What are the tax and social security consequences for participants in an incentive plan including: (i) on grant; (ii) on vesting; (iii) on exercise; (iv) on the acquisition, holding and/or disposal of any underlying shares of securities; (v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.

Employee Incentives

United States Small Flag United States

(i) on grant;

No consequences at grant.

(ii) on vesting;

No income tax consequences upon vesting for stock options (NQSOs and ISOs) or SARs, as long as the award was granted with a fair market value exercise price. Nil-cost or discounted stock options are not taxed at vesting if the options are only exercisable until March 15th of the calendar year following the calendar year in which the option (or tranche) first becomes exercisable, or if later the 15th day of the third calendar month following the fiscal year of the employer in which the option (or tranche) first becomes exercisable.

RSUs are not subject to income taxation at vesting, but are subject to Social Security and Medicare taxes upon vesting.

A participant owes the employee portion of Social Security taxes at the rate of 6.2% (2019) until the participant has Social Security wages (e.g., salary, bonus, taxable equity compensation) of USD132,900 (2019).

Medicare taxes are owed by employees at the base rate of 1.45% of Medicare wages (2019) with no limit or cap. Higher-income participants (those earning more than USD200,000 (2019) that are single taxpayers or USD250,000 (2019) that are married taxpayers filing joint tax returns) pay an additional 0.9%.

Restricted stock issued by a corporation is subject to ordinary income taxes (the maximum US federal income tax rate is 37% in 2019), Social Security taxes and Medicare taxes at vesting (based upon the fair market value of the shares) unless a so-called “Section 83(b) election” was timely made by the participant by filing a statement including IRS-prescribed information with the IRS and the employer within 30 day s of grant and including any “bargain element” in income for that year.

Profits interests granted in LLCs are taxed at vesting in a manner similar to restricted stock of a corporation unless a Section 83(b) election was timely made or the requirements of an IRS revenue procedure were satisfied.

(iii) on exercise;

NQSOs are taxed upon exercise. A participant has ordinary income (taxed in the same manner as wages) upon exercise in an amount equal to the “option spread” (i.e., the aggregate fair market value of the option shares at date of exercise over the aggregate fair market value of the option shares at date of grant). The participant also owes Social Security and Medicare taxes on the option spread at exercise.

SARs are taxed upon exercise in the same manner as NQSOs.

ISOs are not taxed upon exercise.

(iv) on the acquisition, holding and/or disposal of any underlying shares of securities; and

RSUs are subject to income taxation upon payment or settlement. The amount included in income is equal to the fair market value of the shares determined as of the time of receipt.

With respect to any type of award, the resulting shares that are sold or transferred are subject to taxation upon their disposition. The amount taxed is the “gain” on the shares (i.e. the excess of the fair market value at disposition over the sum of the amount paid for the shares, if any, and the amount of income previously recognized upon vesting or exercise of the award, as the case may be).

The gain is considered to be a long-term capital gain if the shares are held for more than 12 months. If the shares are held for a shorter period, the gain is a short-term capital gain. Long-term capital gains are subject to federal income taxes of up to 20% (2019). Short-term capital gains are taxed at rates equal to ordinary income tax rates.

In addition, upon disposition of the shares a participant who has earnings in excess of USD200,000 (2019) (USD250,000 (2019) for married couples filing joint tax returns) owes a 3.8% “net investment income” tax on any capital gains.

ISOs and ESPPs are taxed differently.

An ISO is taxed upon disposition of the shares. If shares are held at least two years from grant and one year from exercise (a “qualifying disposition”), all appreciation is taxed at long-term capital gains rates. A premature disposition (known as a “disqualifying disposition”) causes the option to be taxed in the same manner as a NQSO in the year of sale of the ISO shares, except that no Social Security or Medicare taxes are due.

An ESPP also requires the participant to recognize income in the year of disposition of the purchased shares.

If the disposition of ESPP shares occurs more than two years after the start of the offering period in which the shares were purchased and more than one year after the actual purchase date, then the participant recognizes ordinary income in the year of the qualifying disposition equal to the lesser of (i) the fair market value of the shares at the time of sale less the purchase price, and (ii) the fair market value of the shares as of the beginning of the offering period less the purchase price. Any difference between the sales proceeds and the participant’s “basis” (purchase price plus amount of ordinary income recognized) is treated as a long-term capital gain.

If the participant fails to satisfy the ESPP holding periods and makes a disqualifying disposition, the participant has ordinary income equal to the fair market value of the shares at purchase less the purchase price. The participant has capital gains (long or short, depending on whether the shares were held for more than 12 months) equal to the sales proceeds less the fair market value of the shares on the purchase date.

Neither ESPPs nor ISOs are subject to taxation for Social Security or Medicare purposes.
It should also be noted that officers, certain shareholders and highly-compensated individuals may be subject (there are common exceptions) to an additional 20% tax upon a change of control or sale of substantially all of the assets of a corporation under Sections 280G and 4999 of the US tax code if the present value of certain accelerated payments or certain payments contingent upon the transaction equal or exceed 3 times the average compensation paid to such person during the previously-completed 5 calendar years.

(v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.

Loans to purchase company stock are rare at public companies. In fact, public company executive officers are prohibited by law from borrowing money from the issuer.

It is not uncommon, however, for private corporations to lend money to executives to purchase stock when valuations are relatively low such as when the company is in its start-up phase.

To avoid recharacterization of a loan to purchase stock as a stock option (under which all gain on sale would be ordinary income) and to avoid characterization that the loan is compensation, loans are structured (i) with substantial personal recourse to the participant, (ii) with payment of interest at applicable federal rates that vary with the duration of the loan (“AFR”) (which are generally less than commercial rates) unless the loan is for no more than USD10,000 in which case it may be interest-free, and (iii) without a promise by the employer to pay a bonus equal to the loan amount or to forgive the indebtedness.

If funds are lent to purchase shares, the participant usually will make a Section 83(b) election which reflects no income being recognized at that time because the amount paid with the borrowed proceeds equals the fair market value of the shares purchased.

LLCs generally avoid lending money to participants to purchase equity because equity awards may be granted as profits interests for which the purchase price is nil.

State and local tax consequences, if any, vary and are beyond the scope of this Guide.

Also, the tax consequences may not be as described above in special situations such as if the issuer is a “passive foreign investment company” (“PFIC”).

Mexico Small Flag Mexico

(i) on grant;

Income tax applies to an employee/participant at the time he/she receives a grant of shares or options to purchase shares, for which the employer must make a payroll deduction and then pay such tax before the Mexican Revenue Service. There is no social security effect under applicable Mexican law, at the time of the grant.

