Key Takeaways
- Companies may need to waive custodial responsibility to allow EORs to offer equity
- Eligibility provisions are usually driven by country of incorporation and whether its a private or public company
- U.S. based company is looking to offer equity to EU employees may need to provide a prospectus
- Tax implications should also be considered e.g. whether to offer qualified RSUs or non-qualified stock options
An Employer-of-Record (EoR) or Global PEO is a great workaround for when your company wants to compliantly hire employees abroad, but does not have a local entity in the relevant location. A local in-country partner hires the employee on your behalf, and they take the responsibility for meeting any legal requirements. As the official employer, they usually handle payroll, taxes, compliance, and benefits.
But what about equity?
Why Do Companies Use Equity Compensation?
Giving employees equity compensation such as stock options, Restricted Stock Units (RSUs) or Employee Stock Purchase Plans (ESOPs) is becoming increasingly popular. This kind of non-cash pay can allow a company to show appreciation to existing staff or attract highly-skilled candidates, especially when they can’t afford a cash bonus at this point in their operations, but will have the necessary liquidity by the time the equity matures. If there are vesting requirements involved, such as with Long-term Incentive Plans (LTIPs) or RSUs, this kind of compensation can also encourage and reward retention and loyalty.
Providing Equity Awards to EoR-governed Employees
An Employer of Record is to all intents and purposes, an agent of your business. When they process payroll for example, they are doing it on behalf of your company. Equity can often follow a similar path, allowing the Employer of Record to record the equity through payroll in a similar way to any other benefit given on your behalf.
However, for this to happen, your company may need to waive custodial responsibility from the EoR. This will show that it is you who is issuing the equity, not the in-country partner, and avoid creating a direct employee/employer relationship between the EoR and the employee in question. Even if you do this, in some countries it may not be possible to provide certain types of equity.
In practice, there’s a lot to think about. You’ll need to work with your local in-country partner to work out the best approach to provide shares or equity agreements that fall in favor of the employee. Here are some of the considerations you’ll need to navigate.
Does Your Equity Plan Consider EoR Employees Eligible?
Eligibility provisions are usually driven by where your company is incorporated and whether it is a private company, or a public company. For example, in the U.S., publicly and privately-held companies must comply with the securities registration requirements, as mandated by Form S-8 for public companies, and Rule 701 for private. Many plans will require that the employee being given equity is an employee, a service-provider, or a consultant of your company. EoR employees may not naturally come under this heading.
Many companies may assume that these workers can be considered common-law employees or “de-facto” employees for the purposes of an equity plan. In many cases this will be fine, especially if the employee gets their primary income from your business, and works exclusively for your company through the Employer of Record. However, it’s important to look over your equity plan in detail to make sure that there aren’t any clauses that make it impossible to provide equity to a foreign employee.
Some countries make this easier than others. For example, in the UK, the Enterprise Management Incentives (EMI) scheme allows companies to include provisions specifically for issuing options that do not qualify under EMI. This provides a lot of flexibility. When thought about ahead of time, you could set up your equity arrangement so that if a U.S. citizen sees that the value of UK shares is low, they can opt to receive a share grant instead.
This will then be taxed as ordinary income at the point that the grant is given, and any increase will be taxed according to the rules of Capital Gains, usually lower than regular income taxes. In France however, you cannot grant tax-qualified options or RSUs to anyone who is not employed by a local entity of the parent company in-country.
Local Regulations and Laws
There may also be additional local laws to think about when granting equity to EoR-managed workers. Some of the regulations will be governed by something as simple as the wording that you use to classify you workers. If your workers are classified specifically as “non-employees”, they may not be covered under securities law exemptions, for example.
Another example is whether base pay can be given in the form of equity. In some cases, base pay will be required to be cash, and any equity will need to be called “supplemental pay.” Where this is the case, a start-up looking to incentivize recruitment using Equity in lieu of a base package, for example, may come unstuck.
In some cases, while equity can be given, there might be additional hoops to jump through. If a U.S. based company is looking to grant equity to employees working in the EU for example, they may need to provide a Prospectus. This is a requirement if they don’t currently have securities listed in the EU, or if the compensation is for more than 100 employees in a particular member state.
