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7930 Update UK Share Plans May 2015 Introduction The new rules in force from 6 April 2015 enact recommendations made by the UK’s Office of Tax Simplification (“OTS”). Having recognised complexities in the UK income tax treatment of share awards held by internationally mobile employees (“IMEs”), the OTS recommended that “all share plans that give employees shares or a right to receive share... should be treated consistently from a residence perspective”. The previous position Previously, if an individual was non UK tax resident on the grant of an award in the form of a share option (or other legal “right to acquire” shares) then, unless the award was made in contemplation of UK duties, no UK income tax would arise in respect of the award, even if the relevant shares were acquired when the individual had become tax resident in the UK. Conversely, if an individual was UK resident on the grant of a share option, UK income tax would be due on the full value received on acquisition of the relevant shares (subject to the application of any double tax treaties) even if the individual was no longer resident in the UK at that time. The new rules – now in force The new rules are intended to reduce the inconsistencies in the previous tax treatment of IMEs’ share awards. From 6 April 2015, an individual’s residence at grant is not relevant. Instead, in the case of a share option or other “right to acquire” shares, a proportion of the employment income which arises when the shares are acquired will be subject to UK income tax if the employee was resident in the UK at any time during the “relevant period” in relation to the award. Similar provisions govern other award types, for example “restricted shares”, where a proportion of the employment income treated as arising when the shares cease to be subject to any restrictions will be subject to UK income tax, by reference to the period of the employee’s UK residence during the “relevant period”. There will be some “winners” and some “losers” when compared with the previous rules: Previously, if the individual was UK resident at grant, an award would potentially have been subject to UK tax on its full value on vesting/exercise, depending upon the operation of any double tax treaty. Under the new rules, only the time-apportioned part of the overall award value will be within UK tax. Previously, if the recipient was non UK resident at grant and there was no contemplation of UK duties, the UK would not generally seek to tax the award. Under the new rules, if the recipient comes into the UK during the “relevant period”, then a time-apportioned part of the overall award value will be subject to UK tax. These individuals potentially pay more UK tax under the new rules (although it will be important to confirm tax treatment in other jurisdictions involved to confirm whether there is any disadvantage overall). Generally, awards which have “vested” for the purposes of this new legislation, or have been exercised, prior to 6 April, will not be affected by the change. How to calculate the UK tax arising Where a company has IMEs to whom the rules may apply, it will be necessary to: Identify the “relevant period” for the award in question. For a share option or other right to acquire shares, this will generally be the period from grant until vesting – vesting refers to the earliest time at which an option may be exercised (i.e., when all conditions other than time have been met). New UK tax rules for Internationally Mobile Employees New rules for the UK taxation of share awards held by internationally mobile employees are inforce from 6 April 2015. The new rules apply for all awards which are outstanding at 6 April 2015, as well as for awards granted after that date. In broad outline, under the new rules, UK income tax will arise on a time apportioned basis for most types of share award. There will be some “winners” and some “losers” when compared with the previous rules. Continued on next page >

Update - Pinsent Masons UK Share Plans May • Establish, in each of the tax years which overlap with the “relevant period”, the individual’s tax residence status for that period

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7930

UpdateUK Share Plans

May 2015

IntroductionThe new rules in force from 6 April 2015 enact recommendations made by the UK’s Office of Tax Simplification (“OTS”). Having recognised complexities in the UK income tax treatment of share awards held by internationally mobile employees (“IMEs”), the OTS recommended that “all share plans that give employees shares or a right to receive share... should be treated consistently from a residence perspective”.

The previous positionPreviously, if an individual was non UK tax resident on the grant of an award in the form of a share option (or other legal “right to acquire” shares) then, unless the award was made in contemplation of UK duties, no UK income tax would arise in respect of the award, even if the relevant shares were acquired when the individual had become tax resident in the UK. Conversely, if an individual was UK resident on the grant of a share option, UK income tax would be due on the full value received on acquisition of the relevant shares (subject to the application of any double tax treaties) even if the individual was no longer resident in the UK at that time.

The new rules – now in forceThe new rules are intended to reduce the inconsistencies in the previous tax treatment of IMEs’ share awards.

From 6 April 2015, an individual’s residence at grant is not relevant. Instead, in the case of a share option or other “right to acquire” shares, a proportion of the employment income which arises when the shares are acquired will be subject to UK income tax if the employee was resident in the UK at any time during the “relevant period” in relation to the award.

Similar provisions govern other award types, for example “restricted shares”, where a proportion of the employment income treated as arising when the shares cease to be subject to any restrictions will be subject to UK income tax, by reference to the period of the employee’s UK residence during the “relevant period”.

There will be some “winners” and some “losers” when compared with the previous rules:

• Previously, if the individual was UK resident at grant, an award would potentially have been subject to UK tax on its full value on

vesting/exercise, depending upon the operation of any double tax treaty. Under the new rules, only the time-apportioned part of the overall award value will be within UK tax.