(ii) on vesting;

There are no tax or social security effects by the mere fact of reaching a date in which the grant becomes vested.

(iii) on exercise;

Normally, upon the exercise of the grant, the employee/participant will receive the payment of the value or spread of the grant. Because income tax applied at the time of the grant, there is no further tax effect on exercise. However, based on the amount received by the employee/participant and assuming that the payment is made through the employer’s payroll, the amount will sum up to the salary paid for the period in order to pay social security contributions.

(iv) on the acquisition, holding and/or disposal of any underlying shares of securities; and

The acquisition of a grant is interpreted to occur upon the grant itself and therefore, as explained, income tax applies at that stage. Holding the grant will not trigger a tax effect, but at its disposal, income tax applies based on the gain obtained by the participant, in connection with the value of the grant. Social security effects will not apply on the acquisition, holding or disposal of the grant, assuming the employee/participant received the payment of the associated benefit, at the time of its exercise.

(v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.

Loans must be granted with appropriate document support and must include the obligation to repay the same plus, at least, the minimum interest established in the law.

Romania Small Flag Romania

The tax implications (from an income tax and social security contributions) depend on the type of the plan implemented by the employer, as follows:

A. if the incentive plan qualifies as a non-taxable benefit (meaning that all conditions contained within the Romanian tax legislation are complied with), the only taxable event arises for the participants at the moment when the shares are sold. At this moment (i.e. disposal of shares), any gains obtained by the participants represent taxable revenues and are subject to income tax (currently of 10%). Certain declarative obligations also need to be fulfilled by the participants.

Depending on the level of the gains derived from the sale, the participants may also owe health fund contribution for their gains - the applicable thresholds in what concerns the level of the gains derived are subject to updates and approvals.

B. if the incentive plan does not qualify as a tax-exempt benefit, the participants would be considered to receive salary assimilated revenues (taxable) represented by the difference between the market value of the shares/ titles received and the price they paid for such shares/ titles (if the case). If the shares/ titles were granted free of charge, their entire market value represent salary assimilated revenue and is subject to tax.

Nevertheless, the participants do not have any reporting or payment obligations, since the employer (or the entity that qualifies as deemed employer) has the obligation to compute, declare, withhold and pay to the Romanian state budget all salary related liabilities. These obligations arise at exercise moment - since this is the moment when the participants effectively receive the benefit.

Regarding the loans to be offered to participants within such incentive plans, this is not a common practice on the Romanian market. From a tax perspective, any loans received by the employees that are not reimbursed represent salary assimilated revenues.

Denmark Small Flag Denmark

When an employee participates in an Incentive Plan, the follow tax consequences applies:

  • on the granting day; under Danish legislation the main rule is that payments paid out to an employee is taxable at the time of granting, unless a special scheme applies or unless there are vesting conditions, which entail a postponement of the taxation. Generally, vesting conditions based on economic performance criteria can postpone taxation, until it can be determined, whether the conditions are met or not. Furthermore, if the Incentive Plan is dependent on the employee being employed on a specified day, this can also postpone taxation. However, this only applies, if the condition entails that the employee must be employed for at least two years after the granting day. For options and warrants, the taxation is in general postponed, until sale of option/warrant or until exercise. Furthermore, if the Shares are subject to the 7P Scheme, taxation is postponed until the sale of the Shares.
  • on the vesting day; for stocks (not shares or warrants) taxation, generally, occurs at vesting, if the stocks are subject to vesting conditions, which postpone taxation, see above.
  • on the day of exercise; options and warrants for shares are, generally, taxed at the exercise time (if not sold before).
  • on the acquisition, holding and/or disposal of any underlying shares of securities; the taxation occurs when the employee sell the Shares and is based on a step up in acquisition value corresponding to the value, which has been subject to taxation as salary. i.e. when the salary taxation is settled, any future capital gained will be considered share income, which is payable at sale of the Shares. Furthermore, under the 7P Scheme the taxation is triggered, when the employee sell the Shares.
  • loans offered to an employee to participate in an Incentive Plan; any benefits offered to the employee as part of the loan agreement, e.g. interest rate below market rate should generally be taxable as salary.

Furthermore, the Danish social security contribution is a fixed amount and should, therefore, not be taken into consideration when designing an Incentive Plan.

Ecuador Small Flag Ecuador

(i) on grant;

Tax: When a cost is generated for the company and an income for the employee, a tax effect is generated (deduction for the company and income tax for the worker).

Social Security: When a cost is generated for the company and an income for the employee, the social security contribution is mandatory.

(ii) on vesting:

Tax: When a cost is generated for the company and an income for the employee, a tax effect is generated (deduction for the company and income tax for the worker).

Social Security: When a cost is generated for the company and an income for the employee, the social security contribution is mandatory.

(iii) on exercise;

Tax: When a cost is generated for the company and an income for the employee, a tax effect is generated (deduction for the company and income tax for the worker).

Social Security: When a cost is generated for the company and an income for the employee, the social security contribution is mandatory.

(iv) on the acquisition, holding and/or disposal of any underlying shares of securities;

Tax: Since they are deemed to be income, they will be subject to income tax, but not VAT.

Social Security: When a cost is generated for the company and an income for the employee, the social security contribution is mandatory.

(v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.

Tax: The employee can deduct interest expenses when receiving a loan.

Social Security: No impact.

China Small Flag China

Since there are various forms of incentive plans, we take stock options here as an example,

(i) on grant;

Circular of the Ministry of Finance and the State Administration of Taxation on Issues Concerning the Imposition of Individual Income Tax on Incomes from Individual Stock Options (Cai Shui [2005] No. 35) stipulates that "when participants accept stock options granted by companies implementing stock option plans, unless otherwise specified, Not taxed as taxable income."

No social security consequence.

(ii) participant on exercise;

unlisted company (a)If the participant directly holds the shares in the unlisted company:

Normally the participants shall pay individual income tax which is taxed as “the wage and salary income”, which is 3%-45% progressive tax rate.

However, if a unlisted company satisfies the conditions stipulated in Circular on Improving Income Tax Policies relating to Equity Incentives and Technology Shares (hereinafter referred to as “No. 101 Document”), a deferred tax policy may be implemented. That is, taxes will be deferred until the transfer of equity, and the income tax will be calculated at the 20% tax rate of “property transfer income”. During the period of deferred tax payment, if the relevant circumstances of the enterprise change, it will no longer meet the conditions for enjoying the deferred tax preferential policy, such as item 4 (scope of incentives), item 5 (time of holding shares) or item 6 (Exercise time), the equity incentive plan will no longer apply the deferred tax policy, and the relevant taxes should be paid in time.

