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 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
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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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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.
– 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)
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
French-qualified Awards – Employee Taxation differs for Options / RSUsRSUs• 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% rateNote: you do not get 27% on all income as with options and
if sale prior to vesting/share holding periods, then entire amounts disqualified
• 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.
• 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
• 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
• 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 emails in English. Recommend waiver in English/French
• 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.
Changes to French-qualified Awards – Expected end of November 2007• Oct. 2007 - 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
• 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
UK Employee TaxationRestricted 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.
• 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
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
• 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
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
• 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
• 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