Can an overseas corporation operate an incentive plan?

Employee Incentives

United States Small Flag United States

An overseas corporation may operate an incentive plan in the US subject to adjustments in documentation and operation necessary to comply with Section 409A of the US tax code, federal and state securities laws and, (in the case of ISOs, ESPPs and awards to California participants) obtaining shareholder approval of the plan. The latter two topics were previously addressed in this guide.

Section 409A has no impact upon stock options granted with option exercise prices at least equal to fair market value as of the date of grant. The market value needs to be establish by trading prices, or if none, an independent appraisal or another recognized method of establishing fair market value. Modifications of NQSOs could, however, have consequences to the participant under 409A.

Nil-cost options or those granted at a discount are regulated by Section 409A. Such options must be exercisable, if at all, only until March 15 of the calendar year following the calendar year in which such option is first exercisable, or if later, until the 15th day of the third calendar month following the fiscal year of the US employer in which such options first became exercisable. Failure to meet this requirement subjects the US participant to taxation in the year the option vests (rather than ordinarily when it is exercised), and to further taxation for subsequent appreciation in subsequent years until it is exercised. (Another approach to consider for compliance with Section 409A is to treat nil-cost options as the grant of restricted stock.)

RSUs must comply with Section 409A by either providing in the award for settlement within the applicable 2.5 month period described above for NQSOs, or by linking settlement to one or more of several permissible payment events such as a fixed date or separation from service. Due to Section 409A, “translating” foreign plan good leaver provisions is often difficult.

If an award does not comply with Section 409A at grant the participant is also subject to a 20% penalty tax and potentially other tax penalties and interest.

ISOs, ESPPs and restricted stock awards are not subject to Section 409A.

Mexico Small Flag Mexico

Mexican entities commonly operate the short, mid and long term incentive plans, except for stock or share options plans, which are commonly managed and operated by the foreign entity abroad.

Romania Small Flag Romania

Strictly from a Romanian employment law standpoint, there are no special prohibitions or limitations when comparing local companies to overseas companies in terms of operating incentive plans. However, from a practical perspective, considering the relevant tax implications is key when taking this decision.

In practice there are situations when incentive plans are implemented by multinational groups of companies for worldwide employees. Such scenarios are - in principle - also covered by the Romanian tax legislation, but the specifics of each scheme needs to be analysed so as to determine the local tax implications.

Denmark Small Flag Denmark

Neither the Danish Stock Option Act nor the Danish Salaried Employees Act distinguish between Danish and overseas companies, if the Incentive Plan is governed by Danish legislation.

Ecuador Small Flag Ecuador

In Ecuador, overseas corporations have the same rights and obligations as local companies. Therefore, incentive plans are possible but not regulated by the law. The Labor Code already contains a series of benefits and protections favoring workers.

China Small Flag China

Yes

  • Some Chinese companies will establish red-chip structure for financing or oversea listing, which is the equity structure that the controlling company is registered in overseas region but the operating entity is registered domestically, especially the companies in the technology, media and telecom (TMT) industry. Under the red-chip structure, the equity incentive plan is usually implemented in the oversea controlling company. In this case, the employees of the overseas corporation or its related parties could participate in the incentive plan duly approved by its board of directors, subject to the applicable exchange control laws and regulations.

The Netherlands Small Flag The Netherlands

Yes, taking into account the applicable securities laws when offering awards to employees in the Netherlands.

Brazil Small Flag Brazil

An overseas corporation can offer a share-based incentive plan to its, direct or indirect, Brazilian employees. According to the Accounting Pronouncements Committee (“CPC”) 10, the company that benefits directly from the services provided by the employee/executive is the one that must recognize the expenses related to share-based plans in its accounting books, if the plan has a compensation nature, even if the share-based plan is operated by the overseas corporation.

The participant can hold shares abroad and/or remit funds abroad as required by the share-based incentive plan, provided that the exchange rules explained above are complied with.