(b)If the participant indirectly holds the shares of the company via one limited liability partnership, then the participants shall pay their respective individual income tax for their ratio in such limited liability partnership.

(c) If the participant hold the shares in A-share listed company, when an participant exercises his right, if the actual purchase price (exercise price) at which an participant gets stocks from his enterprise is lower than the fair market price on the purchase day (which refers to the closing price of stocks on that day, similarly hereinafter), the difference is the incomes relating to his service and employment due to his performance and accomplishments in this enterprise, therefore, the individual income taxes on such kind of incomes shall be imposed pursuant to the provisions on "incomes from wages and salaries". If, under special circumstances, a participant transfers his stock options prior to the exercise day, the net incomes from the transfer shall be the basis for calculating the individual income taxes on his income from wages and salaries. For the incomes from wages and salaries of a participant obtained during the exercise day, the taxable income from wages and salaries shall be computed pursuant to the following formula: taxable income from wages and salaries in the form stock options = (market price per stock of stocks to be exercised – exercise price per stock paid by a participant for the said stock options) x amount of stocks. Besides, as stipulated in Circular on Matters Concerning Connection of Relevant Preferential Policies After the Revision of the Individual Income Tax Law, for those with conditions satisfy the Circular of the Ministry of Finance and the State Administration of Taxation on Issues Concerning the Imposition of Individual Income Tax on Incomes from Individual Stock Options, Circular of the Ministry of Finance and the State Administration of Taxation on Relevant Issues Concerning the Collection of Individual Income Tax on Income Derived from Stock Appreciation Rights and Restricted Stocks, Article 4 of Circular on Promoting the Pilot Tax Policies on National Independent Innovation Demonstration Zones Nationwide, Article 4 (1) of No. 11 Document, prior to December 31st, such incentives shall not be calculated into the comprehensive income of the year and the taxation shall be independently calculated in accordance with this formula : the tax payable= income from incentive plan* tax rate-quick deduction

(iii) on the acquisition, holding and/or disposal of any underlying shares of securities; and

(a)If the participant directly holds the shares in the unlisted company, the income tax shall be calculated at the 20% tax rate of “property transfer income”.

(b) if the participant indirectly holds the shares of the unlisted company via one limited liability partnership, which is the method that most non-listed companies choose, the participant shall pay the tax at the tax rate of private proprietor, which is one 5%-35% progressive tax rate. Some regions in China have tax preference policies applying to the limited partnership registered within the region, which shall be one 20% preferential tax rate for property transfer income to natural person partners in a limited partnership.

(c) if the participant holds the shares of the domestic listed company, the taxation shall be waived upon transfer of the securities held by such participant; if the participants holds the shares of the overseas listed company, the income tax shall be calculated at the 20% tax rate of “property transfer income”.

No social security consequence.

(iv) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.

In taxation, if the company provides loan to participants, it is still paid in the name of participants when using the loan to purchase the shares. Therefore, the tax effect is the same as the above-mentioned.

No social security consequence.

The Netherlands Small Flag The Netherlands

When determining the tax and social security consequences it is important to make a distinction between the various incentive plan awards. We have therefore made an overview of the various tax and social security consequences for: i) free / discounted shares, ii) share options and iii) SARs.

Free / discounted shares

(i) on grant (subject to condition precedent):

No tax and/or social security consequences arise at the date of grant.

(ii) on vesting:

Upon the date of vesting, tax and social security consequences will arise for the participant. The taxable amount is the fair market value (share price on the exchange) at the date of vesting, where relevant minus the discounted acquisition price, multiplied by the number of shares under the award.

The benefit (free shares / provided discount) is taxed as employment income at progressive income tax rate (up to 51.75% (2019)), with a mandatory wage tax withholding at source by the employing entity.

The taxable benefit is also subject to social security charges, though this is relevant only to the extent the employee’s remuneration is below the annual maximum chargeable income. Social security contributions are capped at an employment income in the amount of € 34,300 (employee contribution) and € 55,927 (employer contribution) respectively (2019 amounts).

(iii) on exercise:

N/A.

(iv) on the acquisition, holding and/or disposal of any underlying shares of securities:

Acquisition (apart from vesting) does not constitute a taxable moment.

As to holding and/or disposal we have to distinguish between box 1, box 2 and box 3 taxation.

Box 1. If the shares qualify as a lucrative interest (see also Q&A 4), any dividends received and any capital gains realised upon disposal are taxed at progressive rates in box 1 (up to 51.75% in 2019). Through proper structuring at the time of acquisition of the shares (i.a. requiring the interposition of a holding company) box 1 taxation on lucrative interest can be replaced by box 2 taxation for substantial interests (see below or Q&A 4).

Box 2. If the shares are part of a 5% or more interest the participant has in (any class of) the share capital of the company, they constitute a so-called ‘substantial interest’, which is subject to box 2 taxation. Any dividends received and any capital gains realised upon disposal are under this regime taxed at a flat rate of 25% (2019);

Box 3. Any shares not falling within the scope of box 1 or box 2 taxation, are taxed in box 3. During the holding period, a progressively determined notional yield of the taxable value of the shares on 1 January, in each given year, is subject to Dutch income tax at a fixed rate of 30%. Any actual investment income received (e.g. interest, dividends) is not taxable.

There is a general exemption for net worth assets up to (in 2019) Euro 30,360 (for singles) and EUR 60,720 (for couples), which applies to all assets including (market value of) shares on 1 January, prior to the calculation of the notional yield.

Upon disposal of the shares any capital gains realized shall be exempt, whereas a loss will not be tax deductible for the participating employee.

(v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan:

A loan that is offered to participants as part of an incentive plan in principle does not constitute a taxable benefit, provided the interest on the loan is at arm’s length. In general, if the interest is below market rates under similar conditions, the benefit for the participant may constitute taxable employment income.

Share option rights

(i) on grant:

No tax and/or social security consequences arise at the date of grant.

(ii) on vesting:

No tax and/or social security consequences arise at the date of vesting.

(iii) on exercise:

Taxation for Dutch wage tax purpose arises upon exercise of the share option. The exercise gain (i.e. the share price at fair market value minus exercise price) constitutes employment income which is taxable at progressive income tax rates, with a mandatory wage tax withholding. The taxable benefit may also be subject to social security charges (similar to the free / discounted share plans).

As of 2019 an exemption is available in respect of options on shares in innovative start-up companies: 25% of exercise gains up to EUR 50,000 (i.e. EUR 12,500) per employee per calendar year. The exemption is subject to a number of conditions.

