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Belgium | Global Equity | Belgian social security due on RSUs awarded by foreign parent companies

Belgium | Global Equity | Belgian social security due on RSUs awarded by foreign parent companies

February 23, 2024

Global Equity

Belgium | Belgian social security due on RSUs awarded by foreign parent companies

Benefits are subject to Belgian social security contributions to the extent that they meet the definition of ‘salary’ as foreseen in the Belgian Wage Protection Act, meaning:

it is a benefit awarded in cash, or measurable in cash;
to which the employee is entitled as a result of the employment;
which is borne by the employer.

In recent Belgian case law, the question has arisen whether RSUs awarded by a US parent company to employees of a Belgian daughter company, should be subject to Belgian social security contributions, considering the conditions above.

The most recent case law that emerged in answer to this question can be summarized as follows:

Ghent Labour court (20 April 2020)

The Labour court ruled that the RSUs were awarded to employees in service of the Belgian daughter company as a result of the employment and were to be considered as borne by the employer, by unifying the US parent company with the Belgian legal employer on the basis of the wording in the RSU plan, as a result of which they considered that the RSUs were (legally) borne by the (Belgian) employer;
The RSUs are therefore considered as salary and Belgian social security contributions are due.

Court of Cassation (5 September 2022)

The decision of the Ghent labour court was overturned due to lack of legal justification and sent to the Antwerp Labour court.

Antwerp Labour court (20 November 2023)

The US mother company’s objective of awarding the RSUs was the retention of the employees; RSUs were therefore not allocated as the counterpart for work;
The judges argued that the RSUs are furthermore not borne by the Belgian daughter company since there was no legal commitment by the Belgian daughter company vis-à-vis the employees and the RSUs were awarded in the framework of the US mother company’s retention policy;
The RSUs are therefore not considered as salary and Belgian social security contributions are not
due.

The Takeaways
The most important takeaway is that despite the current judgment indicating that Belgian social security contributions are not due on RSUs – this is based on the specific conditions of the case and the RSU plan, whereby it could be argued that the granting of the RSUs is not the counterpart for work performed all while the Belgian legal employer did not intervene in any way in the granting of the RSUs and/or the operation of the plan. A case-by-case assessment and a thorough examination will in any case remain essential to assess exemption conditions.

Brazil | Taxation on foreign investment and Brazilian funds
The effects of legislative bill number 4,173/2023 came into force as of 1 January 2024. Some of the implications of this bill re listed below:

Exemption from income tax due on capital gains has been revoked for gains obtained on the sale or redemption of assets held abroad by tax residents of Brazil when assets have been acquired as a non-tax resident. However, it is possible to claim income tax paid abroad as a tax credit in Brazil (if in compliance with the legal requirements)
The exchange rate variance between Brazilian reais and foreign currencies is now part of the basis for the calculation of capital gains. It is no longer possible to exempt gains realized from an exchange rate variance on assets acquired abroad.
The rate applicable to capital gains or any related income (i.e., dividend distribution, interest income) on financial assets held abroad is now a flat 15%. The standard progressive rates (from 15% up to 22%) will still apply to capital gains which are not related to financial assets held abroad.
The new legislation defines financial investments as, certificate of deposits, current and/or saving accounts, virtual assets, investment funds, certain insurance policies, retirement pensions, stocks and assets derived from Long Term Incentive plans, among others.

Application to Employee Equity Awards
Employers need to consider the change in rate when applying withholding to employee equity awards. Changes should be communicated to employees, with consideration given to employer communications / FAQ documents etc, particularly where employees are responsible for their own tax reporting.

China | Preferential policy extension to equity incentives
A reminder that the Extension of Individual Income Tax (IIT) Preferential Treatment on Equity Incentive Income, MOF STA Public Notice [2023] No.25 (PN25), providing the preferential tax policy on equity incentive income will continue to be extended until 31 December 2027.

As a recap of the preferential policy, the IIT preferential treatment for equity incentive income allows a separate taxation method without adding it to the comprehensive income received by tax residents. Under this calculation method, the individual generally benefits from a tax savings as the equity incentive income will not be added to the regular income for tax calculation purposes and hence a lower tax rate could be applied.

The Takeaways
Companies who adopt the preferential treatment should pay attention to the followings:

It is mentioned again in PN 25 that resident taxpayers receiving equity incentive income can adopt the preferential treatment provided that relevant conditions as stipulated in those relevant tax circulars governing equity incentive income are fulfilled. Among all the relevant requirements, tax registration is one of the conditions and deemed a requirement to be tax compliant.
Failure to complete the required tax registration may result in the revocation of the preferential tax treatment, leading to late payment surcharges and penalties. Thus, companies that offer equity- based compensation to qualified employees should ensure that relevant conditions, including tax registration, are fulfilled in a timely manner.
Taxation of equity-based compensation can be complex, as the features and conditions of each equity grant can vary, and taxation rules in different jurisdictions can be complicated, especially for international assignees. For example, the nature of the income (employment income vs. capital gain), the sourcing of the income (especially for international assignees working in different countries/regions over the vesting period), the taxation rules adopted in different countries/regions (some determine the sourcing based on grant while others based on vesting), the trailing liability, the respective reporting and withholding obligations at home and host countries/regions etc.
In addition to the tax related compliance requirement for equity-based compensation, companies should also review and ensure that the compliance requirement from the State Administration of Foreign Exchange (“SAFE”) perspective has been duly completed. From our experience, companies may sometimes confuse the tax registration with the SAFE registration for equity plans. It is important to note that these are two different compliance requirements serving different purposes. The SAFE registration is a forex compliance requirement for overseas companies that offer equity-based compensation to Chinese nationals and to facilitate inward/outward fund remittance.

