Global Equity and Reward
Global Equity update | January – July 2024
Summary
Our Global Equity update includes the following articles:
Argentina: Stock Based Compensation Changes
Canada: Stock Options Deductions
Czech Republic: Equity Based Compensation amendment
El Salvador: Foreign Income Exemption
Germany: Taxation of stock options in accordance with the new circular letter of the Federal Ministry of Finance dated December 12, 2023
Hong Kong: Submission of Submission of Employer’s return in computerized format
Korea: Stock-based Compensation Changes – Update
US: Change in the definition of wages under the Colorado Family and Medical Leave Insurance (FAMLI) program
The detail
Argentina | Stock Based Compensation Changes
A compensation income reform was passed by Congress through Federal Law 27,725 (October 2023), which created a new income tax regime called in Spanish ‘Imposición Cedular sobre Altos Salarios,’ or ‘Tax on Highest Income.’ This regime replaced the previous system in Argentina and, despite the fact the basis of the system is quite similar, there are some differences between both systems that should be noted
As equity income is treated as compensation income in Argentina, these changes should be considered when reporting equity funds.
New regime: Imposición Cedular sobre altos salaries (Tax on the Highest Income)
| Net income in excess of 180 MVS | Will pay | |||
| From | To | Fixed tax | Plus % | In excess of |
| 0 MVS | 12 MVS | 0 MVS | 27% | 0 MVS |
| 12 MVS | 36 MVS | 3,24 MVS | 29% | 12 MVS |
| 36 MVS | 60 MVS | 10,2 MVS | 31% | 36 MVS |
| 60 MVS | 84 MVS | 17,64 MVS | 33% | 60 MVS |
| 84 MVS | and onwards | 25,56 MVS | 35% | 84 VS |
Old regime: Régimen de Cuarta Categoría (Fourth Category Regime)
Still applies for executive branch secretaries, deputies and senators of the legislative branch, directors, trustees, and members of the board of corporations and equivalent positions, in other entities such as associations, foundations, and cooperatives.
Canada | Stock Options Deductions
Following the budget announcement in April 2024, which proposed reducing the stock option deduction from 1/2 to 1/3 of the taxable amount for individuals whose annual combined limit exceeds CAD 250,000, a Notice of Ways and Means Motion (“NWMM”) was issued on June 9, outlining the legislative framework for the new rules. More detailed draft legislation is expected by the end of July.
Although the legislation has not yet been passed by the House of Commons and Senate, once enacted, it is expected to apply retroactively from June 25, 2024.
Companies must swiftly decide how to calculate withholding taxes for stock option exercises occurring on or after June 25, 2024, assuming the options generally qualify for the stock option deduction. Those opting to follow the new framework should promptly notify employees. In the unlikely event the legislation does not pass, taxpayers should be able to reclaim any excess withholding on option income when filing their tax returns. Those who choose to continue applying the 50% deduction rate during the transition period, may be able to apply for taxpayer relief in the unlikely event that the Canada Revenue Agency (CRA) imposes an under-remittance penalty.
Czech Republic | Equity Based Compensation amendment
As of January 2024, the Czech income tax law was significantly amended in relation to equity-based compensation taxation. The taxable moment was deferred from vesting (e.g. RSU)/exercise (stock options)/purchase (ESPP) to later moments (for example sale of shares, change of employee’s or employer’s tax residence status, termination of employment, etc.). While the change was reflected in the income tax law, the Czech social security and health insurance law remained unchanged. This caused quite a significant problem for the equity awards taxed via Czech payroll as these are generally subject to the Czech social security and health insurance contributions.
As of 1st July 2024, the moment when the Czech social security and health insurance is due is aligned with the taxable moment, and similarly the base of the tax/social security and health insurance is the same. The standard Czech social security/health insurance rates apply on equity awards taxed via payroll. There was no change introduced to the Czech social security/health insurance rates as of July 2024.
El Salvador | Foreign Income Exemption
A tax reform to exempt income, including equity income, obtained outside of El Salvador from income tax was announced in the Official Gazette Number 52, dated March 14, 2024. This reform is enacted under Legislative Decree Number 969.
