Employee Share Plans in Europe and the USA - Sorainen

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Employee Share Plans in Europe and the USAUnited States of Americafraud, civil liability or other provisions of federal securities law may alsoapply.Rule 506 only requires disclosure in the event that offers or sales aremade to non-accredited persons 8 .1.3.2 State: Most states do not impose significant disclosure requirements onRule 701 offerings. In addition, states are pre-empted from imposingdisclosure requirements on Rule 506 offerings.2. Exchange controlsThere are no exchange controls in the U.S.A.3. Financial assistance3.1 US company: Generally, a US company is permitted to give financialassistance to its US employees to enable them to acquire shares in thatcompany. However, a loan which is made to a director or executive officer of apublicly traded US company (or any transaction which could be deemed to besuch a loan) may be prohibited under the Sarbanes-Oxley Act 2002. Otherwise,generally, employers can make loans to employees for the purpose ofpurchasing securities 9 .89That disclosure, however, in most cases is significant, on a level with the disclosure required of SECregistrants, including financial statements prepared in accordance with U.S. GAAP or IFRS as issuedby the IASB.If the loan is “below market” interest and the employee is personally obligated to repay the loan, and ifthe amount of the loan (and any other below market loan) exceeds $10,000 at any time, then theemployee may be treated as receiving taxable income at that time equal to the amount of the foregoneinterest on the loan under Code Section 7872. In that event, the income, if any, would be spread overthe term of the loan if the loan is a demand loan, or treated as received when the loan is made if theloan is a term loan. (A demand loan is generally one that is payable on demand or that is conditionedon the employee's continued performance of services. A term loan is generally any other type of loan.)If the employee is subject to tax under Code Section 7872, he or she will be treated as paying theforegone interest over the term of the loan. The employee may be able to deduct those interestpayments under Code Section 163(d) (thereby reducing the amount of foregone interest subject to tax)to the extent that the payments do not exceed his or her net investment income for the year. Anyincome that the employee is treated as receiving under Code Section 7872 will be subject to incometax at ordinary income rates (as well as social security/Medicare and other employment taxes).Notwithstanding the foregoing, there may be arguments that no imputed interest arises if the loans areof sufficiently short duration.Loans secured only by underlying shares purchased (i.e. non-recourse) may be viewed as options forU.S. tax purposes.UK/1729295/03 203 September 2010
Employee Share Plans in Europe and the USAUnited States of America3.2 US subsidiary of non-US company: In general, a US company is permitted togive financial assistance to its US employees to enable them to acquire sharesin a non US-parent company.4. Taxation of share acquisitions4.1 Employee tax and social security contributions4.1.1 Tax:• Shares: An employee who acquires shares (which are not subject toany restrictions, as discussed below) would generally recognise ordinarycompensation income equal to the fair market value of the sharesreceived (less any amount paid for the shares). The rate of theemployee’s tax on the ordinary federal income recognised will be basedon the individual employee’s ordinary income tax rate (currently, ingeneral, from 15% to 35%, depending on the individual’s level ofincome). State and local tax rates vary by location.• Restricted stock: Restricted stock is stock issued to employees that issubject to a "substantial risk of forfeiture" and is subject to transferrestrictions. 10The tax consequences of restricted stock are determined under Section83 of the Internal Revenue Code of 1986, as amended (the "Code").Generally, if stock is transferred to an employee in exchange forservices, the employee is taxed when the stock is either transferable(free of transfer restrictions and transferable other than to the employer)or is no longer subject to a substantial risk of forfeiture (“substantiallyvested”). The amount of taxable income is the fair market value of thestock at the time that it becomes substantially vested less any amountthat the employee pays for the stock 11 . The rate of the employee's taxon the ordinary federal income recognised will be based on theIn addition, if the loans are viewed as a margin loan, they will be subject to the Federal Reserve’smargin regulations, in which case a number of restrictions may apply. A loan will qualify as a marginloan if it is secured directly or indirectly by margin stock.1011Some common restrictions include a prohibition on sale for a specified number of years, forfeiture if theemployee terminates employment before completing a specified length of service, and a requirementthat the employee sell the stock back to the company at the lesser of cost and the then current fairmarket value.Any appreciation (or depreciation) in the stock after it becomes substantially vested is characterised ascapital gain (or loss) when the employee sells the stock (long-term or short-term depending on theholding period).UK/1729295/03 204 September 2010
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Employee Share Plans in Europe and the USA - Sorainen

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