Czech Republic | Amended Income Tax Acts
As of 1 January 2024, the amended Income Taxes Act came into force, and introduced significant changes to the taxation of the employee equity-based plans.

The amended legislation applies to employees who acquire shares or options from their employer, or from this employer’s parent company, subsidiary, or other related joint-stock corporation.

The amended law explicitly defines the taxable moment of the non-monetary benefit for employees and provides for tax deferral. The taxable moment, that was absent in the tax legislation until now, has been completely redefined for most situations. Possible taxable moments are:

The employee ceases to perform dependent activity with the employer (also economic employment is included in the definition).
The employer goes into liquidation,
The employee or employer ceases to be a Czech tax resident,
Transfer (sale) of shares or options,
Exercise of an option (relates to tradable options only),
10 years from the date a share was acquired,
The share exchange, when the total nominal value of the employee’s shares changes.

The above taxable moments may differ from the tax treatment applied until the end of 2023 i.e., imposing tax at the vest of shares, or at the exercise of options. The “new” taxable moments may occur significantly later.

The Takeaways
Employees are now obliged to inform their employer about the transfer (sale) of shares or options by the end of the calendar month in which the transfer took place. For example, if an individual performs a “cashless” exercise (i.e. an exercise and immediate sale of the underlying shares), the taxable moment will arise at that time. However, there are other facts that might be difficult or even impossible to determine in a timely manner for the employer, such as a change of tax residence. It can be expected that the employer will often be delayed with the relevant tax payments and will thus be subject to possible sanctions.

Furthermore, it will be necessary to monitor changes in the shares’ market price, as the amended law allows (under certain conditions), to consider reducing the value of shares to be taxed. This again imposes additional administrative requirements on the employer and responsibility for determining the correct amount of taxable income. At this time, there is no prescribed threshold for how much of a decline in stock price will allow for a reduction in the taxable amount. The employee must inform the employer as of the date of sale of the shares.

We recommend to all the employers who are involved in the equity-based plans of their employees (i.e., manage the equity-based plans, or bear the relevant costs) to inform their employees in advance of their obligations, including to notify the employer of when a sale of shares occurs.

Where shares or options are acquired from another company in the group that is not considered a Czech taxpayer and the related equity costs are not borne by the Czech employer, the employee will be obliged to report this income in his/her tax return for the taxable period in which one of the taxable moments occurs. The employees will thus need to keep proper evidence of their equity disposal or change in the stock price.

Considering the possible shift of the taxable moment as of 2024, where taxable moments may arise many years after the shares vested / options were exercised, the logic of who should be authorized for the Czech tax return preparation due to trailing income should also be reviewed.

The Czech tax authorities are already discussing possible adjustments to the above and some of the taxable moments may be changed or completely removed from the law in the future.

The above changes have not been reflected in the Czech social security and health insurance laws. The relevant taxable moment for the contributions remains the same as in 2023 (vesting of shares or exercise of the options) and can lead to different moments for income taxation and for payment of mandatory public insurances.

Korea | Stock-based Compensation Changes and Notice of Legislative Action
As of 1 January 2024, stock-based compensation issued to employees will trigger additional reporting requirements. Amendments to the Enforcement Decree of the Income Tax Act (the “ITA Enforcement Decree”) pursuant to the amendments of the Income Tax Act, now mean that stock-based compensation granted to the Korean resident employees by overseas parent company (or the overseas controlling shareholder) must be reported to the National Tax Service of Korea.

The Korean employer entity must submit the transaction details (e.g., details of grant, exercise and payment of share based compensation) by 10 March of the year following the taxable period when the exercise or payment of stock based compensation occurred. This rule will be applied to stock-based compensation exercised (or paid) on or after 1 January 2024.

Notice of Legislative Action
On 29 December 2023, the Financial Services Commission (the “FSC”), which is the competent government ministry with regulatory oversight over the Financial Services and Capital Markets Act (the “FSCMA Enforcement Decree”), issued an advance notice of legislative action which will allow Korean resident employees of multinational companies, who acquired the securities through the stock- based compensation program, to dispose of overseas-listed securities without using Korean licensed brokers.

This notice comes in response to the concerns expressed over regulatory uncertainty caused by the June 2023 rule issued by the Financial Supervisory Service (the “FSS”), which, amongst other things, required employees to open a domestic broker account and request to transfer their foreign-listed shares from their foreign broker account to their domestic broker account in order to be compliant with the regulatory changes.

The proposed legislative action will take the form of an amendment to Article 184(1) of the FSCMA Enforcement Decree and may become effective as of late February or early March 2024 once it is promulgated after a public comment process.

Contact us
Thank you to our local colleagues for their support in drafting this update. For a deeper discussion on the above, please reach out to your Vialto Partner point of contact, or alternatively:

AmyLynn Flood
Americas

Marc Bosotti
APAC

Gemma Ludwig
EMEA

Further information on Vialto Partners can be found here: www.vialtopartners.com

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Vialto Partners (“Vialto”) refers to wholly owned subsidiaries of CD&R Galaxy UK OpCo Limited as well as the other members of the Vialto Partners global network. The information contained in this document is for general guidance on matters of interest only. Vialto is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. In no event will Vialto, its related entities, or the agents or employees thereof be liable to you or anyone else for any decision made or action taken in reliance on the information in this document or for any consequential, special or similar damages, even if advised of the possibility of such damages.

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