This tax reform, which came into effect March 22, 2024, sees the income tax regime in El Salvador returned to being a purely territorial based system. Subsequently, any income obtained from sources outside of El Salvador are no longer subject to income tax. Income from local sources remains subject to income tax.
Through this reform, certain legal provisions, that prior to its entry into force taxed income obtained abroad, were repealed as follows:
In summary, income which is derived outside of El Salvador is generally not subject to income tax.
Germany | Taxation of stock options in accordance with the new circular letter of the Federal Ministry of Finance dated December 12, 2023
In its letter on the tax treatment of wages under Double Taxation Agreements (“DTAs”), the Federal Ministry of Finance (“BMF”) has taken up the ruling of the Federal Court of Finance (“BFH”) of December 21, 2022 (I R 11/20) and used examples to explain how stock options are to be allocated and taxed in the case of cross-border activity.
Due to the complexity of the topic, we would first like to give you a general overview of the taxation of stock options and then explain the impact of the BFH ruling using an example. There are three key factors for the tax assessment:
Determining the date of the taxable event
In principle, for non-tradeable stock options only the actual exercise and the acquisition of the economic power of disposal over the shares (i.e. when the shares granted are booked into the employee’s deposit) leads to the taxable event of a non-cash benefit. The mere possibility of exercising an option doesn’t generally trigger a taxable event. For simplicity, the day of or the day before the transferor books the shares can be used for payroll accounting purposes. Exceptions to this are the so-called “exercise and sell scheme,” stock appreciation rights or phantom stock awards. As the shares are not physically booked into the securities account, the time at which the stock option right is exercised must be taken into account.
Valuation/determination of the non-cash benefit
The non-cash benefit is calculated as the difference between the lowest market price of the shares at the time of receipt and the acquisition price. In the case of non-tradable shares, the fair market value at the time of receipt must be considered.
Allocation of the taxation right in the case of cross-border activity
Non-tradable stock options merely represent the granting of an opportunity. The non-cash benefit is therefore to be regarded as remuneration for the entire earnings period. The so-called “vesting period”, i.e. the period between the granting of the option (grant) and the first possible exercise (vest), is decisive for the allocation. The actual working days within the vesting period must now be taken into account.
Previously, the non-cash benefit was allocated according to the allocation of the right to tax the current salary in the vesting period.
However, the BFH contradicts this in I R 11/20, which the BMF has now taken up. The residence at the time of receipt has an additional decisive impact. In this respect, the residence in the vesting period is no longer relevant. Only taxation rights during the vesting period based on the so-called allocation articles of the DTA are taken into account in combination with the residency according to the DTA at the time of receipt.
Example
An employee receives stock options for the period 01 to 04 (= earning period). In years 01 and 02, the employee was on assignment and solely resident in the host country. In 01 and 02, they physically carried out their employed activity on 185 working days in the host country, 20 days in Germany and 15 days in third countries, totaling 220 working days per year. In the years 01 and 02 they were exclusively resident and taxable in the host country. In the years 03 and 04, the employee was resident exclusively in Germany and worked 220 days in each year.
According to the old legal interpretation, the non-cash benefit was allocated according to the taxation right of the regular salary in the vesting period (year 01 and 02 host country, year 03 and 04 Germany). Thus, 440/880 (= 50%) of the non-cash benefit would be allocated to the host country and exempt from German taxation and 440/880 (= 50%) would be subject to taxation in Germany.
However, according to the BFH ruling of I R 11/20, the residency at the time of receipt must be taken into account. As the employee is resident for tax purposes in Germany at this time, the non-cash benefit is only tax-exempt to the extent that the foreign country has the right of taxation in accordance with Art.15 of the OECD Model Tax Convention. Consequently, Germany has the right of taxation for physically exercised working days in Germany and third countries and only the portion relating to the workdays spend in the host country in year 01 and 02 of 370/880 of the non-cash benefit is tax-exempt.
