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Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. © 2013 Baker & McKenzie LLP International Updates and Grant Acceptances for Equity Plans DC/VA/MD Chapter Meeting National Association of Stock Plan Professionals June Anne Burke, Partner, Baker & McKenzie LLP Sinead Kelly, Partner, Baker & McKenzie LLP August 2, 2013
© 2013 Baker & McKenzie LLP Argentina: New Exchange Control Restrictions –On July 5, 2012, Argentine Central Bank issued Communication No 5318, suspending ability of Argentine residents to purchase foreign currency and remit funds abroad to purchase shares Intercompany offsets to transfer ESPP payroll deductions may also be considered violation Options with cashless exercise (or cash exercise using offshore funds) should be fine –Recommended Action: Consider suspending ESPP Consider restricting options to cashless exercise or notify employees that must use offshore funds to pay exercise price 2
© 2013 Baker & McKenzie LLP Australia: Uncertain Treatment of RSUs and SARs under Securities Laws –Companies granting RSUs/SARs to Australian employees have typically relied on self-executing exemptions (e.g., "20-in-12" exemption) or on Class Order exemption to avoid prospectus disclosure requirement –In 2012, ASIC stated that it does not consider RSUs/SARs to fall under Class Order exemption (unlike options and ESPP) –Also, not certain if "20-in-12" or senior manager exemption still available for RSUs/SARs –Instead, RSUs/SARs are treated as derivatives –ASIC stated it would release draft of revised policy on treatment of employee share schemes by end of July now delayed until later in
© 2013 Baker & McKenzie LLP Australia: Uncertain Treatment of RSUs and SARs under Securities Laws (cont’d) –Recommended Actions: Consider whether other exemptions from prospectus disclosure requirement may apply Consider whether treatment as derivatives can avoid filing requirements Suspend granting RSUs/SARs until ASIC issues guidance (hope revised policy makes exemptions available) Seek specific relief from ASIC for RSU/SAR grants 4
© 2013 Baker & McKenzie LLP Australia: Update on Tax-at-Grant Issue –Under ATO guidance, minimum initial vesting requirements apply to time-based awards to avoid tax at grant 6 months for award that vests over 3 years or less 12 months for award that vests over more than 3 years –Private ruling in 2012 confirmed that tax is deferred until vesting even if minimum initial vesting requirements not met –Recommended Action: Consider obtaining similar ruling in case minimum initial vesting requirements not met 5
© 2013 Baker & McKenzie LLP Australia: Update on Tax Reporting –For ESS reporting to employees and to ATO (due July 14 and August 14, respectively), ATO requires non-Australian award "providers" to prepare ESS reports in their own name – can’t use Australian sub/employer entity (as was previously accepted) If using ESS Bulk Load Excel Spreadsheet – insert 0 for provider’s ABN and explain to employees why parent is reflected as "employer" on their ESS statements –Change in reporting for mobile employees Previously, entire taxable amount was required to be reported Now only pro-rated amount (based upon portion of vesting period employee worked in Australia) to be reported, if available Otherwise, report full amount, but if subsequently become aware of facts, amended report should be submitted 6
© 2013 Baker & McKenzie LLP Australia: Update on Tax Reporting (cont’d) –Recommended Actions: Make sure award issuer is listed as "provider" in ESS reporting Review available data for mobile employees with taxable events during the 2012 – 2013 tax year who worked in Australia and make sure ESS statements (due July 15) were prepared correctly 7
© 2013 Baker & McKenzie LLP Brazil: Update on Taxation of Stock Options –Tax court ruled in two cases on June 21, 2013 that social security taxes apply to stock option gains Court considered gains to be equivalent to remuneration Companies assessed taxes in excess of $22 million At least one of the companies will appeal ruling –Currently, most companies treat equity award gains as additional incentives, not subject to social security taxes –Employer social tax rate is up to 28% (uncapped), and employee rate is up to 11% (but capped) –Recommended Actions: Review current practice in Brazil and potential impact of rulings on your plan with your advisor Stay tuned for further developments 8