In contrast, Brazil doesn’t require any securities rules to be followed, as long as the entity is incorporated abroad. For the EoR provider, it may also be necessary to complete tax-withholding or reporting activities, as the official employer of the worker receiving the award. You shouldn’t assume that your local EoR provider has experience with this, so it’s important to check that all the i’s and t’s have been dotted and crossed for your own liability.
Other regulations may change the compensation package itself when providing equity for the worker. For example, in Australia, employees are able to purchase company shares at a discount price from their public value, a great perk for Australian workers.
If an Australian company hires a worker in France via an Employer-of-Record however, this employee would be unable to take advantage of the discounted price, as they are a non-resident of the country. In addition, the Australian employees can pay for their shares directly as a salary sacrifice, while this is far more complex for the French workers who are being paid by an intermediary. What at first seemed like a bonus, has become a headache.
It’s also important to think about niche regulations that could impact the ability to hand over equity to foreign workers, such as pre-approval from a specific government or agency. For example, in China, Circular 7 requires all companies to get approval from the state before awards can be granted to Chinese nationals, while in Vietnam, RSU plans may have to be registered with the State Bank of Vietnam (SBV) before they can be issued. In some cases, bonuses and other commissions may be preferable to equity, and avoid a lot of operational difficulties.
The Tax Implications of Equity Abroad
The simplest way to offer equity is to provide a set number of shares, which will be taxable in the current year in which they are given, at the standard rate. This may be easiest because there is a known value to the shares. With options, things become a little more complicated, especially when you add foreign laws into the mix. Options usually have a lifespan, for example 10 years, before they expire. They also have a strike price which is often not the same as fair market value, which results in a spread. If the spread is positive, this becomes taxable income.
You will need to decide whether to use qualified RSUs or non-qualified stock options, which will differ in terms of the tax that is taken. For either choice, some countries have tax-favorable options, and some do not. As well as that, within those that have tax-favorable options, there are rules about whether you can use your home countries allowances to benefit from the host countries equity. For example, the U.S. and the UK both have tax-favorable options, and while a UK citizen is not eligible for the U.S. ones, they are able to take advantage of tax relief in the UK.
There are varied laws for how specific countries tax options. In the U.S., option grants aren’t subject to taxation until they have been vested. However, in Belgium for example, the award is taxable like a benefit in the current year. In France, if there is any gain from sold shares within 12 months, this is also taxable in the same way as income will be.
It’s also worth thinking about what happens to any unvested options. Different countries have their own labor laws that will impact the way that unvested options are considered if an employee loses their job, or resigns. In the U.S, they have no value and will be considered expired. In Austria for example, they will be included as part of an overall severance package. If you’re using options as a way to encourage loyalty, this knowledge is essential from the start.
What Happens if You’ve Given Equity, and You Decide to Open a Local Entity?
If and when your company decides to incorporate locally, there may well be preferential tax treatment for equity agreements. For example, in Canada, CCPC (Canadian Controlled Private Corporations) have income tax regulation that allows employees to claim a 50% tax deduction on options, within limits.
One important thing to think about is how to manage reporting and taxes. While the equity plan structure will stay valid, reporting will depend on key tax dates which include the exercise date, the payroll year end date for the region in question, and the sell or disposition date. Depending on where the equity cycle is at when you open the entity, there may be preferable or less favorable tax consequences, so it’s definitely worth speaking to a legal advisor.
Considering all Your Options (No pun intended)
As every country and payroll jurisdiction is unique, it’s important to have a good understanding of the applicable tax and legislative procedures in administering non-cash forms of compensation, whether these are straight shares, or more complex options.
Papaya Global has a presence in over 160 countries via both an EoR and a payroll administration service model. We partner with leading global accountancy and law firms in each country, so that we can provide current and accurate information and support in ever-changing global markets. Our customized services include global tax calculation, processing and payment for options plans, individual RSU calculations and processing with tax-basic data per country, and guidance and assistance with ESPPs in each active payroll location.
Looking to understand more about offering global employees equity? Schedule a call with one of our experts.
