Employee Share Plans in Europe and the USA - Sorainen

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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
Employee Share Plans in Europe and the USARussian Federation4.3 Tax withholdingproviding the securities, there are no payments or compensationconnected to the employee's employment contract and, consequently,no basis on which social security contributions can arise.Social security contributions are paid to the social security funds, (i.e.the Pension Fund, the Social Insurance Fund and the CompulsoryMedical Insurance Fund). Social security contributions are capped onincome up to RUB 415,000 for 2010. The total contribution rate is set at26% for the 2010 calendar year and 34% for 2011. 13The employer has the duty to withhold individual income tax if an employeepurchases shares at less than market value directly from the employer.However, it is less clear whether the withholding obligation arises for theemployer if the shares are provided to an employee by the employer's parentcompany or another third party. 14Should the duty to withhold arise, the employer must withhold the income taxfrom any cash payments made to the employee, i.e. from the employee's salaryor other remuneration. If the employer is not able to withhold the income tax (e.g.if the amount of salary paid in cash is insufficient to cover the amount of incometax for the particular month in which it is to be withheld), the employing entitymust notify the tax authorities of this in writing within one month after the date onwhich the withholding obligation arises. It should be noted that withholdings from13The 34% rate, which comes into effect from 1 January 2011, will be unified for most categories oftaxpayers (e.g. there will be no exemption available for taxpayers using the simplified tax system).However, certain groups of taxpayers will benefit from a 4-year transitional period (e.g. the rates forresidents of special economic zones would be limited to 20.2% in 2011 – 2012 and 27.1% in 2013 –2014.14 According to the Russian Tax Code, individual income tax is to be withheld by the employing entityfrom any income that an individual employee receives from it or which originates as a result of therelationship with it. This wording can be interpreted quite broadly, and if an employee purchasesshares in its employer's parent company at less than their market value, whether directly from theparent or from a third party, there may be room to argue that the employee has obtained the benefitonly due to his employment with the employer, i.e. as a result of the relationship with the employer,which may give rise to the further argument that the employer should withhold individual income tax.On the other hand, however, one might argue that as long as (i) the parent company does not providethe employer with any calculation of the benefits realised by individual employees in Russia, and (ii) nocosts associated with selling the shares to the employees at less than market value are charged backto the Russian employer, then no withholding tax liability should arise for the local employer, as it wouldsimply lack the information necessary to calculate and withhold the tax due.UK/1729295/03 166 September 2010
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Employee Share Plans in Europe and the USA - Sorainen

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