• Previously, if the recipient was non UK resident at grant and there was no contemplation of UK duties, the UK would not generally seek to tax the award. Under the new rules, if the recipient comes into the UK during the “relevant period”, then a time-apportioned part of the overall award value will be subject to UK tax. These individuals potentially pay more UK tax under the new rules (although it will be important to confirm tax treatment in other jurisdictions involved to confirm whether there is any disadvantage overall).

Generally, awards which have “vested” for the purposes of this new legislation, or have been exercised, prior to 6 April, will not be affected by the change.

How to calculate the UK tax arisingWhere a company has IMEs to whom the rules may apply, it will be necessary to:

• Identify the “relevant period” for the award in question. For a share option or other right to acquire shares, this will generally be the period from grant until vesting – vesting refers to the earliest time at which an option may be exercised (i.e., when all conditions other than time have been met).

New UK tax rules for Internationally Mobile EmployeesNew rules for the UK taxation of share awards held by internationally mobile employees are inforce from 6 April 2015. The new rules apply for all awards which are outstanding at 6 April 2015, as well as for awards granted after that date.

In broad outline, under the new rules, UK income tax will arise on a time apportioned basis for most types of share award. There will be some “winners” and some “losers” when compared with the previous rules.

Continued on next page >

UpdateUK Share Plans

May 2015

• Establish, in each of the tax years which overlap with the “relevant period”, the individual’s tax residence status for that period. Companies will need to take account of the UK’s statutory residence test and, if appropriate, the rules for “split year” treatment which can apply if an individual moves overseas for business reasons, or arrives in the UK to work. Note that particular rules apply for employees who are subject to the remittance basis for one or more tax years.

• If the individual is resident overseas but is performing UK duties for any part of the relevant period was not wholly overseas, consider the extent of UK duties so as to make a just and reasonable apportionment.

Having determined the proportion of the “relevant period” for which the IME was UK resident, the proportion of the employment income arising which is subject to income tax can then be calculated. The starting point for the calculation is a time-apportioned proportion, however, a different proportion can be used if it would be just and reasonable to do so.

Double tax treatiesThe new tax treatment should generally reduce the need to rely on double tax treaties to claim relief for tax. However, in certain cases, if the IME pays foreign tax on the share award, there may be a continuing corresponding relief to claim against UK taxation and there can be differences in treatment under certain treaties, meaning that claims may still be relevant. Each case will need to be considered on its own particular facts.

National Insurance Contributions (NICs) and overseas equivalentsThe new rules for UK NICs chargeable on share awards held by IMEs are intended to align the NICs position as much as possible with the income tax treatment.

However, due to the differences between international social security agreements and double tax treaties (the former not allowing for apportionment of income), it will not be possible to align income tax and NICs completely in this area.

Action PointsCompanies need to act now to review their systems and processes in relation to the taxation of IMEs to ensure that these take account of the new UK rules. In particular, companies should:

• Ensure they have relevant records in relation to residence status, including in relation to awards granted before 6 April 2015 but which will now be taxed within the new regime.

• Liaise with colleagues who deal with the administration and payment of taxes relating to share awards held by IMEs.

Companies who have previously given any indication of tax treatment to IMEs in relation to their share awards should now review that information and, where appropriate, consider communicating any change in the overall tax position.

Although it will no doubt take a while for companies to become used to applying the new rules, in general they should be simpler to operate, with the part of the taxable gain which relates to UK duties being taxable in the UK and the part which relates to overseas duties being excluded from UK tax.

This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority and the appropriate regulatory body in the other jurisdictions in which it operates. The word ‘partner’, used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the

LLP or any affiliated firm of equivalent standing. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP’s registered office: 30 Crown Place, London EC2A 4ES, United Kingdom. We use ‘Pinsent Masons’ to refer to Pinsent Masons LLP, its subsidiaries and any affiliates which it or its partners operate as separate

businesses for regulatory or other reasons. Reference to ‘Pinsent Masons’ is to Pinsent Masons LLP and/or one or more of those subsidiaries or affiliates as the context requires. © Pinsent Masons LLP 2015.

For a full list of our locations around the globe please visit our website: www.pinsentmasons.com

To discuss any queries in relation to the new rules on internationally mobile employees, please contact one of the Pinsent Masons’ Share Plans & Incentives Team (details below) who would be happy to help.

Matthew FindleyPartnerT: +44 (0)20 7490 6554M: +44 (0)7500 102039E: [email protected]

Lynette JacobsPartnerT: +44 (0)161 250 0198M: +44 (0)7717 488467E: [email protected]

Suzannah CrookesLegal DirectorT: +44 (0)113 294 5233M: +44 (0)7585 996328E: [email protected]

Hannah NeedleSenior AssociateT: +44 (0)113 225 5448M: +44 (0)7824 481271E: [email protected]

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