Employee Share Plans in Europe and the USA - Sorainen

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Employee Share Plans in Europe and the USAThe United Kingdomoperated in several ways. First, employees can be awarded free shares in theemployer or its parent company (free shares). Secondly, employees may usepre-tax salary to buy shares (partnership shares). The employer can provide anincentive to the employee to buy partnership shares by providing additional freeshares on a matching basis (matching shares). Finally, employees can reinvestdividends received on shares held in the SIP to buy additional shares (dividendshares). A company may offer all or some of these types of share.In order for a SIP to qualify for tax benefits, a number of conditions must be met.The most important conditions are that all UK employees of the company and itssubsidiaries must be allowed to participate (although the company may impose aqualifying period of service subject to certain limits), no more than £3,000 worthof free shares can be given to any one employee each tax year (6 April - 5 April)and employees cannot authorise a deduction of more than £1,500 in each taxyear (or 10% of annual salary, if lower) from their pre-tax salary to buypartnership shares. Shares awarded under the SIP must be held in a special SIPtrust.If a SIP is approved by HM Revenue & Customs, no income tax or socialsecurity contributions arise at the time shares are awarded to participants.Employees who keep their shares in the SIP for 5 years (or who are "goodleavers" within that period) pay no income tax or social security contributions onshares must also be subject to a holding period of between 3 and 5 years. The income tax andsocial security contributions position in relation to the matching shares is the same as for freeshares;• matching shares may also be subject to forfeiture (i) if the employee leaves within 3 years unlessthe employee leaves employment for one of the "good leaver" reasons (in which case the employeewill also receive favourable tax treatment), or (ii) if the employee withdraws his partnership sharesout of the SIP within 3 years;• employees may be permitted to reinvest dividends paid on any shares held in the SIP up to thestatutory limit which is currently £1,500 per employee each tax year. Dividend shares must also besubject to a holding period of 3 years unless the employee leaves. If this happens, the dividendshares are transferred out of the SIP and the original dividends are subject to income tax (unlessthe employee leaves for one of the "good leaver" reasons). However, social security contributionsare not payable in any circumstances. After 3 years, dividend shares may be withdrawn from theSIP free of income tax;• if the employee is liable to pay social security contributions on his free, matching or partnershipshares under the SIP, the employer will also have a liability to social security contributions.However, social security contributions (employee's and employer's) will only be payable if theshares are RCAs (see 4.1.2 above); and• employees who keep their shares in the SIP until they sell them will not have any capital gains taxto pay. If shares are withdrawn from the SIP and sold later, the employee will only be liable tocapital gains tax on any increase in value of those shares after they come out of the SIP.UK/1729295/03 193 September 2010
Employee Share Plans in Europe and the USAThe United Kingdomthose shares. The employee will only be liable to capital gains tax on anyincrease in the value of the shares after they have come out of the SIP.An employer has a statutory right to deduct from its taxable profits contributionsmade to a SIP, provided the statutory requirements are met. There is also astatutory right to deduct the costs of setting up a SIP from taxable profits.4.4 Tax withholdingThe employer must withhold within strict time limits any income tax and socialsecurity contributions due if the shares are RCAs.5. Taxation of share options5.1 Employee tax and social security contributions5.1.1 Grant: There is no tax charge on the grant of a share option. 105.1.2 Exercise: There is an income tax charge on the exercise of a shareoption on the difference between the market value of the shares at thedate of exercise and the option exercise price (plus the amount, if any,paid for the option). For the tax year 2010-2011, tax rates range from20% to 50%.5.1.3 Social security contributions: Social security contributions arecharged on the exercise of options if the shares are RCAs at the time ofexercise. The amount on which social security contributions arechargeable is broadly the same as for income tax. The normal rate ofemployee social security contributions is 11% for the tax year 2010-2011. Employee social security contributions are capped at this rate at£844 per week, and arise at a rate of 1% for income in excess of thisamount.5.2 Employer tax and social security contributions5.2.1 Corporation tax deduction: A company will be entitled to a statutorycorporation tax deduction in relation to the exercise of options in thecircumstances described in paragraph 4.2.1 above. The deduction willbe the amount on which the employee is subject to income tax on theexercise of the option.10The treatment outlined in paragraph 5.1 will only apply where the arrangements under which the shareoptions are granted do not have as their main purpose or one of their main purposes the avoidance oftax or social security contributions. There are special provisions that apply where there is such anavoidance purpose and these operate to remove the exemption from tax on the grant of the option.UK/1729295/03 194 September 2010
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Employee Share Plans in Europe and the USA - Sorainen

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