Building a Road Map to a Global Employee Stock Purchase Plan

GTN Newsletter - October 2015

Building a Road Map to a Global Employee Stock Purchase Plan

Jewon Wee, Managing Director

ISP Advisors
Email: jewon.wee@ispadvisors.com

It is easy to be overwhelmed when faced with the task of establishing and operating a globally offered employee stock purchase plan (ESPP). Identifying and understanding the key issues at the outset of the project is the first step toward achieving your goal.

While there are a range of technical and strategic issues associated with extending ESPP participation to a global population, some of the more significant considerations include:

  1. What are the local HR administrative and compliance requirements?
  2. Are we taking advantage of tax optimization opportunities such as delivering the benefit through a local “qualified” plan mechanism or recharging plan costs to the local affiliates?
  3. How are we going to communicate the plan and its impact to employees?

COMPLIANCE + REGULATION

The global regulatory environment governing equity compensation varies widely. Thus, it is very important for companies to understand the intricacies of local regulations (e.g., local payroll tax withholding and reporting obligations, securities filings, foreign exchange restrictions, payroll deduction limitations, etc.).

A typical first step in understanding the relevant compliance considerations is to conduct a due diligence review of the countries in which you are contemplating extending participation. The review should cover, at a minimum, the following:

  • An overview of the labor law considerations such as acquired rights laws, data protection, etc.
  • Regulatory filing and notification requirements (e.g., with the local securities commission, tax authorities, etc.).
  • Points of taxation for income tax, social tax, and any other applicable taxes.
  • Tax withholding and reporting requirements and responsibilities for the local employer and the employee.
  • Payroll deduction parameters.

EMPLOYEE COMMUNICATIONS

Employee communications are often the catalyst to successful equity compensation arrangements. However, since ESPPs contain many layers of complexity (i.e. administrative rules, tax rules, investment considerations, etc.), it can prove challenging to generate a sense of excitement around the plan. To maximize participation, it is important to ensure that employees, many of whom may be new to share ownership and investment markets, have a solid understanding of the plan’s implications. Employees will also want to know why the company is providing this benefit as well as the benefits of long-term stock ownership.

Global implementations raise unique employee communication issues not found in a typical US communication program. Works councils, translations, varying cultural norms and traditions, different levels of employee awareness, and multiple personal tax implications all require global experience and leadership. Best-practice communication builds on the opportunity to further engage employees in corporate brand values, reinforce the link between job performance and reward, and provide employees with a stake in the company’s overall future. To benefit from the outstanding opportunities and avoid high-risk pitfalls, the approach needed to communicate your ESPP during every stage of the process should be as disciplined and sophisticated as an external marketing or public relations campaign.

FACT-BASED PLAN DESIGN

ISP Advisors recently created a custom ESPP Design Repository by evaluating 114 proxy statements (from 2010 to 2015) and cataloged over 20 distinct ESPP design features, ranging from the ordinary (423 tax-qualified) to the less ordinary (leave-of-absence provision), to create a repository of plan data that includes the exact language used to adopt each design feature:

  • ESPP share pool (# of shares authorized + prevalence of evergreen provision)
  • Eligibility criteria (minimum service requirements)
  • Purchase price setting (prevalence of “look-back” provision)
  • Offering /purchase rules (offering period length + # of purchases per offering)
  • Purchase rules (# of shares + post-purchase transfer /sale)
  • Administrative features (enrollment window + residual contribution treatment)

Unlike other surveys that rely on each respondent’s individual interpretation, all plans were viewed through the same unified, objective lens.

FREQUENTLY ASKED QUESTIONS

Q: Are there any international issues to consider when implementing a 423 plan in the United States?

A: Yes. One of the conditions that must be met in order to establish a 423 plan is that the plan is extended to all employees. This would include employees of a foreign entity if the foreign affiliate were a branch of the US parent. This is because a branch entity of a US parent is regarded (for US purposes) as being the same legal entity. As such, it would be required that participation was offered to such employees at the same time that participation was offered to the US employees. Employees of foreign subsidiaries, however, can be excluded from the plan.

Q: Are there any securities filing requirements that I need to be aware of when extending my ESPP to employees of our international affiliates?

A: Potentially. In certain countries, you might be required to file your plan with the local Securities and Exchange Commission or similar authority. Failure to comply with such regulations could have severe repercussions.

Q: When are employees typically taxed outside of the United States?

A: Most countries impose tax on the discount at the time of purchase. However, the risk of tax at grant and/or sale does exist in some jurisdictions.

Q: Where can I find additional information about best practices in ESPP design and implementation?

A: A good place to start is the ESPP Design Corner, which is found at the bottom right corner of the ISP Advisors home page (http://ispadvisors.com). From there, you can download the Global ESPP Whitepaper as well as the ESPP Repository Whitepaper.

If you have any questions regarding this newsletter please contact Jewon at jewon.wee@ispadvisors.com.

The information provided is for general guidance only, and should not be utilized in lieu of obtaining professional advice.

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