(iv) on the acquisition, holding and/or disposal of any underlying shares of securities:

Please refer to the paragraph on free / discounted shares.

(v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan:

Please refer to the paragraph on free / discounted shares.

SARs

(i) on grant:

No tax and/or social security consequences arise at the date of grant.

(ii) on vesting:

No tax and/or social security consequences arise at the date of vesting.

(iii) on exercise:

In principle the same tax treatment applies at the date of exercise for the SARs, as that apply for the share options. The difference between the SARs and the share options are that the SARs are exercisable in cash and not in shares.

Brazil Small Flag Brazil

  1. If the plan is characterised as compensation, the following tax treatment should apply:

(i) on grant: no taxation

(ii) on vesting: no taxation

(iii) on exercise:

  • Earnings that arise from compensation obtained in Brazil by executive employees and non-employees are subject to individual income tax (IRPF) in the form of withholding tax (WHT), at progressive rates up to 27.5 per cent, as indicated below (for calendar year 2018):

    Rate

    Income

    Amount to be deductible from the personal income tax

    Exempt

    Up to R$ 1,903.98

    --

    7.5%

    From R$ 1,903.98 up to R$ 2,826.65

    R$ 142.80

    15%

    From R$ 2,826.65 up to R$ 3,751.05

    R$ 354.80

    22.5%

    From R$ 3,751.05 up to R$ 4,664.68

    R$ 636.13

    27.5%

    Over R$ 4,664.68

    R$ 869.36

  • In addition, social security contribution (INSS) will be due by the employee at progressive rates varying from 8% to 11%, depending on the amount of the contribution salary and will be withheld by the employer directly from the employee’s salary, according to the following table (in force as of 1 January 2019):

    Rate

    Contribution Salary

    8%

    Up to R$ 1,751.81

    9%

    From R$ 1,751.82 to R$ 2,919.72

    11%

    From R$ 2,919.73 to R$ 5,839.45

The contribution salary is limited to a maximum and minimum value established by the Ministry of Finance (currently the maximum monthly value is R$ 5,839.45).

The contribution of an administrator or an executive officer who is not an employee is calculated according to the following table:

Rate

Contribution Salary

11%

Up to R$ 998.00

20%

From R$ 998.00 to R$ 5,839.45

(iv) on the acquisition, holding and/or disposal of any underlying shares of securities:

  • No taxation will be due on the acquisition/holding of any underlying shares.
  • The disposal of the underlying shares may result in a capital gain that will be recognized by the Brazilian employee and subject to income tax.

    Taxable basis is the positive difference between the disposal value and the acquisition cost of the units and the tax rate will vary from 15% to 22.5%, depending on the amount of the gain:

    Rate

    Capital Gain

    15%

    Up to R$ 5,000,000.00

    17.5%

    From R$ 5,000,000.00 to R$ 10,000,000.00

    20%

    From R$ 10,000,000.00 to R$ 30,000,000.00

    22.5%

    Over R$ 30,000,000.00

(v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan:

Interest remuneration arising from loans between individuals and legal entities will be subject to WHT at a rate that will vary depending on the term of the loan contract, as follows:

Contract Term

Tax Rate

Up to 180 days

22.5%

From 180 days to 360 days

20%

From 360 days to 720 days

17.5%

Over 720 days

15%

2) If the plan does not qualify as compensation, the tax treatment applicable to commercial plans would be as follows:

(i) on grant: no taxation

(ii) on vesting: no taxation

(iii) on exercise: no taxation.

(iv) on the acquisition, holding and/or disposal of any underlying shares of securities:

  • No taxation will be due on the acquisition of any underlying shares.
  • The disposal of the underlying shares may result in a capital gain that will be subject to income tax, at a rate will vary from 15% to 22.5% depending on the amount of the gain.

(v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan: the same as applicable for compensation plans.

Japan Small Flag Japan

In relation to the payment of the bonus, they are subject to income tax and the employer company is required to withhold such tax from the bonuses. In addition, contributions to the national social and labor insurance systems are required when the participants receive the bonuses. If an employee receives a payment from the profit sharing plan mentioned above, the payment received is also subject to income tax and social security contribution.

In relation to the stock option, the taxation is as follows:

(i) on grant;

No taxable income and social security contribution.

(ii) on vesting;

No taxable income and social security contribution.

(iii) on exercise;

Taxable income.

The formula for calculating the amount to be taxed depends on the type of stock option. For example, if an employee is able to acquire listed shares by exercising the options, the taxable amount is the amount deducted from the market price of the listed shares by a certain amount.

On the other hand, stock options that satisfy certain conditions, such as transfer restrictions, are not subject to taxation at the time of exercise.
The exercise of stock options is not subject to social security contribution.

(iv) on the acquisition, holding and/or disposal of any underlying shares of securities;

The acquisition and holding of any underlying share of securities are not subject to income tax. On the other hand, when the share is sold, the income from the disposal is subject to income tax.

(v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.

There is no special taxation system for borrowing related to stock options.

If the employee’s stock ownership plan uses a partnership, the partnership itself is not subject to taxation. Income tax will be imposed directly to the individual who is a member of the partnership in the event of disposal of the acquired stock.

With regard to an ESOP, the Japanese National Tax Agency (“NTA”) has published their answer regarding its taxation. The fact is that the ESOP trust acquires all the shares that the Employee Shareholding Partnership is planning to acquire in the future, sells it to the Employee Shareholding Partnership on a regular basis, profits from the sale of the stock and distributes it to the employees after the trust period expires. NTA understands that the payment of dividends to employees under this plan is subject to income tax.

Norway Small Flag Norway

A benefit in kind or in cash received through an employment is as a starting point taxable once received, or earlier, if the employee has an opportunity to receive the benefit. This is interpreted as the maturity date, taxation will normally occur no later than when the payment is agreed to be paid.

Deferral of taxation may occur where there are sufficient restrictions and limited possibility for the employee to elect investment options. In such cases, the following conditions needs to be fulfilled:

  1. The plan is mandatory for the employee; it is not an option to receive cash or a benefit as an alternative;
  2. The employees have limited or no influence on how the funds should be invested;
  3. The employees have no right to receive dividends and cannot dispose of the funds through sale, as security for loan or in any other way before a certain time or when certain conditions have been fulfilled.

For share options in relation to employment, there are special provisions regarding time of taxation. Share options are taxable at exercise.

An annual discount may be tax free for all-employee equity based plans. The tax free discount does not apply to cash based plans or where the shares are held indirectly. Some limitations regarding seniority may be included without disqualifying the plan as an all-employee plan.

