employee long-term stock- based incentive...
TRANSCRIPT
Employee longbased incentive plans
Tax Flash ReportPwC Russia, Issue No. 6 (242), March 2011
www.pwc.ru
PwC
Employee long-term stock-based incentive plans
PwC Russia, Issue No. 6 (242), March 2011
Employee long-term stock-based incentive plans
Now that the Russian Federal Service for Financial Markets Order No. 10
Confirming the Procedure for Determining the Settlement Value of Unquoted
Derivatives for the Purposes of Chapter 25 of the Tax Code of the Russian Federation”
(the “Order of the FSFM”) has come into effect, a fresh perspective is required when
considering the taxation of individuals who participate in long
incentive plans. In particular the changes affect stock
Until 2010, the tax legislation did not provide for the taxation of individuals when
concluding option contracts. The generally accepted approach was that stock option
participants’ taxable income was generated when the option was exercised, while the
procedures for taxation of the option premium were not described by the tax
legislation. Starting from 2010, amendments were made to Chapter 23 of the Russian
Tax Code (the “Tax Code”) that specifically introduced new rules for taxing individuals’
transactions with derivatives, including unquoted option contracts. The amended
Article 212 of the Tax Code prescribes that the material benefit from purchasing
derivatives is to be determined if such derivatives were purchased below the market
price.
What has changed?
There is a risk that income for stock option plan participants arises when the options
are granted, i.e., when the participants enter the plan. Under Chapter 23 of the Tax
Code, the taxpayer retains the liability to determine material benefit upon exercising
the option, and it is impossible to account for expenses related to paying tax when
obtaining the corresponding derivative. The taxation risk present on two stages of the
stock option plan makes it significantly less attractive for potential participants.
When do participantsreceive taxable income?
PwC
stock option plan makes it significantly less attractive for potential participants.
Before December 2010, when the Order of the FSFM came into force, the legislation
did not determine the procedures for calculating separate indicators that are required
for calculating unquoted derivatives’ market value (including premiums under option
contracts). This significantly limited the possibility of acknowledging stock option plan
participants’ income as material benefit when such participants were granted options.
After the Order of the FSFM was published, the gaps in the legislation were eliminated,
and the issue of taxing stock option plan participants at the two stages of exercising
those options became critical.
The securities market legislation gives quite a broad definition of an option contract.
Analysis of traditional stock option plans for compliance with this definition does not
allow the assumption that, formally, the above programmes cannot be attributed to
such contracts.
We believe it is unlikely that lawmakers intended for there to be two
stock option plan participants. Moreover, we believe that the imposition of tax on stock
option plan participants, both at the entering stage and upon exercising options, is in
conflict with the economic substance and legal nature of an option contract.
Nevertheless, the tax authorities can, following the letter of law, demand tax not only
for exercising options, but also when participants enter stock option plans. Therefore,
we believe there is a risk that long
stage taxation. In order to properly assess this risk, each plan’s conditions need to be
analysed in detail. We are considering the possibility of alleviating the risk by changing
current plans’ conditions or structuring alternative plans that would properly tackle
employee incentive issues, with all the features of option contracts reduced to a
minimum.
What about doubletaxation?
based incentive plans
Now that the Russian Federal Service for Financial Markets Order No. 10-67/pz-n “On
Confirming the Procedure for Determining the Settlement Value of Unquoted
Derivatives for the Purposes of Chapter 25 of the Tax Code of the Russian Federation”
(the “Order of the FSFM”) has come into effect, a fresh perspective is required when
considering the taxation of individuals who participate in long-term stock-based
incentive plans. In particular the changes affect stock option plans.
Until 2010, the tax legislation did not provide for the taxation of individuals when
concluding option contracts. The generally accepted approach was that stock option
participants’ taxable income was generated when the option was exercised, while the
procedures for taxation of the option premium were not described by the tax
legislation. Starting from 2010, amendments were made to Chapter 23 of the Russian
Tax Code (the “Tax Code”) that specifically introduced new rules for taxing individuals’
transactions with derivatives, including unquoted option contracts. The amended
Article 212 of the Tax Code prescribes that the material benefit from purchasing
derivatives is to be determined if such derivatives were purchased below the market
There is a risk that income for stock option plan participants arises when the options
are granted, i.e., when the participants enter the plan. Under Chapter 23 of the Tax
Code, the taxpayer retains the liability to determine material benefit upon exercising
the option, and it is impossible to account for expenses related to paying tax when
obtaining the corresponding derivative. The taxation risk present on two stages of the
stock option plan makes it significantly less attractive for potential participants.
2March 2011
stock option plan makes it significantly less attractive for potential participants.
