When companies develop benefit packages to attract and retain top talent, they must invest in the features that employees want most. While benefits in the areas of medical, pension and leave are standard (and even mandatory in many markets), some employers find that the best way to engage employees is to have them become a vested player and beneficiary of the company’s growth.
An employee stock option plan (ESOP) is an employee benefit plan designed to incentivize employees through equity ownership. But for companies that hire through an employer of record (EOR) or professional employer organization (PEO), there are often questions about how they can provide equity options to their team members. Here are some answers to the most frequently asked questions (FAQs) we get from employers when it comes to providing ESOPs to EOR/PEO-governed employees.
Why Do Companies Offer Equity Compensation as a Benefit?
The ‘world of work’ is constantly evolving, with stock options as a benefit becoming increasingly popular in markets around the globe for many reasons. Equity as a non-cash compensation tool enables a company to demonstrate appreciation to their existing staff and even attract highly skilled candidates. Equity as a benefit is especially useful for startups and SMEs if they cannot afford a cash bonus at the time of hiring or promotion but expect to have the outlined liquidity by the time the equity fully matures.
If there are vesting requirements involved – such as those that come with long-term incentive plans (LTIPs) or restricted stock units (RSUs) – the compensation received through ESOPs can also cultivate long-term loyalty and enhance retention.
Can I Provide Equity Compensation to My EOR/PEO-Governed Employees?
Most ESOP or other company stock plans allow for consultants or advisors to participate in the plan. This is the easiest way to allow an EoR Employee to participate in the plan, as legally they are not an employee of the organization.
Many companies assume that EoR/PEO-governed employees can be regarded as common-law employees or “de-facto” employees for the purposes of participation in an equity plan. This treatment, however, will be inconsistent with the position that, for other purposes, the third party EOR/PEO, and not the company, is the actual employer. It is critical to review the equity plan in detail to see if there are clauses that restrict providing equity to a foreign employee, consultant, or advisor.
Does My Home Country Versus the Country of the EoR/PEO-Governed Employee Matter?
When it comes to administering ESOPs to employees, the complexities and restrictions vary by country. For example, in the United Kingdom, the Enterprise Management Incentives (EMI) scheme enables companies to include specific provisions for issuing options that do not qualify under EMI. This facilitates a lot of flexibility in how ESOPs can be offered. When planned in advance, the EOR/PEO-governed employee can opt to receive a share grant instead of the traditional share. This share grant will then be taxed as ordinary income at the point that the grant is given; any increase will be taxed according to the rules of capital gains, which is usually lower than regular income taxes. However, in some jurisdictions, such as France, organizations cannot grant tax-qualified options or RSUs to anyone who is not employed by a domestic entity of the parent company.
In Order to Provide an ESOP, Will I Need to Change How I Classify My EOR/PEO-Governed Employees?
When granting equity to EOR/PEO-governed team members, there may be classification nuances to consider. Even just the wording of the classification often matters. For example, if the team members in question are classified specifically as “non-employees,” they subsequently may not be covered under securities law exemptions. Another wording example is in determining whether base pay can be offered in the form of equity. In some jurisdictions, base pay must be fully cash; equity will need to instead be called “supplemental pay.” If a startup is looking to incentivize recruitment, knowing this nuance is helpful because it allows them to properly offer equity in lieu of a base package.
What Are My Reporting Requirements to Local Tax Authorities?
Sometimes there are additional reporting hoops to jump through in offering equity options. For example, if a US-based company is looking to grant equity to EOR/PEO-governed employees that work in the EU, they may be required to provide a Prospectus. In particular, the Prospectus is required of companies if they don’t currently have securities listed in the EU or if the compensation is for more than 100 employees within a single EU member state. By contrast, some other countries do not require any securities rules to be followed so long as the entity is incorporated abroad. As your EOR/PEO and the official employer of the worker receiving the equity compensation, GoGlobal may need to report to local authorities on tax-withholdings or other relevant activities. In some cases, we may need to be in touch with you to satisfy these reporting requirements.
Will I Need Pre-Approval From My Government or From the EoR/PEO-Governed Employees’ Local Government?
