Employee Share Plans in Europe and the USA - Sorainen

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Employee Share Plans in Europe and the USAUnited States of AmericaDuring 2010 the Internal Revenue Service ("IRS") issued guidance intended toprovide relief to employers who inadvertently or unintentionally fail to comply withthe written document requirements under Code Section 409A. The reliefgenerally only applies (i) to inadvertent and unintentional failures to comply withthe documentary requirements under Code Section 409A and (ii) if the servicerecipient (e.g. the employer) takes commercially reasonable steps to (A) identifyall other non-qualified deferred compensation plans that have a document failurethat is substantially similar to the document failure initially identified andcorrected, and (B) corrects all such failures in a method consistent with theissued guidance. The relief is generally not available (i) if the service provider orservice recipient's federal income tax return is under examination with respect tonon-qualified deferred compensation for any taxable year in which the documentfailure existed, (ii) if the failure is directly or indirectly related to participation in a"reportable transaction" under Treasury Regulation Section 1.6011-4(b)(2), (iii) ifthe non-qualified deferred compensation plan is linked to certain other nonqualifieddeferred compensation or qualified plans, or (iv) with respect to theissuance of a stock right.Under a special rule, if the non-qualified deferred compensation plan is correctedin accordance with the guidance on or before December 31, 2010, the plan maybe treated as having been corrected on January 1, 2009 for purposes of applyingsuch relief and would be treated as if the plan complied with Code Section 409Afrom the time documentary compliance was required.5.6 Application of Code Section 457ACode Section 457A (added under the USA "bailout" legislation in Autumn 2008)generally provides that amounts deferred under a non-qualified deferredcompensation plan of a "non-qualified entity" are currently includible in a serviceprovider's gross income to the extent such compensation is not subject to asubstantial risk of forfeiture. However, if the deferred compensation is subject toSection 457A but is not readily determinable at the time it is otherwise includiblein gross income (e.g. generally at the time of vesting), such amount will besubject to an additional tax of 20%, plus interest on any related underpayment oftaxes when such amount becomes determinable. For these purposes, a "nonqualifiedentity" is generally (i) any non-US corporation unless substantially all ofits income is (a) "effectively connected with the conduct of a trade or business inthe US", or (b) subject to a "comprehensive foreign income tax", and (ii) anyUK/1729295/03 211 September 2010
Employee Share Plans in Europe and the USAUnited States of Americapartnership unless substantially all of its income is allocated to "eligiblepersons". 18Similar to the provisions of Code Section 409A, restricted stock and stockoptions granted at fair market value are generally not subject to Code Section457A. However, (unlike Code Section 409A) plans that provide for a right tocompensation based on the appreciation in value of an equity unit (such as astock appreciation right) of the service recipient will generally be subject to CodeSection 457A unless they are, among other things, certain partnership interestsor stock appreciation rights that are settled in shares.In general, compensation will not be subject to Code Section 457A if thecompensation is paid within 12 months following the end of the servicerecipient's taxable year in which the right to such amount is no longer subject toa "substantial risk of forfeiture" (the "short-term deferral" exception under CodeSection 457A). However, for the purposes of Section 457A, a substantial risk offorfeiture means only that a person's right to compensation is conditional uponthe future performance of substantial services by such person (e.g. generally atime-based forfeiture restriction).6. Taxation of share disposals6.1 Non-qualified stock options: The employee will pay tax at capital rates on anysubsequent sale of the stock. If the shares are held for more than one year, thecapital gains tax rate on any gain from the sale will be taxed at a maximum rateof 15% (2010 tax year). If the shares are held for one year or less, then theemployee will have to pay taxes on any gain from the sale at the employee’spersonal tax rate. The tax is based on the difference between the employee’sbasis in the stock (i.e. the market value of the stock on exercise) and the amountreceived from the sale of the stock.18"Substantially all" income is deemed to be "effectively connected with the conduct of a trade orbusiness in the US" if at least 80% of the corporation's gross income is effectively connected with theconduct of a trade or business in the US, and it is not exempt from US federal income tax pursuant to atreaty. In general, substantially all of the income of a non-US corporation will be considered subject toa "comprehensive foreign income tax" if, for the foreign corporation's taxable year ending with or withinthe service provider's relevant taxable year (i) either (A) it is eligible for the benefits of an income taxtreaty between such country (excluding Bermuda and Netherlands Antilles) and the US, or (B) itdemonstrates to the satisfaction of the Secretary of the Treasury that such country has acomprehensive income tax, and (ii) such corporation is not taxed by the country under any regime orarrangement that is materially more favourable than the taxes otherwise generally imposed by suchcountry. In general, substantially all of a partnership's income for a taxable year will be allocated toeligible persons if at least 80% of the gross income of the partnership for such taxable year is allocatedUK/1729295/03 212 September 2010
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Employee Share Plans in Europe and the USA - Sorainen

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