Navigating Global Incentive Plans

When operating a global share plan, one of the key considerations is whether it is possible to do so under local securities laws and foreign exchange controls. In many cases there will be an exemption available for employee share plans, however, sometimes local securities laws will make the award of share-based incentives impossible or impractical, in which case alternatives such as cash-settled plans may be necessary. Even with cash arrangements, businesses need to be mindful of any exchange control restrictions on the flow of funds into and out of a particular country. 

Securities Laws

Businesses need to check whether they have to produce a prospectus or file supporting documents with local regulators before offering share plans to their employees. The penalties for non-compliance can be significant, and in federal countries compliance may be required at both state and national levels. Additionally, employees working across borders may trigger multi-country requirements.

In addition, employees in some countries will have personal disclosure obligations in relation to their participation in a share plan. Although companies should not provide personal advice to them, they can inform participants of these obligations in general terms while making it clear in the plan documentation that responsibility for compliance rests with the individual.

Foreign Exchange Requirements

Care is needed when a share plan involves the transfer or holding of funds across borders. Certain countries only permit foreign exchange transactions to be undertaken through authorised banks or require a domestic agent to register with a local foreign exchange office, adding further administrative complexity.

The tax landscape for global share plans is intricate and varies between countries. In the UK, there are a number of share plans that can benefit from tax advantages such as Enterprise Management Incentive Plans (EMI), Company Share Option Plans (CSOPs), Save-as-you-earn Plans (SAYE) and Share Incentive Plans (SIPs). Similar regimes can be found internationally such as Incentive Stock Options (ISOs) or Employee Share Purchase Plans (ESPPs) in the US, or free share arrangements in France.

Finding locally tax efficient arrangements

While consistent tax treatment is desirable, this is often unattainable due to differing rules and rates. In the UK, businesses may favour capital gains treatment over an arrangement that is taxed as income because of significant differences in the way in which employment income and capital returns are taxed. 

In other countries, this distinction may not exist or may be less relevant. Therefore, the potential savings of adopting a locally tax efficient arrangement must be weighed against the added complexity and cost of both implementation and ongoing maintenance.

Timing of tax charges

Although the tax treatment of share options or awards will vary from country to country, the key is to avoid so-called 'dry' tax charges where employees have to pay tax before receiving any realised benefit (for example, on the grant of a share option that hasn't yet vested or become exercisable). Global share plans should be designed to ensure that, if at all possible, tax charges and withholding obligations are only triggered when the participant receives value.

It is important to note, however, that some countries have specific tax rules that apply to deferred compensation, such as the 409A regime in the US. Therefore, assuming that deferral is a tax neutral act, without getting appropriate legal advice, could lead to unexpected (and unwelcome) tax consequences. 

Payment of tax charges

It is essential that local payroll and finance teams are fully briefed on how the global share plan works and when and how tax withholding obligations will arise. 

Some multinational groups opt to implement a uniform "blended" tax rate at the point of tax withholding, often calculating the deduction at the highest possible rate. This approach simplifies administration but requires a subsequent "truing up" process, where employees are reimbursed or, occasionally, required to repay any shortfall through their local payroll arrangements. Importantly, if this method is adopted, it must be clearly incorporated into the share plan documentation to establish a valid legal basis for potential adjustments.

Recharging costs

Some countries allow local employers to claim a corporate tax deduction for the recharged costs of operating a group share plan on a proportional basis. This can offer tax efficiencies across the group, but it is a potentially complex process. Internal finance and accounting teams play a key role and should be involved early to ensure the structure remains tax-efficient and operationally feasible, even if they are not part of the initial design phase.

Reporting obligations

Ongoing monitoring and reporting should also be maintained across the group. Establishing a timely internal reporting policy supports accurate and effective information exchange between the parent company and its subsidiaries, facilitating compliance with reporting requirements at both local and group levels.

Robust internal reporting systems also support effective management of leavers, ensuring correct handling of tax and accounting matters when employees exit the plan or the business. By setting clear internal guidelines, companies can manage compliance risks and minimise last-minute reporting issues.

The principle of equal treatment is key in many countries and is often supported by laws that enforce non-discrimination. In some cases, there may be an explicit requirement for equal access to share plans for all employees or all the employees within a particular group company or business. In such cases, companies seeking flexibility in plan participation should explore whether it is possible to design schemes that allow for some discretionary inclusion based on objective criteria, such as seniority or length of service. Care should also be taken to ensure that the operation of plan rules (for example in relation to leavers) does not breach local laws.

In certain countries there may be different regulatory requirements depending on the nationality of employees. Thorough legal due diligence is essential to ensure that global share plans remain compliant and fair across all relevant markets.

Translation of Documents

Language is also a practical consideration, as the need for local translations can add both time and cost to the process. Where a parent company operates a global share plan for its international subsidiaries governed by the same set of rules, maintaining a single language version is generally preferred. However, whether a single language document is enforceable may depend on the employee’s understanding of, and consent to, its contents. It is therefore advisable to obtain explicit confirmation from employees that they agree to receive documents in the chosen language and understand them.

Aside from the legal aspects, translating explanatory guides and supporting documents into local languages will clearly help to encourage employee support for the plan.

Restrictions on Payroll Deductions

Participants in a plan might be required to fund the purchase price of their shares, as well as any tax liabilities that arise on acquisition. While it may seem reasonable for employees to authorise these costs to be met from their net of tax salary, some countries impose rules on how such authorisation must be obtained. There may also be other restrictions such as a cap on the maximum amount that can be deducted from an employees' pay. In these cases, alternative arrangements, such as direct bank transfers, may be necessary.

It is also important to consider any national minimum wage laws to ensure that an employee's pay after deductions does not breach statutory requirements.

Whilst it is not possible to provide an exhaustive list, businesses will also need to consider local data protection rules, sector specific regulatory requirements and corporate governance issues. Businesses should also be mindful of local history and cultural sensitivities before launching a global share plan. For example, timing the launch to avoid major holidays or religious events in each country is important.

Rolling out a global share plan requires significant investment of time and coordination across a multinational group, as well as collaboration with external advisors and administrators. Ultimately, success hinges on thorough preparation, clear communication, and the ability to anticipate and deal with regulatory, legal, and tax complexities. By focusing on these fundamentals, businesses can ensure their global share plans are well received and deliver real value to the group and its employees.