International Share Incentive Plan – a case study
March 20, 2019
This case study explains how a FTSE 250 company, with MM&K’s help, adapted a UK Share Incentive Plan (SIP) for its employees in Germany and Luxembourg.
The Company regards employee ownership as essential to aligning employees and shareholders by creating a common interest in the growth in value of the Company.
The UK SIP
The Company established its UK SIP in 2017 to give all permanent UK-based employees an opportunity to invest in partnership shares annually up to the lower of £1,800 and 10% of their taxable earnings. Each employee can choose to make either monthly salary deductions or a single annual contribution, following payment of annual bonus.
The Company matches each partnership with an award of one free matching share. Provided that the partnership shares and the matching shares are held in the SIP Trust for five years, no tax liability will arise on participants in respect of those shares.
Replicating SIP in Germany and Luxembourg
The Company’s business in Germany and Luxembourg was growing. Its workforce in those countries was expanding and the Company wished to provide equity incentives on similar terms to those provided to the UK workforce. Unfortunately, neither Germany nor Luxembourg has any tax advantaged legislation equivalent to the UK SIP.
A challenge was to design a plan whereby German and Luxembourg employees could be awarded matching shares when they purchased partnership shares without:
(a) a ‘dry’ tax charge arising on the award date, as employees would receive no benefit from their matching shares until after the end of a three-year forfeiture period; or
(b) additional cost (such as hedging costs) to the Company for the provision of the matching shares.
Additionally, the Company did not wish to establish an offshore employee benefit trust to ‘warehouse’ shares during the three-year forfeiture period.
The plan for Germany and Luxembourg is administered by a professional administrator, which also acts as nominee for the employees. The administrator collects monies from employees out of their post-tax income and purchases partnership shares for them participants as nominee. As such, it holds the legal title to both partnership and matching shares on behalf of the participants.
No ‘dry’ tax charge arises in respect of an award of matching shares . Instead, the tax liability is delayed until after the end of the forfeiture period when the shares are transferred to them by the administrator in its capacity as nominee.
No additional cost, such as hedging cost, is incurred by the Company, which pays for the matching shares at the time of award.
Whilst participation terms are similar to the UK SIP, modifications had to be made to deal with issues under local laws. We worked closely with local lawyers to ensure the procedures for making salary deductions, acquiring partnership shares and awarding matching shares avoided the law of unintended consequences.
Whilst German and Luxembourg participants do not enjoy similar tax advantages to their UK colleagues, the outcome ensures that the charge to tax coincides with the receipt of benefits and the Company’s commercial objective to provide an opportunity for substantially the whole of its workforce in the UK, Germany and Luxembourg to participate in equity on similar terms has been achieved.
For further information contact Mike Landon