What are the reporting/notification/filing requirements applicable to an incentive plan?
Except for compliance with securities laws of certain US states discussed below, it is not necessary to file the plan with a government regulator or to seek permission from the government to use the plan in the US unless request is made by an authority for a copy of the plan.
It is, however, necessary for a US employer to report income related to plan awards to the IRS, the Social Security Administration (”SSA”)and any applicable state and/or local tax authorities. The resulting income must be reported to participants on an IRS Form W-2 after the close of year in which the income-producing event occurs.
Employers are required to furnish an informational report, IRS Form 3921, Exercise of Incentive Stock Option, to participants to whom stock was transferred in the previous calendar year pursuant to the exercise of an ISO. Similarly, employers are required to furnish IRS Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan, when shares are transferred pursuant to an ESPP. Copies of each form are also sent to the IRS.
Employers have significant tax withholding obligations for equity incentive awards. Whenever a federal tax arises upon vesting, exercise or settlement of an equity award, the US employer must remit the employee’s and employer’s portions of federal income, Social Security and Medicare taxes to the IRS and SSA, generally within 1 business day of the tax event. Form 841 must be filed quarterly to report the amounts withheld.
Provided the incentive plan is not a public offering and does not entail a retirement benefit, there is no requirement to file or notify the plan before any Mexican government agency. However, if the incentive plan is granted directly by the Mexican employer or if the Mexican employer is charged for the cost arising from the incentive plan by a related legal entity, the costs of the plan must be reported in the general accounting structure of the local entity to the Mexican Revenue Service through its electronic platform.
The share option schemes (regardless if they qualify as non-taxable benefits or not) should be based on structured plans that represent supporting documentation from a tax perspective. Such documentation does not need to be filed with the authorities, but should be readily available and provided to the authorities upon their request.
Moreover, implications from a capital markets perspective should be considered - for this, please see below our input to question 13.
If an Incentive Plan is subject to the Danish Stock Option Act, the employer is obligated to draft an employer-declaration (in Danish: arbejdsgivererklæring). The employer-declaration shall include all the details in the Incentive Plan, including:
- the granting day,
- the criteria or conditions for granting Shares to the employee,
- the day when the employee can purchase the Shares in the Company,
- the price under which the employee can purchase the Shares,
- the employee’s rights, if the employment is terminated and
- the economic consequences for an employee to participate in an Incentive Plan.
The employer-declaration must be in Danish and should be given to the employee at the time as the Incentive Plan becomes a part of the employment agreement.
If the employee is not given the employer-declaration, the employee will be entitled to a compensation in accordance with the level in the Danish Employment Agreement Act (in Danish: ansættelsesbevisloven).
Furthermore, the employer is obligated to report payments under an Incentive Plan to the Danish tax authorities. If the granting is subject to the 7P Scheme, the employer must also register as reporting to a share-register of the Danish tax authorities. Subsequently, a grant under an Incentive Plan on which the 7P Scheme applies must be filed to this share-register. Reporting obligations also applies when a foreign group company has granted the Incentive Plan directly to the employee.
There are no official proceedings or requirements. Incentive plans must be mutually agreed by employer and employee or be part of a company’s internal policies.
There are no mandatory reporting/notification/filing requirements applicable to an incentive plan. However, the following filing process are required for the taxation defer purpose:
- Where qualified stock incentives are offered by a unlisted company and individual income tax is paid on a deferred basis, the unlisted company shall, within the first 15 days of the following month from the exercise date of stock options, the elapse date of restricted stock, or the grant date of stock awards, submit to the competent tax authority the Record-filing Form for Deferred Payment of Individual Income Tax on Income from Stock Incentives of Non-listed Companies (Appendix I), the stock incentive plan, the resolution of board of directors or shareholders meeting, and information on the managerial or technical positions of the incentive recipients, as well as reports on the main business revenues of the company that offers the stock incentives and the target company of the stock awards.
