U.S. workers aren’t the only ones demanding stock plans. Increasingly, international IT companies are finding that foreign employees expect equal benefits. But there are hazards to offering stock options or purchase plans in foreign countries.
We asked an expert to identify what CIOs and other executives should know before offering an overseas stock plan.
“In most countries, there isn’t legislation that specifically addresses stock plans, so what you need to look at [are] several sources of the law,” said Raji Antoun, a principal in international consulting practice with William M. Mercer .
Antoun identified four areas of law that may impact your stock plan:
- Tax laws
- Currency/foreign exchange regulations
- Labor laws
- Data protection and security laws
You’ll need to pay attention to when the options are taxed. Some countries tax the options when they are granted, others tax options when they are exercised, and still others tax only when the stocks are sold, according to Corey Rosen, executive director of the National Center for Employee Ownership (NCEO).
In some cases, your employee’s options could be taxed twice, once in the U.S. and once in the home country, so be sure to check out tax laws on both sides of the ocean.
“You don’t want to give an employee an option in some country only for the employee to find out that it’s taxable on grant,” Rosen said. ”So you’ve given this employee the right to buy shares in the future but right now he’s got to pay taxes, and he may not think that’s much of a benefit.”
Foreign exchange restrictions
Some countries also restrict how much money can leave the country, said Antoun.
For example, South Africa has a maximum lifetime amount of money that can be sent outside the country, although the amount changes yearly. Brazil also has foreign exchange restrictions but allows up to $20,000 per year for employer-sponsored stock plans, options, or purchases.
China does not allow citizens to transfer more than $500 outside the country in any given year, Antoun said. Chinese law also prohibits employees from holding foreign securities.
Yet William M. Mercer’s 1999 Total Remuneration Survey in China shows that 34 percent of multinational companies provide their employees with some kind of stock plan. Among high-tech companies, the percentage is even higher: 48 percent offer some form of stock plan to Chinese employees.
How is that possible?
In countries with foreign exchange restrictions, it’s difficult to offer what U.S. employees would consider a stock purchase or stock option plan, Antoun said. To get around that barrier, companies sometimes limit the way foreign employees can exercise their options to a “cashless exercise option,” which allows employees in those countries to buy and sell stock on the same day and have the proceeds paid in the local currency.
However, Antoun cautioned that because the law is not clear, companies might be taking a risk when they use this practice.
In some countries, offering stock plans can end up costing your company money, Antoun said.
In Latin America, for example, an employee who is terminated is entitled to severance indemnity. That amount is determined by the employee’s income.
If that country counts stocks as a part of the employee’s income, it would increase the amount your company will have to pay if you ever fire the employee, Antoun said.
You should also look at social security laws. Some countries, including the United Kingdom, France, and Sweden, require employers to pay a portion of the social security tax on stock proceeds granted to employees.
“That should not be overlooked because that can be fairly significant,” Antoun cautioned.
Data protection and security laws
Data protection laws can also add additional steps to enacting your stock option plan. Privacy laws in Europe and some non-European countries prohibit the exportation of personal data about a citizen if the country that will receive the data does not have the same level of data protection, Antoun said.
In those countries, you must acquire the person’s consent and you may need to file paperwork or at least notify local authorities about your plan.
Another consideration when offering overseas stock plans relates to securities laws. Belgium, for example, requires you to file a prospectus if your plan will be extended to over 50 employees. And in the United Kingdom, the government must approve a company's plan or it will be subject to different tax laws.
Where to begin?
So with all these legal considerations, where should you start?
Rosen recommended you seek professional assistance from a large international human resources firm.
“You need to go to one of those sources where there’s some real expertise or you could end up with a lot of unpleasant surprises,” he said.
But before you contact any company, Antoun suggests you consider what you want your plan to accomplish.
“They come to us and they say, ‘We have this stock plan in the U.S., and we want to extend it overseas,’” Antoun said. “We’d much rather—before they even do that—sit down and look at a few things: What are the plan objectives? What is their organizational structure and how does this plan fit that organizational structure? What are the financial and legal implications to what they’re doing? What are they trying to accomplish?”
For instance, if your goal were to attract and retain staff, you wouldn’t want to offer a plan that would pay enough to allow people in countries with a low cost of living to retire in a few years.
|Impact of 100 shares held for three years and sold for a total gain of $1,900.|
Antoun offered a theoretical example of a company offering 100 options to employees in Hong Kong and Indonesia. When the stock appreciates for three years and is sold, the proceeds would amount to 176 percent of the employee’s pay in Indonesia versus an 11 percent gain for the worker in Hong Kong.
If you want to learn more, the NCEO hosts an annual Francisco “Global Equity Compensation Conference.” This year’s conference will be held in November. If you don’t have time for a conference, you might check out the NCEO’s Equity-Based Compensation for Multinational Corporations, which offers advice on granting stock options.
With tech stock values falling, do your employees still consider them a lure? Or have they lost their luster? Post below or share your thoughts via e-mail.