The current annual tax-free discount for share purchases and share option exercise is maximum 20 %, limited to NOK 3,000. The tax-free discount will also be excluded from the Employer National Insurance basis.

(i) on grant;

Shares: Free share awards and purchase of discounted shares are taxable when shares are received.
Derivative: If the employee does not pay fair market value for the derivative at investment, the discount will be subject to marginal tax/social security of 46.6% (proposed reduced to 46.4% in the pending 2019 fiscal budget).

(ii) on vesting;

Usually no tax or social security due

The concept of “vesting” may differ from plan to plan. If vesting is connected also with protection from loss related to the investment, the acquisition date for tax purposes may be deferred until when sufficient protection mechanisms no longer apply.

(iii) on exercise;

Share Option plans, share subscription rights and Restricted stock units: The exercise of an option is subject to income tax. The taxable benefit, i.e. the difference between the market value of the underlying share at exercise and the exercise price (less any price paid by the employee at grant) is subject to income tax and social security.

Derivative: If the employee paid fair market value at investment, a 23% flat rate applies on capital gains (proposed reduced to 22% in the pending 2019 fiscal budget). The gain is not subject to social security contribution.

If a discount applied on investment that was reported as taxable employment income at investment, the gain at exit is taxed at the flat rate of 23 %.

If the employee did not pay fair market value for the derivative and no employee income was reported at the time of investment, the gain will most likely be considered employment income and subject to the marginal tax/social security of 46.6%.

(iv) on the acquisition, holding and/or disposal of any underlying shares of securities; and

Changes in the underlying object for a share option due to merger, demerger or in the corporate structure usually do not result in taxation.

A special tax deferral plan was introduced from 2018, applying to qualified plans involving shares in newly established, smaller start-up companies. Under this, it is possible to defer taxation until actual sale of the underlying shares. The conditions are, however, many and complex.

(v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.

Loans to shareholders may in some cases be seen as a dividend payment for tax purposes, resulting in dividend taxation. A general exemption applies for loans to employees who, together with closely related individuals, directly or indirectly holds less than 5 % of the shares and less than 5 % of the votes.

The benefit of a low interest loan within an employment relationship is subject to taxation and social security using an interest rate set by the Directorate of Taxes bimonthly. Interest free or low interest loans may be tax free if the amount is limited (NOK 58,129) and repayment occurs within 12 months. Third party loans given to employees may be treated in the same way as loans from an employer if the terms, fees and interest rate deviate from general market terms.

United Kingdom Small Flag United Kingdom

(i) on grant;

No tax or social security (national insurance contributions) is payable by an individual on the grant of options under either a tax-favoured or non tax-favoured share option plan.

(ii) on vesting;

Where vesting means shares are delivered to participants, income tax and (usually) national insurance contributions will be payable on vesting. Where vesting simply means that an award (such as an option) is capable of being exercised then no liability to income tax or national insurance contributions will arise until exercise.

(iii) on exercise;

No tax is payable by an individual on the exercise of an option under a tax-favoured share option plan provided the specific conditions of each plan (including, if applicable, holding periods) are met. If an individual exercises an option under either a tax-favoured plan in non-qualifying circumstances or a non tax-favoured share plan then income tax and (usually) national insurance contributions will be due on the difference between the market value of the shares on exercise and the aggregate exercise price paid for them.

(iv) on the acquisition, holding and/or disposal of any underlying shares of securities; and

Other than when a non-tax-favoured option is exercised, no income tax or national insurance contributions should normally arise through the acquisition and holding of shares acquired pursuant to a share option plan. The acquisition of shares under a non-tax advantaged share ownership plan will give rise to income tax and (usually) national insurance contributions if the participant pays less than market value for them.

Although there are anti-avoidance provisions that can trigger charges to income tax and national insurance contributions in respect of shares held by employees, it is usually possible to manage these through the making of special elections.

Any gain made by an individual on the disposal of shares should be subject to capital gains (depending on the availability of allowances and reliefs).

(v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.

It is quite common for a company to make loans available to its employees in order to enable them to participate in share offers.

The loans can be made available to employees on an interest-free basis. However, if the loan to an individual employee exceeds £10,000, that employee will be charged to tax on the difference between the interest paid (i.e. zero) and interest calculated by reference to an official rate prescribed by HMRC (the UK's tax authority).

As regards repayment of the loan, this could be by employees paying monthly instalments or using the sale proceeds of the shares acquired. Alternatively, the loan terms could provide for waiver of all or part of the loan in prescribed circumstances, for example by reference to the achievement of performance conditions. Any waiver of the obligation to repay the loan would give rise to an income tax charge and national insurance contributions.

Due to anti-avoidance legislation, is it now uncommon for third parties to make loans to employees as these can trigger automatic charges to income tax and national insurance contributions at the time the loan is advanced.

Germany Small Flag Germany

In general, any income from employment is taxable and subject to social security contribution. Depending on the type of incentive plan, different time frames in which taxes and social security contributions are raised and social security contributions must be paid, are notable. The general rule is that the tax burden occurs if and when the beneficiary receives something of immediate value (something he/she can turn into money (e.g. trade)). The same applies in general for the obligation to pay social security contributions on the payment.

(i) on grant:

The requirements for taxation and social security contributions depend on the type of incentive plan. In case of a share plan, income taxes (up to 45 % of gross income) and social security contributions must be paid at the time of the grant (ca. 19,4 %).

Shares granted by a parent company might not be classified as remuneration due to the fact that the parent company is not the employer. While the obligation to pay taxes remains out of discussion, the question whether social security contributions must be paid is discussed controversially. The Federal Fiscal Court classifies share options as income, some argue that shares or share options are to be seen as remuneration in the sense of social security law even if paid by a parent company;

(ii) on vesting:

The vesting period might be an event, where taxes or contributions must be paid. This event occurs as a subject to taxation and social security contributions if the shares and share options become transferable and therefore tradable after the vesting period (then taxation and obligation to pay social security in the same way as the granting of shares);

(iii) on exercise:

The benefit from exercising a share option is taxable. The income taxation refers to the difference between the market value and the exercised price of the shares at the time of exercise. The employee is obliged to pay income tax, nevertheless usually the company retains the disbursement from the employee´s remuneration. Social Security contributions, in contrast, must be withheld by the company and have to be contributed to social insurance agencies at latest by the third last banking day of the month of exercise.

In case of exercising convertible bonds, taxation will take place in this phase as well, so that the employee must pay taxes on the monetary benefit;

(iv) on the acquisition, holding and/or disposal of any underlying shares of securities:

The acquisition of shares in execution of an option is a taxable event (as mentioned above), while holding the shares through the vesting-period has no effect on the obligation to pay taxes or social security contributions.

