Employee Share Plans in Europe and the USA - Sorainen

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Employee Share Plans in Europe and the USARussian Federationan employee's salary made by an employer cannot exceed 50% of theemployee's monthly salary.5. Taxation of share options5.1 Employee tax and social security contributions5.1.1 Grant: There is no income tax or social security contributions charge onthe grant of a share option.5.1.2 Exercise: There is an income tax charge on the exercise of a shareoption, at a rate of 13% for Russian tax residents and 30% for nonresidents.As mentioned in paragraph 4.1.1, the tax is assessed on theso-called "material benefit" on the purchase of shares at less thanmarket value. The comments made in paragraph 4.1.1 also apply here.5.1.3 Social security contributions: Social security contributions should notbe due from the employee.5.2 Employer tax and social security contributions5.2.1 Corporation tax deduction: Generally, it is unlikely that a corporationtax deduction will be available for a Russian company that bears thecost of an employee share plan. However, if the opportunity to purchaseshares in an employer's parent company at less than market value isexpressly provided for in the relevant employment contract (e.g. byreference to an incentive plan offered by the employer in which theterms and conditions for purchasing such shares at less than marketvalue are set out), then the Russian employer may at least try to arguebefore the Russian tax authorities that the relevant costs are deductible.5.2.2 Social security contributions: Social security contributions will be dueif the employee purchases the shares at less than market value directlyfrom the Russian employer or if the Russian employer absorbs the costsof the securities being sold to its employees at less than market valueotherwise (e.g. if the costs are charged back to the Russian employingentity). The comments made in paragraph 4.2.2 also apply here.5.3 Tax withholdingIndividual income tax should be withheld by the employing entity if the sharesacquired by employees at less than market value are in the employing company.If, however, the shares are sold to employees by the parent company or by athird party, then the duty on the part of the employer to withhold the tax is lessclear (see the comments in paragraph 4.3).6. Taxation of share disposals6.1 If an employee is a Russian tax resident, tax is charged at a rate of 13% for the2010 tax year on the difference between the sale proceeds and the market valueUK/1729295/03 167 September 2010
Employee Share Plans in Europe and the USARussian Federationof the shares at the time when the shares were acquired (whether directly or byway of a share option), provided that the costs of acquisition (i.e. the amountpaid and the tax paid, if relevant) are confirmed by supporting documents. Inaddition, the taxable amount can be decreased by certain other documentedexpenses in relation to those shares, e.g. brokerage fees etc.6.2 In relation to non-resident individuals, the Tax Code states that they are taxedonly on income arising from sources in the Russian Federation (whereasresidents are taxed on their worldwide income). According to the Tax Code,income from sources in the Russian Federation includes, amongst other things,income from sales of securities in Russia. There may be a good basis forarguing that this provision primarily encompasses sales of Russian securitiesand that it should not apply to sales of foreign securities by non-residentemployees (e.g. sale of shares in a Russian employing entity's foreign parentcompany), although there is a theoretical risk that the tax authorities may take adifferent view and claim that a non-resident making a disposal of foreignsecurities while staying in Russia is also liable for Russian individual income tax.If this risk ever materialises, the non-resident individual should be able to deducttheir acquisition costs from the taxable proceeds, and the resulting taxable gainwould be subject to 30% income tax.7. Employee benefit trusts7.1 Employee benefit trusts are not recognised under Russian law. Theoretically, aRussian company could attempt to claim a corporation tax deduction for acontribution made to the employee benefit trust, but as Russian law is notfamiliar with this concept, the likelihood of the tax authorities accepting such adeduction would appear to be fairly low.7.2 From a strict legal perspective, an employee who is a beneficiary of adiscretionary employee benefit trust should not be taxable for that reason alone.Such an employee should be taxed when he actually receives a benefit from thetrust on the same principles as described in paragraph 4.1.1.8. Data protection8.1 Russian personal data legislation contains detailed requirements regarding theprocessing of an individual's personal data. 15 Russian employment legislation15It should be noted that restrictions regarding transfers of an individual's personal data apply to anytransfers of such data, including transfers between group companies.UK/1729295/03 168 September 2010
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Employee Share Plans in Europe and the USA - Sorainen

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