In some countries, there are niche regulations that could restrict how you offer equity to foreign workers, such as obtaining pre-approval from a specific government authority or agency. Sometimes, pre-approval is also needed from the local government of the EOR/PEO-governed employees. For example, in China, the Circular 7 provision requires all companies to get approval from the state before awards can be granted to Chinese nationals. In Vietnam, RSU plans may have to be registered with the State Bank of Vietnam (SBV) before they can legally be issued to employees.
Should We Consider Providing a Bonus or Commission Instead of an ESOP?
In some cases, especially when local laws and strict regulations make ESOPs less attractive, bonuses and other commissions may be more desirable than equity. At GoGlobal, we work with clients to determine whether an ESOP will be preferrable or if it might make more sense to provide a bonus or commission in lieu of equity awards.
How Do I Determine the Tax Implications of Offering Equity Abroad?
The simplest way to offer equity is to allocate a set number of shares, which will be taxable at the standard rate in the current year in which they are offered. Because there is a known value to the shares, this is typically the most straightforward method. When offering options, the allocation becomes a little more complex. And when you consider the intricacies of foreign laws and cross-border administration, offering options becomes even more multifaceted.
Furthermore, it is also important to consider that options usually have a lifespan before they expire (10 years, for example). Options also have a strike price that is often not the same as fair market value, which can result in a spread. If the spread is positive, this becomes taxable income.
Should I Offer Qualified or Non-Qualified Stock Options?
Companies have the choice of offering qualified (usually in the form of RSUs) or non-qualified ESOPs, which will differ in terms of tax liabilities. Within either choice, some countries have tax-favorable options while others do not. Even when offering tax-favorable options, there are often rules about whether an employee can use their home country’s allowances to benefit. For example, the US and the UK both have tax-favorable options. While a citizen of the UK is not eligible for the tax-favorable US options, they are still able to take advantage of tax relief in the UK.
How Are the EOR/PEO-Governed Employees Taxed?
There are varying laws for how specific countries tax ESOPs. In the US, option grants do not become subject to taxation until they have been vested. However, in other countries, like Belgium, the equity award is taxable like any other benefit administered in the current year. In France, if there is any gain from sold shares within 12 months, the award is also subject to the same tax liability as income would be.
What Happens to Unvested Options?
Companies should consider what will happen to any unvested options. Different countries have their own labor laws that dictate how unvested options are treated if an employee is terminated or resigns. In the US, these options have no value and will be considered expired. But in some other countries, such as Austria, the options will be included as part of an overall severance package. If you are using options as a way to encourage employee loyalty, knowing how unvested options will be treated is essential from the start.
What Happens If I Offer Equity Options Now But Later Incorporate a Local Business Entity?
If your organization eventually incorporates locally, there may be preferential tax treatment for equity agreements in place. For example, in Canada, companies that are structured as CCPCs (Canadian Controlled Private Corporations) have income tax regulations that allow employees to claim a 50% tax deduction (subject to limits) on their options.
One important factor to consider is how to manage reporting and taxes upon incorporation. While the equity plan structure will remain valid upon incorporation, the reporting will depend on key tax dates. These include the exercise date, the payroll year-end date for the market in question and the sell or disposition date. Depending on the equity cycle timeline, there may be more preferable or less favorable tax consequences. As the EOR/PEO that is managing your ESOP, we can help you determine these consequences before you incorporate.
How Can GoGlobal Help Me in Offering an ESOP?
When it comes to offering equity options, each country and payroll jurisdiction is unique. Empowered by our team of leading EOR and PEO experts, GoGlobal can work with tax and legal professionals to construct a plan to offer shares to EOR employees. For example, by reviewing the provisions of your home country and the home country of the employees in question, we can help you determine whether your equity benefits should be offered in the form of straight company shares or more complex options.
As a leader in delivering global EOR and PEO models, GoGlobal partners with leading accounting and legal professionals in each of the countries we serve. In a continuously evolving global business environment, these strategic partnerships enable us to provide the most accurate information and optimized support. In terms of administering ESOPs, our customized services include global tax calculations, processing, and payment for equity options in each of your active payroll locations.