Global tax treatment of equity awards.

• Author: Neuhauser, Derrick

More and more companies operate on a global basis to expand their market reach, create cost efficiencies, and leverage their resources. To attract, motivate, and retain their employees, these multinational companies reward their worldwide workforce with equity grants.

In the past, the long-term incentive generally was a plain vanilla stock option granted at fair market value (FMV), with a ten-year term and vesting period of three or four years. However, with the U.S. adoption of Statement of Financial Accounting Standards (FAS) No. 123R, Share-Based Payment, which requires stock options to be expensed on the balance sheet, companies have granted more and more equity alternatives, including restricted stock, restricted stock units, stock appreciation rights, phantom stock, and indexed options. When granting a stock option before the adoption of FAS 123R, multinational companies faced difficulties in complying with the various tax and accounting rules that were unique to each country. This task has become even more difficult with the granting of these various other long-term incentives.

Another compounding problem is that although U.S. tax laws regarding equity awards have remained fairly consistent over the past 15 or 20 years, international tax laws have not. Many foreign countries' equity requirements for income and social tax and withholding obligations change annually, and sometimes more often than that. Foreign countries have also been slow to adapt and provide guidance for the many long-term equity award alternatives such as restricted stock units and indexed options. Therefore, careful consideration is needed before a company begins to issue long-term incentives in foreign tax jurisdictions.

The following is a brief review of recent developments in four countries.

Italy

In the past, Italy had one of the most share scheme-favored regulations in Europe. In recent years, however, Italy has imposed regulations that are increasingly strict and challenging. In 2004, stock-based benefits to employees required qualified intermediaries. In 2006, the qualified stock option plan required a three-year vesting period and a five-year holding period. By complying with the qualified plan rules, an individual could avoid both income and social taxes, but due to the complexity of all the qualified requirements and the administrative hassles, Italy changed its rules again. The new rules subject the equity gain to income tax but exempt social taxes. However, the new rules are prospective, so if an option was exercised prior to their inception, a careful tracking will be needed to determine which tax regime was applicable at the time of the grant. This has created a challenging environment.

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