© 2013 Baker & McKenzie LLP Canada: More Stringent Foreign Asset Reporting Requirements –On June 25, 2013, Canada Revenue Agency issued a revised Foreign Income Verification Statement (Form T1135), effective for 2013 tax year – Form required for Canadian residents to report foreign assets/property over C$100,000 Requirement applies to shares of non-Canadian companies even if shares held in a Canadian brokerage account Vested options appear to be subject to the Form T1135 reporting –Revised statement requires more detailed information on foreign property, such as: Name of the foreign institution or entity holding assets/funds outside Canada; Country of foreign assets/property; and Income generated from foreign assets/property 9
© 2013 Baker & McKenzie LLP Canada: More Stringent Foreign Asset Reporting Requirements (cont’d) –In addition, extension of the normal reassessment period by three years for a taxpayer who has failed to report income –Recommended Action: Communicate these changes (and foreign asset reporting requirements in other award countries) in award agreement addenda, employee information supplements or other materials 10
© 2013 Baker & McKenzie LLP China: Update on SAFE Requirements –Under Circular 7, generally all SAFE offices requiring re-registration of plans approved under Circular 78 –Shanghai SAFE requiring annual re-registration –New applications are more streamlined and usually faster, but: Beijing SAFE focused on past non-compliance – increased penalty risk Shanghai SAFE refuses to register cash-settled awards Non-PRC nationals – increasing grey area: Circular 7 requires inclusion of all "domestic individuals" But all SAFE offices seem to view inclusion of non-PRC nationals as optional Beijing SAFE will not allow inclusion unless resident in China for one year 11
© 2013 Baker & McKenzie LLP China: Update on SAFE Requirements (cont’d) –SAFE issued Circular 17 (effective May 13, 2013) in connection with implementing a new monitoring system for foreign inbound transactions –Companies with existing SAFE approvals need to obtain monitoring system code and new business registration certificate from SAFE –Renewal process appears to be simple Takes approximately 2-3 days in Shanghai; 1 day in Beijing No additional documents need be submitted –Banks may refuse to accept wire transfers without new code/certificate 12
© 2013 Baker & McKenzie LLP China: Update on SAFE Requirements (cont’d) –Recommended Actions: If you have SAFE approval – make sure you have re- registered under Circular 7 and Circular 17 (to keep your funds flowing) If you do not have SAFE approval but need it – tread carefully with respect to prior grants in China; consider suspending grants and share issuances until approval is granted If you have/need SAFE approval, talk to your advisor about whether you should include non-PRC nationals 13
© 2013 Baker & McKenzie LLP EU: Status of Employee Share Plan Exemption under EU Prospectus Directive –Directive amended in 2010 –Expanded employee share plan exemption for non-EU issuers listed on non-EU regulated exchanges (NYSE, NASDAQ, etc.) is subject to determination that non-EU regulated exchange is "equivalent" to EU regulated exchanges –EU Commission’s equivalency determination is stalled and unlikely to be made until late 2014/2015 –EU Prospectus filers should expect to continue filing through 2014 (possibly beyond that) –In the meantime, Germany and Poland confirmed non-transferable options no longer subject to Directive 14
© 2013 Baker & McKenzie LLP France: Changes for Qualified Awards –Both employer and employee tax liability for qualified awards significantly increased following 2012 changes Employer social tax now 30% (RSUs) / 7.5% (options) on value of underlying shares at grant – effective for grants on or after July 11, 2012 Employee now subject to a maximum combined rate of approx. 61% - effective for grants on or after September 28, 2012 –Has resulted in many companies ceasing to grant qualified awards –But qualified awards can continue to be beneficial (at least for company) under certain circumstances –French government announced plans to introduce 75% employer-paid tax on income above Euro 1 million (for single taxpayer) – may not apply to qualified award income but will need to monitor 15
© 2013 Baker & McKenzie LLP France: Changes for Qualified Awards (cont’d) –For options, 4-year holding period requirement (currently) not applicable for grants since September 28, 2012 –Holding period still applies to RSUs 16
