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International Development: US Tax Reform

One of the perennial issues with employee share schemes is the incidence of tax (and often social security contributions) at the point when shares are received. This is recognised in UK tax law with the exclusion from tax for shares received under a Share Incentive Plan (SIP)

This issue is not restricted to the UK. In the USA, a reform has been announced to address this for unlisted companies. Under the changes, being introduced as part of wider tax reform, an employee of an “eligible corporation” can elect to defer tax on the receipt of stock until the year which includes the earliest of the date on which:

  • The stock becomes transferable;
  • The employee becomes an “excluded employee”;
  • Stock of the corporation becomes readily tradeable on an established securities market;
  • Seven years have passed after the rights of the employee in the stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier; or
  • The employee revokes the election.

In addition, in order for the relief to be available:

  • No stock of the company (or a predecessor) could have been readily tradeable or listed on an established securities market in the previous year.
  • The company has a written plan under which at least 80% of certain employees are granted stock options or restricted stock units on similar terms to the receipt of the stock qualifying for the election.
  • The recipient must not be a 1% owner, the CEO or CFO (in each case at any time during the ten preceding calendar years) or a family member of such individuals or been one of the four highest compensated officers of the corporation during the preceding ten taxable years.

Pett, Franklin & Co. LLP are experts in employee share schemesexecutive incentives and share valuation. To find out more about how we can help you or your client, please contact Stephen Woodhouse at stephen.woodhouse@pettfranklin.com or call 0121 348 7878.

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