Notable in this context: At the time of disposal of shares the amount based on the difference between the purchase and selling price is taxable as well (any increase of gains). This event is subject to capital gains tax based on Section 43 Income Tax Act, although the grant of shares has already been taxed. In this model participants must face a two-phased taxation obligation. Thus, this scenario has no effect on the participant as an employee, but is a general obligation in the case of gains;

(v) in connection with any loans offered to participants (either by the company operating the incentive plan, the company of the participant (if different) or a third party) as part of the incentive plan:

For the participant a company´s loan is mostly an advantageous way of receiving an incentive at a good rate of interest. If the company grants a loan at more favourable conditions than prevailing on the market, the interest advantages are deemed to be a monetary benefit which is therefore taxable and subject to social security contributions. However, an advantage of interest is only recognizable if the monetary advantage does not exceed 2,600 EUR at the end of the remuneration period. In every other case, the granting of a loan itself does not constitute taxable income for the employee. Only if the company waives his right to repayment of the loan, the cash flow is deemed to be remuneration and therefore subject to tax and social security contributions.

France Small Flag France

On a preliminary basis, note that:

- Cash bonuses or bonuses resulting from phantom shares plans are subject to national social security contributions and income tax (through withholding tax) under the same conditions as salary. Consequently, the developments that follow only concern stock options and free shares;

- Bonuses in shares (stock options and free shares) are subject to preferential social and tax regime provided that the requirements of the French Commercial Code are complied with (see question 5) and specific disclosure requirements are fulfilled (see question 9).

The social and tax regime depends on the date of authorization to grant the shares. The rules set out below are those applicable to stock options granted since 28 September 2012 and free shares granted since 31 December 2016.

a. Tax and social security consequences on grant:

Assuming that definitive grant is subject to conditions that are not met yet, there are no tax and social security consequences at this stage.

b. Tax and social security consequences on vesting:

For stock-options, the added value on vesting corresponds to the difference between the real value of the shares on the date of exercise of the option and the subscription/purchase price.

If the issuing company is listed:

- the subscription price cannot be than 80% of the average of the quotation price over the 20 trading days preceding the day on which the option is granted;

- the purchase price may not be less than either 80% of the average purchase price of the shares held by the company or 80% of the average of the quotation price over the 20 trading days preceding the day on which the option is granted.

If the company's shares are not listed on the stock exchange the subscription price must be determined in accordance with the provisions of the French commercial code.

For free-shares, the added value on vesting corresponds to the real value of the shares on the date of vesting.

As far as tax and social security consequences on vesting are concerned:

- If the requirements of the French Commercial Code are complied with, a specific tax and social regime applies.

For stock-options, if the option benefits from a discount of more than 5% compared to the actual value of the share, this excess discount constitutes an advantage that is subject to tax and social security contributions, such as salary, at the time of vesting.

For free shares and stock options, the added value on vesting is exempt from social security contributions. They remain subject to “CSG” and “CRDS” (French taxes that aims at financing the French Social protection) and social taxes on assets, the rates of which vary depending on each situation.

The beneficiary is also subject to a specific contribution amounting to :

  • for stock-options: 10% of the added value on the difference between the value of the share upon exercise of the option and the purchase price of the share;
  • for free shares exceeding 300,000 euros: 10% of the portion of the added value on acquisition that exceeds the threshold of 300,000 euros.

In terms of taxation, the added value on vesting is taxed in the wages and salaries category. However, for free shares, deductions are provided for the portion of the added value on acquisition lower or equal to 300,000 euros.

- Otherwise, bonuses in shares (stock options and free shares) are subject to social security contributions under the same conditions as salary on the basis of the value of the shares (stock market price) on the date of grant. There are also subject to income tax (through withholding tax) in the wages and salaries category for the year of grant of the shares.

c. Tax and social security consequences on exercise:

For stock-options, the added value on exercise corresponds to the difference between the effective sale price of the shares and the subscription/purchase price.

For free-shares, the added value on exercise corresponds to the difference between the effective sale price of the shares and their value at the date of vesting.

- If the requirements of the French Commercial Code are complied with, there are no social security consequences on exercise. In terms of taxation, for free shares and stock options, the added value on exercise is taxed under the same conditions as capital gains on securities (flat tax rate unless the beneficiary decides to be taxed in the wages and salaries category).

- Otherwise, the added value on exercise is subject to income tax and social security contributions under the same conditions as capital gains on securities (but, due to recent case law, there is currently a debate on whether or not those plans shall be considered as remuneration and, as such, subject to social security contributions and income tax as wages).

d. With regards to loans offered to participants: note that social security contributions are due from the date of payment, even if it is an advance payment. According to the French tax administration, the company must apply the withholding tax to this advance.

Spain Small Flag Spain

Bonus and commissions

Bonuses and commissions are treated as employment income arising in the tax year in which the employee becomes entitled to receive them and are taxed at a variable rate up to 48% depending on the region where the employee resides.

Under certain conditions, a 30% reduction over a maximum amount of €300,000 would apply to bonuses and commissions generated over a period of more than two years provided that the employee has not obtained any other income in the preceding five tax years to which this 30% reduction has been applicable.

The employer is required to make, at the time of payment of the bonus or the commission, a withholding on the amount paid. This withholding tax is fully creditable from the employee’s annual tax liability.

The company pays social security contributions on behalf of employees. The contribution is calculated by applying a specified rate to a monthly social security base amount.

The base amount for the calculation is the aggregate monthly salary the employee receives, plus any annual amount not accrued on a monthly basis. The aggregate includes remuneration received from bonus and commissions. The remuneration is pro-rated over the 12-month period of the calendar year in which either the payment of the bonus/commissions takes place.

There is a cap of €4,070.10 for 2019 on the monthly amount on which social security contributions are calculated.

If the normal monthly salary exceeds the maximum monthly contribution cap, the salary the employee obtains from the plan does not incur higher social security contributions.

Stock Options

Non-Transferable stock options are treated as an employment income on the difference between the market value of the shares at the date of exercise and the exercise price. Such income is deemed as arising in the tax year of exercise and it is taxed at a variable rate up to 48% depending on the region where the employee resides.

- Position on grant: the employee is not taxed.

- Position on vesting: the employee is not taxed.

- Position on exercise: employee receives an in kind employment income on the difference between the market value of the shares and the exercise price.

Such employment income is not taxed up to the limit of €12,000 per year provided that the following conditions are met:

- The stock option is granted under the same conditions to all the employees of the company. The company can restrict the incentive to employees with a minimum seniority provided that the seniority required to enjoy the incentive is the same for all the employees.