Japan Small Flag Japan

Yes. Overseas corporations are able to implement various incentive plans for employees of their Japanese subsidiaries or affiliates with reasonable flexibility. However, it is important to note that (i) the Japanese Companies Law does not apply to incentive plans implemented by a foreign parent company; and (2) the Japanese Labor Standards Act and other labor related laws and regulations may not apply to incentive plans implemented by a foreign parent company provided that such plans are kept separate from the employment contract and work rules. As result, the majority of overseas corporations holding Japanese subsidiaries offer incentive plans operated by the mother company, which is an overseas corporation, in the same manner of the original plan abroad.

Norway Small Flag Norway

Yes. An overseas corporation can operate an incentive plan. However, the foreign company may have to comply with prospectus requirements regarding offer of shares in Norway.

In order for the cost to be deductible for tax purposes for the Norwegian employer, a recharge from the overseas corporation must be carried out. The recharge must be arm’s length and should be based on a written agreement.

United Kingdom Small Flag United Kingdom

An overseas company can operate an incentive plan in the UK including most tax-favoured plans. Where an overseas company already has its own share incentive plan, it may be able to operate this without any amendment in the UK. It will need to ensure that the operation of the plan complies with UK securities laws and regulatory rules. However, it is usually preferable (and necessary if the issuer company wants to operate a tax-favoured plan) for it to adopt a schedule to its plan that will operate as a separate arrangement in the UK.

Germany Small Flag Germany

A foreign parent company can grant incentives with facing the consequence that the employee is entitled to a payment by the parent company and not by the company himself, which can lead to difficulties regarding judicial enforcement in the case of conflict. Entitlements towards a parent company might exclude the obligation to pay social security contributions due to the fact that the payment is not to be seen as remuneration.

France Small Flag France

Yes, companies whose registered office is located abroad may grant stock options or free shares to employees working in a French parent or subsidiary entity. The concepts of parent company and subsidiary are defined by the French Commercial Code.

An overseas corporation may also grant shares to employees employed in France in a permanent establishment (e. g. a branch office) or a permanent establishment of another foreign company related to it.

The favourable tax and social regime will be applicable provided that such allocation comply with the conditions provided for by the French Code of commerce. These can nevertheless be adjusted but some conditions that are deemed to be essential must be complied with.

Spain Small Flag Spain

Considerations from an employment point of view.

It is lawful to offer an incentive plan operated by the foreign parent company. In this regard, it is possible to offer a share plan for shares in foreign parent companies or a cash incentive plan based on, among other targets, the business performance of the foreign parent company.

The Spanish subsidiary is responsible for complying with any formal obligations arising from participation in share plans. For example, the subsidiary pays any social security contributions that arise.

Considerations from a mercantile point of view.

There are no limitations on the operation of foreign companies in incentive plans under Spanish mercantile regulations. The provisions of this questionnaire will apply to these companies.

Colombia Small Flag Colombia

Although incentive plans may include stock options or shares from a foreign company, the plan itself must always be granted by the employer. The operation, and even the location of the benefits included in an incentive plan may be operated abroad by an overseas corporation, but the employer is responsible for such plan, its terms and conditions, and any future litigation or claim as a consequence of the plan.

Portugal Small Flag Portugal

There are no general restrictions on this matter. Companies registered in other countries may grant stock options or share plans to those employed by their Portuguese branch.

Italy Small Flag Italy

There are no restrictions for foreign companies operating in Italy on the possibility of applying incentive plans for employees, collaborators and/or directors.

If the incentive plan includes an offer of financial instruments by a foreign issuer to persons residing in Italy, the offer of option rights to the employees of the Italian subsidiary is undoubtedly to be considered as a "public offer of financial products" according to the definition contained in Article 1, paragraph 1, read. t) of Legislative Decree 24 February 1998, n. 58 (Consolidated Law on Finance in Italian acronymized as "TUF") on the basis of which any type of communication addressed to persons (i.e. independently of the number of persons, theoretically also one) in any form and by any means that details offers of financial products with a view to the purchase or subscription of the same is subject to the regulation and restrictions of the public offer of financial products.

Turkey Small Flag Turkey

Yes an overseas company can participate in an incentive plan.

Updated: February 26, 2019