© 2013 Baker & McKenzie LLP France: Changes for Qualified Awards (cont’d) –Recommended Actions: Consider whether grants of qualified awards make sense If qualified options will be granted, update sub-plan/agreement for new rules (no holding period) Update (or create) employee tax disclosures, including details of foreign account reporting, as severe sanctions apply for failure to report Monitor proposed changes in tax law 17
© 2013 Baker & McKenzie LLP Israel: New Guidelines for Trustee Plans –For Section 102 trustee plans, new guidelines issued July 24, 2012 impose additional requirements for awards to be qualified Provide trustee with grant details (e.g., copy of resolution approving grants) within 45 days of grant date Provide trustee with hard copy of executed grant agreements within 90 days of grant date Possible to use electronic acceptance but may require ruling from tax authorities May be possible to obtain one-time consent that covers all grants going forward (further guidance expected from ITA) 18
© 2013 Baker & McKenzie LLP Israel: New Guidelines for Trustee Plans (cont’d) –Prior grants also subject to 90 day notification, but may be possible to rely on favorable tax treatment even if non- compliant (requires application to tax authorities) "Change of Track" approach: holding period starts from date of notification to trustee and tax treatment depends on whether award vested or not vested as of date of application to tax authorities – requires approval "New Grant" approach: grants treated as made on date of application to tax authorities, holding period restarts – approval is automatic upon submission of application 19
© 2013 Baker & McKenzie LLP Israel: New Guidelines for Trustee Plans (cont’d) –Recommended Actions: Check with trustee to ensure new notification requirements can be met Consider obtaining ruling from ITA to confirm that electronic acceptance of grant agreement sufficient (or rely on blanket ruling obtained by trustee) Monitor ITA guidance to check if one-time consent sufficient Verify if old awards met notification requirements 20
© 2013 Baker & McKenzie LLP Italy: Changes to Financial Intermediary Requirements –Companies offering ESPP and options (not limited to cashless exercise) were required to engage Italian broker to offer in Italy –Effective November 13, 2012, Italian Financial Services Act amended to exempt offers to service providers of issuer and related entities if offer made at companies’ offices –Not certain if offers made via , intranet or internet exempt –Recommended Actions: Wait for clarification on application to electronic offers before terminating existing intermediary relationship Alternatively, consider delivering enrollment documents in hardcopy to avoid intermediary requirement 21
© 2013 Baker & McKenzie LLP Philippines: Securities Law Update –New informally adopted Philippines SEC ("PSEC") policy requires companies with Section 10.2 exemption to notify PSEC before issuing shares to new employees in the Philippines –Requires notification letter and new HR Manager certification –PSEC will monitor compliance by comparing the names of employees issued shares against the list of employees previously approved by the PSEC –Recommended Action: If relying on a Section 10.2 exemption, determine whether employees who were not listed in prior approval are participating and/or whether they will be receiving awards - file notice with PSEC before awards vest 22
© 2013 Baker & McKenzie LLP 23 Russia: Ruling on Taxation of Options Since January 1, 2011, options and ESPP rights taxed at grant and again at exercise, with no step-up in basis Private ruling in December 2012 – held that options were taxable only at exercise, not at grant Does not apply to other taxpayers but is helpful precedent for companies granting/considering granting options or ESPP rights in Russia Recommended Action: Continue to exercise caution with option/ESPP grants in Russia Consider obtaining a private ruling to confirm tax treatment
© 2013 Baker & McKenzie LLP Russia: New Penalties for F/X Violation –Income paid to Russian nationals (including equity income) arguably has to be paid into Russian bank account –Historically, no tracking by authorities or penalties –Effective February 13, 2013, violation of currency control laws penalized by 75% to 100% of value of illegal currency transaction –Recommended Action: Until further guidance issued, companies may consider paying proceeds into Russian bank account 24