Before December 2010, when the Order of the FSFM came into force, the legislation
did not determine the procedures for calculating separate indicators that are required
for calculating unquoted derivatives’ market value (including premiums under option
contracts). This significantly limited the possibility of acknowledging stock option plan
participants’ income as material benefit when such participants were granted options.
After the Order of the FSFM was published, the gaps in the legislation were eliminated,
and the issue of taxing stock option plan participants at the two stages of exercising
those options became critical.
The securities market legislation gives quite a broad definition of an option contract.
Analysis of traditional stock option plans for compliance with this definition does not
allow the assumption that, formally, the above programmes cannot be attributed to
We believe it is unlikely that lawmakers intended for there to be two-stage taxation of
stock option plan participants. Moreover, we believe that the imposition of tax on stock
option plan participants, both at the entering stage and upon exercising options, is in
conflict with the economic substance and legal nature of an option contract.
Nevertheless, the tax authorities can, following the letter of law, demand tax not only
for exercising options, but also when participants enter stock option plans. Therefore,
we believe there is a risk that long-term stock option plan participants will face two-
stage taxation. In order to properly assess this risk, each plan’s conditions need to be
analysed in detail. We are considering the possibility of alleviating the risk by changing
current plans’ conditions or structuring alternative plans that would properly tackle
employee incentive issues, with all the features of option contracts reduced to a
As for other important aspects of the taxation of long
the Russian Ministry of Finance has formed its viewpoint on the creation of tax
liabilities related to remuneration received while working in Russia. Based on this
viewpoint, when analysing the tax implications of such long
mobile employees (including foreign employees who were working in Russia when
options were granted or during an interim period, but were tax non
those options were exercised), it is necessary to remember that remuneration paid to
participants of such plans should be attributed to income from Russian sources to the
extent it relates to working in Russia. Therefore, a participant may have Russian tax
implications that include the obligation to file a tax return, even if at the moment of
exercising the option the participant is not a Russian tax resident and the income is
received from a foreign company, but for a period of time between entering the plan
and option exercising he/she worked in Russia. This approach corresponds to
international tax practice.
It is our hope that the Russian Ministry of Finance will clarify its viewpoint and
intentions related to the taxation of long
stages of participation in such plans soon, and we will inform our clients on the
outcome.
Other important issues
PwC
As for other important aspects of the taxation of long-term incentive plan participants,
the Russian Ministry of Finance has formed its viewpoint on the creation of tax
liabilities related to remuneration received while working in Russia. Based on this
viewpoint, when analysing the tax implications of such long-term incentive plans for
mobile employees (including foreign employees who were working in Russia when
options were granted or during an interim period, but were tax non-residents when
those options were exercised), it is necessary to remember that remuneration paid to
participants of such plans should be attributed to income from Russian sources to the
extent it relates to working in Russia. Therefore, a participant may have Russian tax
implications that include the obligation to file a tax return, even if at the moment of
exercising the option the participant is not a Russian tax resident and the income is
received from a foreign company, but for a period of time between entering the plan
and option exercising he/she worked in Russia. This approach corresponds to
international tax practice.
It is our hope that the Russian Ministry of Finance will clarify its viewpoint and
intentions related to the taxation of long-term stock option plan participants at all
stages of participation in such plans soon, and we will inform our clients on the
3March 2011
Contacts in RussiaDavid John
PartnerLeader, Tax and Legal Services (TLS)david.с[email protected]
Irina Martakova
Partner, TLS CIP(Consumer and Industrial Products)
Denis Gorin
Partner, TLS EU&M(Energy, Utilities and Mining)
Natalia Milchakova
Partner, TLS TICE(Technology, Communication,Entertainment and Media)
Karina KhudenkoPartner, Human Resource [email protected]
Natalia Kuznetsova
Ekaterina LazorinaPartnerTLS Financial [email protected]
Galina Naumenko
PartnerMergers & Acquisitions Tax Services
Vladimir Konstantinov
Partner, IndirectTax Services and Customs
Kirill Nikitin
Partner, Tax Managementand Accounting [email protected]
Yana ZoloevaPartnerLeader, Legal [email protected]
Evgeny Sivoushkov
PwC
© 2011 PricewaterhouseCoopers Russia B.V. All rightsreserved.In this document "PwC" refersto PricewaterhouseCoopers Russia B.V., which is amember firm of PricewaterhouseCoopersInternational Limited, each member firm of which is aseparate legal entity.
Natalia Kuznetsova
Partner, International Tax Structuring
Evgeny [email protected]
Contacts in RussiaLazorina
TLS Financial [email protected]
Mergers & Acquisitions Tax Services
Konstantinov
Tax Services and Customs
Partner, Tax Managementand Accounting [email protected]
Leader, Legal [email protected]
SivoushkovSivoushkov