Employee Share Plans in Europe and the USA - Sorainen

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Employee Share Plans in Europe and the USAHungaryHungary1. Securities law1.1 Offer of securities: As a general rule, the Hungarian Capital Markets Act (theAct) applies to offers of securities. Although not an explicit provision of the Act(nor explicit in any another regulation or guidance) in interpreting the definition ofsecurities the Hungarian Regulator appears to take the view that the provisionsof the Act relating to offers of securities only apply to securities that aretransferable and negotiable on capital markets ("transferable securities").Consequently, where transferable securities are offered to employees, then theprospectus requirement must be followed, if applicable. Where a prospectusexemption applies, then private offer rules will apply instead. Where securitiesoffered to employees are not transferable securities then the provisions of theAct do not apply.Practice indicates that most companies operating share plans in Hungary offersecurities which do not meet the Hungarian Regulator's view of what constitutestransferable securities. The procedure which then appears to be accepted bythe Hungarian Regulator is that in such cases the issuers should follow the rulesfor private offers. Under these rules, an information document setting out therelevant elements of the offer is prepared and a notification is made to theHungarian Regulator.1.2 Regulatory issues: In the absence of specific legal provisions coveringemployee share plans where the securities or options being offered are nottransferable securities, it may be advisable to request a ruling from theHungarian Regulator regarding the launch of such a share plan.1.3 Disclosure: Where the securities or options being offered to employees are nottransferable securities, a notification must be sent to the Hungarian Regulatorand information on the features of the share plan must be provided to employeesin accordance with general practice.The Company should also consider requesting clarification from the HungarianRegulator regarding any other disclosure requirements.2. Exchange ControlsThere are no applicable exchange controls in Hungary.3. Financial assistance3.1 Hungarian company: A company limited by shares is generally prohibited fromproviding financial assistance for the acquisition of its own shares. A companylimited by shares cannot grant loans, provide any security or satisfy third partypayment obligations in connection with the acquisition of its own shares.However, there is an exception to this prohibition where financial assistance isprovided to employees of the company to acquire shares in the company.UK/1729295/03 95 September 2010
Employee Share Plans in Europe and the USAHungary3.2 Hungarian subsidiary of a non-Hungarian company: The sameconsiderations apply as set out in paragraph 3.1 above.4. Taxation of share acquisitions4.1 Employee tax and social security contributions4.1.1 Tax: An employee who acquires shares in his employer or its parentcompany free of charge or at a discount to market value is deemed tohave received employment income. The employment income is equal tothe difference between the fair market value of the shares at the datetriggering the tax liability and the amount paid by the employee for theshares, if any. The tax liability is triggered on the date the employeeacquiring the shares acquires any rights (dividends, voting rights etc.)attaching to those shares.Employment income arising from the acquisition of shares is subject toconsolidation with other income and the consolidated income notexceeding HUF 3,937,000 (approximately €13,000) per annum is subjectto tax at 17.1%. Income in excess of that amount is subject to tax at32%.Shares (worth up to HUF 1,000,000 per annum) received under a shareplan which is reported to, and registered with, the Hungarian fiscalauthorities are exempt from income tax provided a number of criteria aremet and certain administrative requirements are complied with (an"approved employee share plan"). 1 One such requirement is that theshares must be subject to a minimum holding period of at least 2 years.Under such approved employee share plans, the capital gain arising onthe sale of the shares is taxed at the time of sale and the income (i.e. thedifference between the value of the shares when they are first acquiredby the employee and the amount paid for them, if any) is classified as acapital gain, taxed at a rate of 25% (or 20% if the sale takes place on aregulated capital market of an OECD or EEA member state).4.1.2 Social security contributions: Social security charges are payable bythe employee at a rate of 17% on employment income up to HUF7,453,300 and at a rate of 7.5% on employment income in excess of that1The criteria and administrative requirements are complex and impose a signification administrativeburden on local employers. In practice, local employers may find that the tax benefits derived fromregistering the share plan are outweighed by the costs of registering and running such an approvedplan.UK/1729295/03 96 September 2010
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Employee Share Plans in Europe and the USA - Sorainen

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