- Where stock incentives are offered by a listed company and individual income tax is paid within 12 months, the listed company shall, within the first 15 days of the following month from the exercise date of stock options, the elapse date of restricted stock, or the grant date of stock awards, submit to the competent tax authority the Record-filing Form for Deferred Payment of Individual Income Tax on Income from Stock Incentives of Listed Companies (Appendix II). The listed company shall also submit the stock incentive plan and the resolution of board of directors or shareholders meeting when applying for initial record-filing for stock incentives.
- The employer is required to deduct wage tax and (the employee part of) social security contributions on taxable benefits from an incentive plan that constitute employment income. In addition, the employer must pay the employer part of social security contributions up to the maximum chargeable remuneration. These benefits must be included in the payroll.
- The participant must disclose any taxable benefits of the shares in the annual income tax return and pay the income tax due (any wage tax deducted at source may be offset).
- In case (i) the shares to which the incentive plan relates, are listed on a regulated market in the Netherlands or (ii) the MAR (as further described under number 13) applies to the relevant company, specific disclosure obligations have to be observed.
- Share incentive plans with a cross-border dimension that have the effect of converting income into capital or other categories of revenue which are taxed at a lower level or are exempt from tax, may have to be reported to the tax authorities under the (yet to be enacted) legislation based on the EU Mandatory Disclosure Directive.
When the employer is a public company (i.e., a company whose shares are transferrable without restriction), a summary of stock options allocated to officers is required to be disclosed in the business report, a mandatory document under the Companies Act and where the general business activities of the company are reported to the shareholders.
In the case of listed companies, under the Financial Instruments and Exchange Act (which is a securities law in Japan), information regarding stock options shall be disclosed in a security report, a mandatory document for such companies in which certain facts and data of annual business performance are disclosed, mainly for the investor’s analysis. In practice, the listed companies disclose the same information required to be disclosed in the business report (i.e., summary of stock options allocated to officers) to simplify the process. Information regarding an ESOP and/or shareholding membership needs to be disclosed in the security report as well.
When offering share options as incentive plans to 50 employees or more, a securities notice or securities registration statement generally must be filed with the Kanto Local Finance Bureau before the offering when the following conditions are met:
- Securities Notice:
- the total value of the share options is more than JPY 10 million but less than 100 million.
- Securities Registration Statement:
- the total value of the share option is JPY 100 million or more.
A taxable benefit received by an employee should be included in the monthly payroll reporting that is sent electronically to the tax authorities, usually through a payroll system.
The due date for individual income tax returns is 30 April following the end of the tax year. The due date for self-employed individuals is 31 May. Extension of the deadline of up to one month is available upon application.
A taxable benefit related to an incentive plan, operated by a company that is subject to the Norwegian reporting scheme, should be pre-filled as a remuneration item in the partly pre-completed tax return issued by the tax authorities in early April. The employee should check that the amount subject to income tax is correctly included in the tax return. Corrections are necessary only if not already included based on reported information.
Wealth tax basis may in many cases not include shares, financial instruments and vested share options. Year-end value may need to be reviewed and included in the tax return.
A special attachment to the individual return (form RF-1059) should be completed for foreign shares that are not included in the “Shareholders’s tax report” (form RF-1088) from Norwegian companies and foreign companies registered on Oslo Stock Exchange. The information to be provided in RF-1059 is basic information about the company, the number of shares, the historical cost price, sales price and proceeds and dividends.
Every employee share plan has to be registered with HMRC through the PAYE Online Service. For tax-favoured plans the registration process includes an additional requirement that the company must self-certify the plan as meeting the relevant statutory conditions.
Once a plan is registered, the company must submit an annual online return by 6 July following the end of each tax year. This is the case even if there has been no activity in relation to the plan during the year.
There are no specific requirements regarding incentive plans.