A query within the Vialto Partners network has shown that a large number of countries do not share the German perspective and that double taxation can therefore occur.
Wage tax aspects
It should be noted that a domestic group company is obliged to deduct wage tax, even if a foreign group parent company issues the equity plan. However, the application of the one-fifth rule may be applied in the case of remuneration for activities lasting several years.
This is the case if the term between granting and exercising the option was more than twelve months and the employment relationship continued for at least twelve months after the option was granted.
The employment relationship no longer has to exist when the option is exercised. Only the term of the individual share options of more than twelve months with simultaneous employment by the employer is decisive. It is not detrimental if an employee does not exercise share options in full in a single tax year or if share options are granted repeatedly and the options in question are not exercised all at once.
In the course of the new legislation “Wachstumschancengesetz” it is planned that the one-fifth rule will be abolished for the payroll process as of 1 January 2025 and it will then only be applicable within the individual income tax return.
An annual tax-free allowance of EUR 2,000 (EUR 1,440 until December 31, 2023) can be taken into account if the equity participation program is open to at least all employees who have been employed by the company for one year or longer without interruption at the time the offer is announced, Section 3 no. 39 EStG. For small and medium sized companies’ special regulations for a tax deferral may apply (Section 19a EStG).
Hong Kong | Submission of IR56B Requirements
From April 1, 2024 onwards, the Hong Kong Inland Revenue Department (IRD) will no longer accept the submission of IR56B records used to report taxable remuneration (including equity income) through any removable storage device e.g. floppy disk, etc.
To file the IR56 Form through the IRD’s Employer’s Return e-Filing Services, employers still using IRD IR56B Software are advised to switch to use the IR56 Forms Preparation Tool to prepare the IR56B data file. The IR56 Forms Preparation Tool is a web-based application developed by the Department to provide a convenient way for employers to prepare up to 2,000 sets of IR56B or IR56F record in one single data file. The Preparation Tool can be used by employers without any installation process. Employers can designate a person to use the Preparation Tool to prepare the IR56B or IR56F data file online anytime.
For employers still using Employer’s Self-developed Software which prepare IR56 Form data file in TXT format, they are required to enhance their software in accordance with the requirements specification (xml file or xml schema for the Form IR56B) and send the testing file through the e-application of electronic services for the IRD’s approval.
Korea | Domestic Broker Update
June 19, 2023 – The Financial Supervisory Service (the “FSS”) issued a notice, 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.
December 29, 2023 – The Financial Services Commission (the “FSC”), issued an advance notice of legislative action which will allow domestic resident employees of multinational companies, who acquired the securities through the stock-based compensation program, to dispose of overseas-listed securities without using a domestic broker.
March 5, 2024 – UPDATE – The Korean government adopted the amendments to the Enforcement Decree of the Financial Services and Capital Markets Act “FSCMA Enforcement Decree” on February 27, 2024, which became effective as of March 5, 2024.
This means, as of March 5, 2024, domestic employees of multinational companies who have acquired shares under a stock-based compensation program may sell such shares without the involvement of a domestic broker and may deposit proceeds from the sale of shares into an account with an overseas financial institution. Employees have the obligation to report such transactions to their designated foreign exchange bank in Korea. Further, the FSS announced that domestic residents who sold foreign-listed shares acquired as compensation through an overseas institution prior to March 5, 2024, will not be penalized (with the exception of a few specific pending cases).
US | Change in the definition of wages under the Colorado Family and Medical Leave Insurance (FAMLI) program
Effective January 1, 2024, the Colorado Family and Medical Leave Insurance (FAMLI) program has revised the definition of wages under the FAMLI Act to use “gross wages” instead of the same definition as unemployment insurance.
Gross wages will NOT include stocks or stock options. Therefore, CO FAMLI is not applicable to stock options, RSUs, and PSUs.
Contact us
For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:
AmyLynn Flood
Americas, Global Equity Lead
Marc Bosotti
APAC, Regional Equity Lead
Gemma Ludwig
EMEA, Regional Equity Lead
Further information on Vialto Partners can be found here: www.vialtopartners.com
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