- The employee, together with his non-separated spouses or relatives up to the second degree, does not have a, direct or indirect, participation in the company exceeding 5%.

- The shares acquired are kept for at least 3 years.

If the stock options are granted more than two years before the date of exercise, the 30% reduction referred to in above over a maximum amount of €300,000 could be applicable.

On the sale of the shares, the employee derives a capital gain on the difference between the sale price and the market value of the shares on exercise. This capital gain is taxed at a flat rate up to 23%.

Transferable stock options are treated as an employment income on the market value of the option at the date of grant. Such income is deemed as arising in the tax year of grant and is taxed at a variable rate up to 48% depending on the region where the employee resides. At the date of exercise, the employee derives a capital gain on the difference between the market value of the shares and the exercise price that it is taxed at a flat rate up to 23%.

- Position on grant: the employee receives an in kind employment income on the market value of the option.

- Position on vesting: the employee is not taxed.

- Position on exercise: the employee derives a capital gain on the difference between the market value of the shares and the exercise price.

This employment income is not taxed up to the limit of €12,000 per year provided that the conditions above mentioned for the non-transferable stock options are met. In addition, the 30% reduction referred to in above over a maximum amount of €300,000 could be applicable.

On the sale of the shares, the employee derives a capital gain on the difference between the sale price and the market value of the shares on exercise. This capital gain is taxed at a flat rate up to 23%.

The employer is required to make a payment on account of the employee's annual tax liability on the employment income at the time of exercise (non-transferable stock options) or at the time of grant (transferable stock options) that would be fully creditable from the employee’s annual tax liability. This payment on account can be borne by the employer (increasing the amount of the taxable income for the employee) or charged on to the employee.

The employer would register the relevant expense for the delivery of the shares which, as a general rule, would be tax deductible for Corporate Income Tax purposes in the tax year of exercise. Notwithstanding the above, when the stock options relate to shares of a group company, such expense would only be tax deductible provided that the employer reimburses the group company for the relevant costs and provided further that there exists a written reimbursement agreement.

The company pays social security contributions on behalf of employees. The contribution is calculated by applying a specified rate to a monthly social security base amount.

The base amount for the calculation is the aggregate monthly salary the employee receives, plus any annual amount not accrued on a monthly basis. The aggregate includes remuneration received from stock option plans. The remuneration is pro-rated over the 12-month period of the calendar year in which either the delivery of the shares acquired takes place or when the cash payment is made.

There is a cap of €4,070.10 for 2019 on the monthly amount on which social security contributions are calculated.

If the normal monthly salary of a participant in the share option plan exceeds the maximum monthly contribution cap, the salary the employee obtains from the plan does not incur higher social security contributions.

Restricted stock units (RSUs)

RSUs are treated as an employment income arising on the date of the delivery of the shares to the employee. Such income is calculated on the difference between the market value of the shares and the price paid by the employee (if any) and it is taxed at a variable rate up to 48% depending on the region where the employee resides.

This employment income is not taxed up to the limit of €12,000 per year provided that the conditions above mentioned for the stock options are met. If the RSUs are granted more than two years before the delivery of the shares, the 30% reduction referred to in above over a maximum amount of €300,000 could be applicable.

On the sale of the shares, the employee derives a capital gain on the difference between the sale price and the market value of the shares on the date of delivery. This capital gain is taxed at a flat rate up to 23%.
The employer is required to make a payment on account of the employee's annual tax liability on the employment income at the time of delivery of the shares that would be fully creditable from the employee’s annual tax liability. This payment on account can be borne by the employer (increasing the amount of the taxable income for the employee) or charged on to the employee.

The employer would register the relevant expense for the delivery of the shares which, as a general rule, would be tax deductible for Corporate Income Tax purposes in the tax year of delivery. Notwithstanding the above, when the RSUs relate to shares of a group company, such expense would only be tax deductible provided that the employer reimburses the group company for the relevant costs and provided further that there exists a written reimbursement agreement.

The company pays social security contributions on behalf of employees. The contribution is calculated by applying a specified rate to a monthly social security base amount.

The base amount for the calculation is the aggregate monthly salary the employee receives, plus any annual amount not accrued on a monthly basis. The aggregate includes remuneration received from RSU plans. The remuneration is pro-rated over the 12-month period of the calendar year in which the cash payment is made.

There is a cap of €4,070.10 for 2019 on the monthly amount on which social security contributions are calculated.

If the normal monthly salary of a participant in the RSU plan exceeds the maximum monthly contribution cap, the salary the employee obtains from the plan does not incur higher social security contributions.

Loans offered to participants

Interest on loans granted by the employer or the company operating the incentive to the employees is treated as employment income on the difference between the loan’s interest rate and the legal interest rate applicable in the relevant period. Such income is taxed at a variable rate up to 48% depending on the region where the employee resides.

The employer is required to make a payment on account of the employee's annual tax liability on such employment income that would be fully creditable from the employee’s annual tax liability. This payment on account can be borne by the employer (increasing the amount of the taxable income for the employee) or charged on to the employee.

Colombia Small Flag Colombia

According to the tax code, by general rule it is considered as Colombian-source income the personal services rendered by any individual within Colombia, which include among others the employment income.

In general terms, employment income includes salaries, wages, bonuses, benefits in kind and any other amount, received in cash or in kind, under an employment relationship. Therefore, the stock option, the awards or any other incentive plan made by a company to its employee in Colombia, may be deemed to be taxable as employment income under provisions in the tax code.

The tax liability for any incentive plan depend on the kind of plan; nonetheless, the Colombian tax law is clear in establishing that the income tax arises for employees only when the income is realized, as it is described below :

(i) Cash awards/ bonus: The income would be taxable when the employee's compliance with certain covenants and it is payed to the employee. (Taxable on granted).

(ii) Stock option: The income would not be taxable until the rights to ownership of the equity awards on the employee's compliance with certain covenants and the option is exercised. Thus, no income tax liability arises at grant, but it would be spread at exercise.

The sale of the acquired shares made by the employee may be deemed to be taxable upon the difference between its acquisition value (fiscal cost) and its sale price. If the shares qualify as a fixed asset for the employee, it could varied the tax treatment: (i) if the shares have been held for over 2 years and qualify as fixed assets, the profit would be deemed as a capital gain (10% tax rate); or (ii) if the shares do not comply with the 2 characteristics mentioned above, it would be taxable as ordinary income with progressive rates, up to 39%.

