40 ©2007 Baker & McKenzie 40 Increasing Scrutiny of Internationally Mobile Employees by Revenue Companies should determine at grant whether employee is: –Resident and Ordinarily Resident UK –Resident but not Ordinarily Resident UK –Neither Resident Nor Ordinarily Resident UK Note that NICs pass through available when employee resident and ordinarily resident UK, not otherwise

41 ©2007 Baker & McKenzie 41 Options – Resident but Not Ordinarily Resident UK 3 potential tax charges 1.taxed at the time of grant award if discounted exercise price 2.taxed from exercise of option to disposal of shares on amount equal to 5% of the spread (deemed notional loan) 3.taxed on full spread when shares are disposed of

42 ©2007 Baker & McKenzie 42 RSUs – Resident but Not Ordinarily Resident UK There could be income tax and NICs due on the grant if RSU can only be settled in shares. For these individuals, consider putting election for company to settled in cash (then not an option)

43 ©2007 Baker & McKenzie 43 Questions?

44 ©2007 Baker & McKenzie 44 Contact Details Valerie H. Diamond, Esq. Baker & McKenzie LLP Two Embarcadero Center, 10 th Floor San Francisco, CA Direct Number: (415) Rita Dickson Oracle Corporation Delphi Asset Management Corp Plumas Street, Suite 100 Reno, NV Direct Number: (775)


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