© 2013 Baker & McKenzie LLP Singapore: End of ERIS Scheme –Employee Remuneration Incentive Scheme ("ERIS") –SGD2,000 of annual gain is 100% tax exempt; 25% of the remaining annual gain is tax-exempt, up to SGD 1M over 10 years –Applies on portion of award that vests after one year from grant if grants are made to 25% of employees in Singapore –Exemption expires for new grants effective January 1, 2014; will continue to apply to prior grants as long as options are exercised/RSUs vest prior to 2024 –Recommended Action: Companies may consider notifying employees of the change and scheduling eligible grants prior to year-end 25
© 2013 Baker & McKenzie LLP Spain: New Foreign Asset Reporting –Spanish residents required to report any shares and/or bank accounts outside Spain if, as of December 31, the joint value of each asset type is at least EUR 50,000 –Deadline is March 31 of following year (extended until April 30, 2013 for first year of reporting) –Severe penalties for non-compliance –Recommended Action: Companies should consider notifying employees of new tax reporting requirement 26
© 2013 Baker & McKenzie LLP United Kingdom: Tax-Related Changes –Real Time Information Reporting: New PAYE reporting system known as "real time information" ("RTI") is in pilot stages and will be required broadly by Oct –Changes in Maximum Tax Rates: Effective April 6, 2013, maximum tax rate decreased from 50% to 45% –Changes to CSOP (approved option) regime (awaiting Royal Assent) likely require changes to existing CSOPs –Employee Owner Contract –Changes to non tax-qualified awards are on the way 27
© 2013 Baker & McKenzie LLP Grant Acceptance
© 2013 Baker & McKenzie LLP Grant Acceptance –For options, acceptance of the award may be built into the exercise process participants must take affirmative action to exercise options –No participant action is required when RSUs vest –Therefore, RSUs have no built-in mechanism to force participant to accept the award prior to the vesting date –Same issue impacts restricted stock awards and performance units/shares 29
© 2013 Baker & McKenzie LLP Why is Acceptance Important? –Award agreements contain terms and conditions that protect the company in case of dispute (e.g., vested rights disclaimer, data privacy consent, governing law/venue provision) –Award agreements may also include other provisions that are beneficial to the company (e.g., restrictive covenants such as non-compete or non-solicit) –Important that plan participants affirmatively agree to those terms and conditions; the terms and conditions are more readily enforceable 30
© 2013 Baker & McKenzie LLP Possible Acceptance Solutions – Weigh the Pros & Cons 1.Cancel the award if not accepted by first vesting date? 2.No new grants to participant if he/she fails to accept award within timeframe, or at all? 3.Don’t issue shares until plan participant accepts the award? 4.Include award in income at vesting but delay release of shares until acceptance? 5.Issue shares at vesting but restrict sale/transfer of shares until acceptance? 6.Issue shares on the vesting date without a signed/accepted agreement? 7.Implied or negative acceptance? 8.Require acceptance of standard terms prior to making grant? 31
© 2013 Baker & McKenzie LLP Form of Acceptance –Electronic versus written acceptance What are the electronic acceptance procedures (e.g., double-click acceptance)? Is electronic acceptance permissible/enforceable in all countries? –Negative acceptance Need to verify enforceability in each applicable jurisdiction 32
© 2013 Baker & McKenzie LLP Recap –One-size fits all approach may not be the best option –Consider using different solutions in different jurisdictions or for different groups of participants –When considering any solution consider: tax, accounting, labor law and data privacy issues – as well as company profile 33
© 2013 Baker & McKenzie LLP Global Equity Matrix App 34 Information on the key compliance issues for equity awards. Covers tax and securities, exchange control, labor and data privacy issues in nearly 40 countries. Available for free on your iPhone, iPad or Android smartphone More at
© 2013 Baker & McKenzie LLP Questions?
© 2013 Baker & McKenzie LLP Contact Information 36 June Anne Burke Sinead Kelly
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