Nevertheless, the German banking supervision law stipulates to comply with protection against insider trading for listed companies. Also the vesting-period itself is supposed to grant protection against insider trading. In this context companies are obliged to comply with the Securities Trading Act (Wertpapierhandelsgesetz). The Federal Financial Supervisory Authority (BaFin) controls the processes.
Within the process of granting (or exercising) incentives the International Financial Reporting Standards (IFRS 2) by the International Accounting Standards Board (IASB) must be fulfilled. The IFRS 2 is applicable in Germany. Therefore, all domestic companies whose securities trade in a regulated market are required to use IFRS Standards as adopted by the EU in their consolidated financial statements. IFRS Standards as adopted by the EU are required in their consolidated financial statements except a foreign company whose home jurisdiction’s standards are deemed by the EU to be equivalent to IFRS Standards may use its home standards.
The French issuing company is bound by reporting obligations towards the beneficiaries, the administration (tax and “URSSAF”) and, where applicable, the institution holding the securities account.
More particularly, the preferential tax and social regime is subject to reporting obligations:
- on grant, the employer must inform the “URSSAF” (French agency in charge of collecting the national social security contributions) of the beneficiaries’ identity;
- on vesting, the company must issue an individual statement for each employee having acquired shares and send such statement to the employee no later than March 1 of the year following vesting.
Information relating to the awards must also be reported by the employer on its annual wages declaration (DSN) to the “URSSAF”. In the absence of such notification, the employer would have to pay all social security contributions, including employee’s share.
Beneficiaries must inform tax administration on the added value on vesting as well as, where applicable, the added value on exercice.
Note that additional reporting requirements are applicable for incentive plans benefiting to company officers, in particular in listed companies.
Considerations from an employment point of view.
Although no legal reporting/notification/filling requirements apply to an incentive plan from an employment perspective, it is totally advisable to provide employees with a copy of the plan with acknowledge of receipt. The company must obtain evidence of (i) the employee´s consent to participate in the plan and (ii) of the fact that the employee knows, understands and agrees with its terms. A copy duly signed by them is highly advisable to try to reduce the risk of claims and to reinforce the position of the company in case that the employee alleges lack of knowledge.
In addition,, collective bargaining agreements may set out certain specific requirements to be addressed by companies when implementing/modifying or withdrawing an incentive plan.
Furthermore, the amendment of the incentive plan may qualify as a substantial amendment of employment conditions in which case ,consultation/information duties may also arise for the company.
Considerations from a mercantile point of view.
There are no reporting/notification/filing requirements applicable to an incentive plan from a Spanish corporate Law standpoint for companies that are not listed.
Nevertheless, the board of directors of listed companies must prepare and publish an annual report on the remuneration of directors (Informe Anual de Retribuciones de los Consejeros or "IARC"), including that which they receive or should receive in their capacity as such and, where appropriate, for the performance of executive duties.
The content and structure of the IARC is determined by the Minister of Economy and Competitiveness or, with his express authorisation, by the CNMV, and shall include complete, clear and comprehensible information on the directors' remuneration policy applicable to the current financial year. It shall also include a global summary on the application of the remuneration policy during the closed financial year, as well as a detail of the individual remunerations accrued for all concepts by each of the directors during said financial year.
The IARC shall be published as a significant event (Hecho Relevante) in the Spanish Stock Exchange Commission (Comisión Nacional del Mercado de Valores or "CNMV") by the company simultaneously with the annual corporate governance report.
The IARC shall be submitted to a consultative vote, as a separate item on the agenda, at the ordinary GSM.
The Directors of listed companies must notify any acquisition/transfer of shares of the company to the CNMV within the three (3) business days following the relevant transaction.
Incentive plans are usually granted to employees by writing since, as previously mentioned, the exclusion of the benefits from the salary base must be agreed by both parties.
Although it is advisable to always establish benefits and incentives by writing in a company’s policy, there are no specific rules or requirements regarding reporting, notification or filing of an incentive plan.
Requirements depend on the type of incentive plan and the scheme used to feed the plan.
