Employee Share Plans in Europe and the USA - Sorainen

Employee Share Plans in Europe and the USARussian FederationFor the 2010 tax year the tax rate is 13% for Russian tax residents(individuals who have spent more than 182 days during 12 consecutivemonths in the Russian Federation) and 30% for non-residents.4.1.2 Social security contributions: Social security contributions should notbe due from employees, since, in general, social security contributions inRussia are payable by the employer rather than the employee.4.2 Employer tax and social security contributions4.2.1 Corporation tax deduction: Generally it is unlikely that any corporationtax deduction will be available to a Russian company for any costsrelated to granting shares to its employees for free or at less than theirmarket value. However, if the opportunity to purchase shares in anemployer's parent company at less than market value is expresslyprovided for in the relevant employment contract (e.g. by reference to anincentive plan offered by the employer, in which the terms andconditions for purchasing such shares at less than market value are setout), then the Russian employer could attempt to argue before theRussian tax authorities that the relevant costs are deductible.4.2.2 Social security contributions: A Russian employing entity maybecome liable for payment of social security contributions incircumstances where it sells its shares to its employees at less thanmarket value or otherwise absorbs the costs of the securities being soldto its employees at less than market value (e.g. if the costs are chargedback to the Russian employing entity).Although the position is less clear in circumstances where a Russianemploying entity neither provides its securities to its employees at lessthan market value nor incurs any costs associated with the employeeshare plan, there may be good arguments to support the view that nosocial security contributions should be due from the employer. This isbecause, as a matter of Russian law, in the absence of partialsatisfaction of the securities price or payments to third parties which areon a stock exchange. The Russian tax authorities have indicated that in the absence of rules fordetermining the market price of non-traded securities established by the FSFM, the material benefit onthe acquisition of such securities shall be determined based on methodology approved by a sellingentity. It is not entirely clear that this is correct from a legal standpoint.12To determine the taxable income arising upon the purchase of Russian securities at less than marketvalue, the fair market price is adjusted downward by a statutory price fluctuation coefficient of 20% (i.e.for tax purposes the market value is considered to be 80% of the market price). It is not entirely clearwhether this statutory fluctuation coefficient is also applicable to the purchase of foreign securities.UK/1729295/03 165 September 2010