Need to know:
- Any employer looking to roll out a share scheme internationally will need to conduct a thorough analysis and overview of the legal and tax regulations of the country it is looking to expand into.
- Some countries may have a more advanced savings culture than others or different economic outlooks.
- Understanding any obligations between religious and legal systems is also important.
A good share scheme can boost engagement and improve recruitment and retention, so it is not surprising that more and more employers are looking to roll out an international share scheme across their workforce. When it comes to rolling out an international scheme, however, there are a number of factors employers must take into consideration.
Expanding a share scheme into new territories can seem a daunting and complex process, says Gabbi Stopp, head of employee share ownership at industry body IFS Proshare. “First, the organisation will need to establish why it is that it wants to expand abroad,” she explains. “What benefits will expansion of the plan bring to the organisation and its employees in the jurisdictions being considered? Can the organisation be sure of an acceptable level of take-up, as a return on its investment and launch plus ongoing costs?”
Local tax considerations
The employer will then need to provide a thorough analysis and overview of the legal and tax regulations of the country it is looking to expand into. It will also need to consider how the expansion fits in with its overall share plan vision and assess how complex the process will be.
“Appointing experienced advisers with a good global network of partner firms or presence in key jurisdictions is a decision that should be taken early in the process,” says Stopp. “They will provide analysis of the legal and the tax requirements for local nationals and the local entity, and mobile employees, whereby employees on secondment or permanently transferred to work outside the UK may be liable to two different tax regimes under different jurisdictions, may also need to be taken into account.”
It is vitally important to have an in-depth knowledge of local customs and practices of whichever country an employer is looking to expand into, says Paul Randall, partner and head of employee benefits and incentives at law firm Ashurst. “Whether these are simply cultural or formal legal and regulatory ones, a failure to appreciate local customs and practices can result in anything from merely low or nil take-up, after a lot of effort and expense,” he says.
For example, provider Computershare adminsters a share plan for global employer Evraz in Russia and has noted cultural differences (see case study box). Naz Sarkar, chief executive officer (CEO) at Computershare, says: “Few large [employers] operating in Russia have employee share plans, partly as a result of difficult regulatory challenges, and Evraz was also one of the first firms to introduce a long-term incentive plan (L-tip) for its employees. As a consequence, developing a comprehensive understanding of regulations and tailoring its share plan was vital to its success.”
Understanding any obligations between religious and legal systems is also important. Stopp says: “In Islamic countries, for instance, share plans will probably need to be Sharia compliant in order to gain traction and participation from local employees within the workforce.”
Some countries may also have a more advanced savings culture than others or different economic outlooks. “It is an economic reality that employees in different countries may earn more or less depending on market conditions and pay levels in their geographical area,” adds Stopp. “The less disposable income an employee has, the less likely it is that investing in share plans will be a priority.”
Employers also need to ensure staff are aware that shares might be bought and sold in a specific currency that may not always be the same as their own. This is a particularly important factor with a stock purchase plan. Furthermore, some international employees may prefer the cash option. “Sometimes, after investigating the local position, [employers] may choose to implement a plan in a given country on a cash-only basis to avoid issues revolving around the use of equity but to ensure that the relevant employees don’t feel left out of a group-wide plan,” Randall explains.
As in all things, the job needs enough time to be done properly. As Randall says: “[Employers should] consider the merits carefully at the very outset and, in doing this, take sound advice from the advisers if [they] decide to proceed. Ensure that there is someone at the core who will take principal responsibility for the project, and that he or she has the time, resources, budget and support to see it through.”
Evraz offers share plan to Russian employees
Steel, mining and vanadium business Evraz offers employee share plans to its 105,000 employees in Russia, Ukraine, the US, Canada, the Czech Republic, Italy, South Africa and Kazakhstan.
In Russia, the organisation has offered a long-term incentive plan (L-tip), administered by Computershare, since 2012. Employees are able to access details of their plan through an online portal and trade through a broker in real time, with proceeds being paid into their local account in their chosen currency within five working days. The process is assisted by the use of an automated payment system that is tailored to the local banks’ requirements.
Across all eight countries in which Evraz operates, information about the share plan portal is provided for employees in the local language. Staff also gave access to a native-speaking client relationship manager to help with their enquiries.
When implementing its schemes understanding local cultures and practices was essential. For example, in Russia there was a far more ingrained distrust of internet-based services. Therefore, Evraz has to reflect this in the way it operates its share plan, and the way it talks about it to employees.
Its uses a range of communication methods through the share plans portal, direct post or email to help to foster a relationship between employee and employer, which can lead to a wider understanding of the plan as members share their experiences with colleagues.
Evraz also had to overcome a number of legislative challenges to introduce a share plan in Russia’s emerging market. Marat Murtazin, head of the incentive programmes department at Evraz, says: “The main difficulty was the difference in taxation so we studied and reviewed it carefully with the help of consultants.
“[We needed] to take into account local practices but still try to keep an original concept of the programme. I think that’s why we were able to make a success of it.”
Viewpoint: Employers need to determine their objectives in extending a share plan internationally
Extending a share plan internationally is no longer an exception and the considerations for a small organisation extending participation into three jurisdictions and a multinational group operating a plan in 80 countries will be the same.
The employer should first determine its objectives in extending the plan overseas, typically to strengthen group identity and cohesiveness.
If the UK plan is a tax-advantaged arrangement, for example, an all-employee sharesave plan, the employer should decide whether it wishes to operate the plan, where possible, on a tax-efficient basis overseas. This may require changes in its operation, so that if simplicity is a stronger preference, this objective will be disregarded.
Due diligence of the countries in which the plan will be operated is strongly advised, to pick up any showstoppers, such as exchange control or securities requirements, or prohibitions on local residents owning foreign assets. A phantom arrangement, not using actual shares, can instead be offered in the relevant jurisdiction(s).
Will a basic due diligence check, also known as a database or desktop review, providing non-specific information on key due diligence areas or a full due diligence check, involving liaison with local lawyers for specific advice on the employer’s circumstances, be used? This will depend on matters such as the number of employees in a relevant jurisdiction, if a jurisdiction is known as being tricky, and the employer’s budget. Many organisations apply a combined approach, using a database due diligence in some countries, and a full due diligence exercise in others.
The tax rules in each country should be understood, as well as local cultural and religious practices. For instance, adaptations may be necessary to take account of Sharia law requirements. Likewise, employers may translate documents, even if not legally required, to promote employee engagement, checking the translation locally to avoid any misunderstandings.
Lynette Jacobs is a partner at Pinsent Masons