Share saving plans that imply the transfer of cash from the company to the employees or a trustee can be subject to reporting requirements within certain limits. Pursuant to Bank of Portugal’s instruction 27/2012, companies incorporated or resident in Portugal must comply with reporting requirements, in relation to any transfers made to or from beneficiaries incorporated or resident abroad, to the extent that those transfers are in a value higher than a yearly EUR 100,000 threshold.
If the feeding of a stock option plan is made through the acquisition of treasury stock, the conditions and requirements set forth in the Companies Code for this operation must be complied with.
Information to be given to the market on the allocation of financial instruments to company representatives, employees or collaborators are referred to by article 114-bis of Legislative Decree no. 58/1998 (in Italian abbreviated as TUF, meaning Consolidated text of the provisions on financial intermediation). It provides the following:
- Remuneration plans based on financial instruments in favour of members of the board of directors or of the management board, of employees or collaborators not linked to the company by subordinate employment relationships, or of members of the board of directors or of the management board, of employees or collaborators of other parent or subsidiary companies are approved by the ordinary shareholders' meeting. The issuer shall make available to the public a report with the information concerning it:
(a) the reasons for the adoption of the plan;
b) the members of the board of directors or the management board of the company, of the parent companies or subsidiaries, who benefit from the plan;
(b-bis) the categories of employees or associates of the company and of the parent or subsidiary companies of the company who benefit from the plan;
(c) the arrangements and clauses for implementing the plan, specifying whether its implementation is subject to the fulfilment of conditions and, in particular, to the attainment of specified results;
d) the possible support of the plan by the Special Fund for the encouragement of worker participation in enterprises, as per article 4, paragraph 112, of Law no. 350 of 24 December 2003;
(e) the manner in which prices are to be determined or the criteria for determining prices for the subscription or purchase of shares;
(f) the availability constraints on the shares or on the option rights assigned, with particular reference to the terms within which the subsequent transfer to the same company or to third parties is permitted or prohibited.
- The provisions of this Article shall apply to listed issuers and issuers of financial instruments which are widely distributed to the public in accordance with Article 116, which regards issuers of financial instruments which, even if not listed on regulated Italian markets, are available to the public to a significant extent. Consob establishes in its regulations the criteria for their identification, and may dispense issuers of financial instruments listed on regulated markets in other European Union countries or in markets in non-Community countries, in view of the information requirements they are required to meet, from the obligations laid down in those Articles, in whole or in part.
- Consob's regulations define the information, relating to the elements indicated in paragraph 1, that must be provided in relation to the various methods of implementing the plan, providing more detailed information for plans of particular importance.
As regards performance bonuses, however, an essential condition for the application of the tax relief (article 1, par. 187, Law no. 208/2015) is that the payment of such bonus, takes place “in the implementation of the company or territorial contracts referred to in article 51 of Legislative Decree no. 81 of 15 June 2015”, i.e. contracts entered into by trade unions that are comparatively more representative at the national level or company collective contracts entered into by their company trade union representatives or by the unitary trade union representation. Furthermore, in order to benefit from the substitute tax introduced by article 1, paragraphs 182 and 189, of Law no. 208/2015 it is necessary that the company or territorial collective agreements, which provide the payment of performance bonuses and/or compensation are filed with the competent territorial Labour Office within 30 days of their signing, together with the declaration of compliance of such agreements with the provisions contained in the Decree. The filing of the agreement and the relative declaration must be made using the telematic method made available in the “Services” section of the institutional website of the Ministry of Labour and Social Policy at the address: www.lavoro.gov.it. In any case, the aforementioned period of 30 days is to be considered as a non-compulsory deadline without prejudice to the fact that performance bonuses will be admitted to the relief provided that the company or territorial agreements at the time of payment of the bonus have already been filed, together with the declaration of compliance of the agreement with the provisions of the law.
There are no general reporting/notification/filing requirements applicable to incentive plans however requirements with respect to publicly held companies are briefly explained under Q13.