In this month’s update, important information about the United Kingdom, India, Nigeria, New Zealand and Sweden.
UK Share Schemes Annual Reporting Deadline – 6 July 2016
All companies in the UK or overseas operating a share plan with UK participants are required to complete an online return for both UK tax advantaged and non tax advantaged share plans by 6 July 2016 for the tax year 2015/16 to avoid any late filing penalties.
If you are making a filing for the first time, the scheme will first need to be registered with the HMRC through the HMRC Online Services Portal. The registration process may take up to a week so it is important to complete this step as soon as possible.
Once a scheme has been registered a filing should be completed, and if no ‘reportable events’ have occurred within the tax year, you should file a ‘nil return’. If a plan has ceased then a closure event needs to be reported.
Please contact us if you require any assistance with the returns process.
Shareworks Global Compliance comments:
Whilst measures have been put in place by the HMRC to avoid the technical difficulties experienced last year by many companies, it would be wise to complete the 2015/2016 returns process in good time to ensure a smooth process.
Court decision regarding the tax treatment of options exercised by mobile employees
The Chennai Bench of the Income-tax Appellate Tribunal (the Tribunal) recently ruled that the value of Stock Appreciation Rights (SARs) received by employees of an Indian subsidiary of a US parent company is taxable as income (rather than as a capital gain), either as a benefit or as a perquisite. Furthermore, as the taxpayers were resident in India at the time of exercise, they were held to be liable to tax on the full amount, regardless of the fact that they had been non-resident in India during the vesting period. This gave rise to double taxation for the taxpayers as they were taxed on the full amount in India and on an apportioned basis in the US.
The Tribunal stated that, as the SARs were granted under an employee equity scheme, they were considered to be compensation for the services provided to the Indian subsidiary. In addition, as the grant of SARs was made to the employees in addition to salary, they were therefore considered to be a benefit or perquisite, irrespective of whether the employees had been providing services to the US parent company outside India during the vesting period.
However, the Tribunal did submit the matter back to the assessing officer for further analysis as to the double taxation implications of the decision, i.e. whether the taxpayers would also be required to pay taxes on the SARs in the US under the double tax treaty provisions between India and the US.
Enforcement of employer withholding obligation
Recently, the Federal Inland Revenue Service (FIRS) has intensified its efforts to recover unpaid taxes and enforced compliance with tax law provisions, including withholding tax obligations of employers. Companies across the country have been scrutinized. Companies are advised to ensure full compliance with any tax filing and payment obligations.
Proposed changes to the taxation of employee share scheme (ESS) benefits
The Inland Revenue has issued proposed changes to the taxation of certain conditional employee share schemes benefits (ESS). The proposal will impact the taxation of ESS with features that make the arrangement similar in economic effect to an option to acquire shares.
It is proposed that the taxable benefit be determined when the shares are held free from any substantive conditions. Generally, in respect of listed shares, the substantive conditions will not have met when:
- there is still a real risk of forfeiture
- employment-related conditions have not been satisfied
- contingent rights associated with the shares have not been exercised or extinguished
In comparison, under the current rules the tax point occurs when the shares are acquired. Under the proposal, as the tax point will arise at a later time when the economic right to the shares will have fully vested, the shares will have potentially increased in value and there will be a larger taxable benefit.
In addition, it is proposed to:
- allow a deduction for the cost of shares issued under an ESS equal to the employee’s share benefit income (deductible when it is taxable for the employee); and
- introduce additional employer reporting obligations
For existing ESS benefits, there are limited transitional rules, which would expire at the end of the third full year following enactment.
Shareworks Global Compliance comments:
Employers in New Zealand operating share plans are advised to be aware. If implemented, they will need to assess the impact of the proposals on the tax treatment of their incentive arrangements. They will need in particular to consider the transitional arrangements that apply to ensure that they comply with both the old and new provisions as appropriate.
Proposed changes to tax treatment
A committee appointed by the Swedish government to review the taxation of equity incentive schemes has recently published proposals to introduce qualified stock options.
The current position is that income tax is due on option exercise at rates of up to 61.74% (including municipal income tax). Under the new regime, qualified stock options would not be taxed at exercise but would instead be taxed on the eventual sale of the underlying shares when capital gains tax (rather than income tax) would be payable at a rate of 25% (non-quoted shares) or 30% (quoted shares).
A number of criteria must be satisfied by the grantor company for stock options to be considered qualified: it must have fewer than 50 employees, it must have net annual sales below SEK 80 million and it must not have been in business for more than seven years. In addition, certain industries are excluded from being able to grant qualified stock options, such as finance and insurance.