(iii) Awards -shares: The employee should be subject to income tax once the shares are delivered and applies the same rule mentioned above for the disposal of the shares, according to the section 108-4 of the tax code.

As summary, the employee would not be subject to tax the income until such is realized, in other words, the incentive would be taxable at the time of their perception when it is likely to produce a net increase for the employee.

(i) on grant: It would not have tax effects for the participant of the incentive plan; hence, not subject to be taxable.

(ii) on vesting: It would be deemed to be taxable on spread at exercise for those stock options’ plans where the rights to ownership of the equity awards on the employee's compliance with certain covenants and the option is exercised.

(iii) on exercise: For most of the incentive plans, it is on exercise of the right and the acquisition where the income is taxable.

(iv) on the acquisition, holding and/or disposal of any underlying shares of securities: (See the comments for stock option)

As per social security, all plans when granted shall always be agreed between the parties as non-salary payments in order for them to be excluded of the base to perform social security contributions. If such agreement is executed, incentives will not be taken in to account for social security payment purposes on the moment of vesting, exercising or acquiring.

Portugal Small Flag Portugal

Cash-based Incentives

Cash-based incentives are characterized as employment income and are subject to tax in the tax year in which the employee becomes entitled to receive them. This income is subject to the general progressive rates of up to 51% (on gross annual income in excess of approximately € 80,000).

The employer is required to withhold income tax at the time of the payment. The tax withheld is fully creditable against the employee’s annual tax liability.

As a rule, the employer pays the employee’s social security contributions, which are levied at the rate of 11% over the total compensation (and are not capped). Note, however, that variable bonuses are not currently subject to social security contributions.

Share Plans

Employees are not taxable on the granting and vesting of any share plans.

On the contrary, employees are deemed to receive employment income on the exercise of the options. The taxable income consists of the difference between the fair value of the shares on the exercise date and the exercise price.

There are no specific rules to determine the fair value of shares that are not listed. The general principle is that fair value consists of the value that would have been agreed for the transfer of those shares between two knowledge independent parties.

The taxable income is classed as employment income and is subject to the general progressive income tax rates of up to 51% (for gross income in excess of 80,000 euros). The top marginal rate is increased to 54.5% on annual income in excess of € 250,000.

In case the employer or any related entity extends a loan to the employee, the difference between the agreed interest rate and the market rate for a similar loan will also be considered as employment income. This income is not subject to withholding tax.

Capital gains realized on the subsequent transfer of the shares will be subject to tax at the flat rate of 28% (the employee may opt to include the gain in his gross taxable income and subject it to the general progressive rates).
Currently, compensation from share plans is not subject to social security contributions.

Italy Small Flag Italy

From a fiscal point of view, the stock options, after the repeal of the favorable regime existing until June 2008, are to be considered to all intents and purposes as fringe benefits.

In the first phase of granting the right, there is no taxable phenomenon, while when the right is exercised, the beneficiary shall normally pay a price (strike price) lower than the value at that time of the underlying security.

Since the benefit derives from the conditions of employment (or similar in the case of directors), it must be considered in all respects as income from employment, for the principle of all-inclusiveness according to which all sums and values that the employee receives in relation to the employment relationship, constitute income from employment (article 51 of the TUIR).

Therefore, when the employee receives shares for participation in a stock option plan, the difference between the normal value of the securities at the time of exercise of the option and the price paid by the employee (strike price) is considered as employee income, to be subject to normal IRPEF taxation.

For the determination of the normal value, article 51, paragraph 3 of the TUIR expressly refers to art. 9 of the TUIR, which, with reference to shares, identifies it:

for shares, bonds and other securities traded on regulated Italian or foreign markets, on the basis of the arithmetic average of the prices recorded in the last month;

in the case of other shares, in the case of shares in non-equity companies and in the case of securities or shares in the capital of entities other than companies, in proportion to the value of the net assets of the company or entity or, in the case of newly constituted companies or entities, to the total amount of the contributions.

However, the qualification as an employee's income, as an exception to the principle of harmonisation of the tax and contribution bases, by explicit legislative provision (article 82, paragraph 24-bis of Decree Law. 112/2008), does not count for the formation of the taxable income basis.

Once the option right has been exercised, the new shareholder/beneficiary will be taxed in accordance with the general rules as regards both the possible receipt of dividends during the period of ownership of the security and as regards the taxation of any capital gains realised at the time of disposal of the security itself; in the event of sale, the tax cost of the security, to be compared with the consideration, will be the normal value of the same at the time of the exercise of the option right.

Conversely, performance bonuses are afforded preferential tax treatment which consists in subjecting such bonuses to an alternative taxation in lieu of the ordinary taxation established for the natural person’s income (hereinafter referred to as IRPEF, after the Italian acronym for Imposta sul reddito delle persone fisiche) and its surcharges. More specifically, paragraph 182 of Article 1 of Law no. 208/2015 provides for the application of a 10% substitute tax for personal income tax and surcharges as a preferential measure for performance bonus , unless the employee expressly waives it in writing.

Finally, as to the so-called corporate welfare, article 51, in its paragraphs 2 and 3, of the TUIR provides that such benefits do not contribute to the formation of employees’ income and, therefore, is not subject to taxation or contribution. It is essential, in order for these benefits not to contribute to the formation of employee income, that they are offered to all employees or to categories of employees.

Turkey Small Flag Turkey

(i) on grant;
There are none.

(ii) on vesting;
There are none.

(iii) on exercise;
Please see below.

(iv) on the acquisition, holding and/or disposal of any underlying shares of securities; and

As a general rule, the taxable event for employment income is triggered once the employee legally and economically has the right to dispose of the benefit or to receive payment.

Having said that regarding stock option plans, income tax is imposed upon exercise on any spread on the shares, which is the excess of the fair market value of the shares on the exercise date, over the aggregate exercise paid price.

When an employee sells its share to a third party, the share is acquired by payment of the share price. As per the repeating Article 80 of Income Tax Law, the gain obtained from the sale of the securities, except the ones belonging to the fully-taxable entities and which are held for more than two years, is considered as value increase gain.

(v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.

These loans to participants may be offered in two ways to participants. First as advances given to employees as a benefit in the payroll to be paid later in instalments without interest or typical loans to be paid back with interest.

In the first scenario, as per Tax Law advances are included in the broad meaning of the term salary and subject to income tax. In other words advance payment becomes subject to income tax right at the moment the advance is paid to the employee. Employer shall deduct income and pay the income tax in advance.

On the other hand if company is granting a loan rather than an advance to be paid back with the interest, the company will be invoicing this amount and participant will have no tax duty.

Updated: June 25, 2019