Appendix 3
Overseas schemes
United States
1.1
The United States (US) has some 25 million employee owners with some €1,000 billion in assets.[1]
Schemes exist in 'practically every industrial branch', from large, publicly
traded firms to small, closely held companies.[2]
Companies offer multiple schemes and employees participate in more than one
scheme. Approximately 15 per cent of the workforce participate in some form of
employee share scheme.[3]
1.2
The US legislation provides employee share trusts a special status which
has led to a great increase in employee ownership.[4]
Dr Klaas Woldring submitted that the fiscal and legislative measures make it
'attractive for both companies and employees to invest in employee ownership'.
The measures facilitate the raising of loans from financial institutions for
setting up a scheme and buying shares for employees, with loans repaid tax free
from company profits and share dividends.[5]
The growth has also been attributed to the better performance of companies with
schemes.[6]
1.3
In the US, stock options for taxation purposes are categorised into two
types: non-statutory, which are taxed under general principles of compensation
and income, and statutory options.[7]
Non-statutory schemes
1.4
In non-statutory schemes, options are taxable upon grant if there is a
readily ascertainable fair market value; if not, they are taxed at exercise.
Subsequent gains are treated as capital gains, and taxation 'may be deferred if
there is a substantial risk of forfeiture. Compensatory income can be converted
into capital gains, and if done within 30 days of acquiring the option, the
difference of the value and employee contributions is taxed as ordinary income;
on disposal, the excess is taxed as capital gain.[8]
Statutory schemes
1.5
Statutory schemes are plans approved by shareholders in order to grant
employees options to purchase shares. Statutory schemes have two types of
plans: incentive stock options (ISOs), often limited to key employees; and
employee stock purchase plans (ESPPs), granted to all employees. In both types,
the employer is generally not eligible to claim deductions, and both the
employer and employee are subject to 'stringent reporting requirements'.[9]
1.6
Under ESPPs, there is no tax on the grant or exercise of a right. Any
discount is taxed as ordinary income upon disposal of the right. Further gains
are treated as capital gains. Discount can be 15 per cent at most but the
shares cannot be sold within two years from the grant and one year after they
are transferred. An employee's voting power or value of employer's stock must
not exceed five per cent. Employers usually use payroll deductions to pay for
the shares.
1.7
Similarly to ESPPs, taxation of ISOs occurs upon disposal, with gains
treated as a capital gain. The part of the value exceeding $100,000 is treated
as ordinary income. An employee's voting power or value of employer's stock is
limited to no more than 10 per cent.
1.8
The three main employee ownership schemes in the US are Kelso or
employee share ownership plans, the 423 plan and the 401(k) plan.
Employee share ownership plan
1.9
The employee share ownership plan (ESOP) or Kelso plan is the most
popular employee share scheme type in the US, with 11,400 ESOPs and equivalent
plans in existence, involving 13.7 million employee owners who held some €700 billion in assets in
2006.[10]
ESOPs are leveraged share purchase instruments which enable employees to buy
into their employer company over a period of time, on average over 3 to 5
years. It works in the same way as a corporate takeover. It can be used to
finance the expansion of a company's capital base.[11] Employees can purchase
shares using pre-tax income and third-party loans.[12]
1.10
In an ESOP, the company establishes a trust. If it is funded through
loans, the company can deduct up to 25 per cent of payroll for repayments of
principal, with interest payments fully deductible. If the scheme is not funded
by a loan, up to 15 per cent of payroll is deductible for principal repayments.
Further deductions may include dividends if they are 'used to repay an ESOP
loan or paid directly to workers'. Employees do not pay income tax as the
shares are acquired by the trust but any gains outside the trust are subject to
capital gains tax (CGT). 'If over 30% of an unlisted company's shares are sold
into an ESOP trust, CGT is deferred for as long as the proceeds are continually
reinvested in domestic (US) securities'.[13]
423 Plan
1.11
The 423 Plan is an employer share only scheme.[14]
It is similar to ESOP, with the main difference being that the employees hold
their shares personally, not through a trust. Employees can acquire shares or
options at a maximum 15 per cent discount, with CGT payable upon disposal of
the shares. The 423 Plans are more common in public companies.[15]
401(k)
1.12
The 401(k) schemes are set up for retirement savings such as
superannuation.[16]
They are funded out of remuneration, with shares in the employer company and
other listed companies purchased through profit shares, salary sacrifice and
matching employer contributions. The legislation requires partial investments in
non-employer equities to spread the risk.[17]
1.13
The Australian Employee Ownership Association considered 401(k)
important to the share scheme discussion in Australia for a number of reasons.
Firstly, its financing is closer to Australia's typical unleveraged scheme than
ESOP. Secondly, it is very effective in increasing worker ownership. While
smaller than the ESOP, 401(k) still has about 2,000 participating plans with
two million employees who own an estimated US$250 billion.[18]
United Kingdom
1.14
In the United Kingdom (UK), there are four types of employee share
schemes. Two of them must be offered to all employees that meet the
qualification requirements; the other two can be offered to selected employees.
The schemes generally require an approval of Her Majesty's Revenue and Customs
(HMRC). Income tax and national insurance are payable upon exercising the
option to buy shares at discount.[19]
1.15
The two main schemes are share incentive plan (SIP) and Save As You Earn
(SAYE) scheme. The other two main schemes are the company share option plan and
the enterprise management incentive scheme.
Share incentive plans
1.16
The share incentive plan (SIP) offers employees four classes of shares:
partnership, free, matching and dividend shares. Companies must set up a trust
to hold the shares.[20]
1.17
Using pre-tax income, an employee can acquire up to £1,500 in partnership
shares annually.[21]
In addition, an employee can be given up to £3,000
in free shares, provided they have been held in the scheme for five years.
If the employee keeps the shares in the plan until they are sold, no CGT is
payable; if the shares are sold after leaving the plan, CGT will apply.[22]
1.18
With post-tax income, an employee can acquire two matching shares for
each partnership share held (up to £2,500
annually).[23] Taxation depends on how long the
shares have been in the plan: similarly to the free shares, there is no income
tax if the shares are held more than five years. Free and matching shares can
be forfeited if the employee ceases employment, and performance conditions can
be included.[24]
1.19
In addition, an
employee can reinvest tax free up to £1,500 of dividend shares in the employer
company. Dividends 'used to buy dividend shares are taxed when the
shares are withdrawn from the plan'.[25]
In total, employees can receive up to £7,500
worth of shares each year in three components of £2,500 each. However, not all
employers offer all three components but can choose the one(s) most suitable
for their employee base.[26]
1.20
The employer is eligible for tax concessions regarding the 'costs of
offering free and matching shares and the costs of offering partnership shares
where this exceeds employee contributions'.[27]
1.21
A 2005 reform
enabled people to roll their benefits out of the scheme into an individual
savings account or a self-invested pension.[28]
Save As You Earn scheme
1.22
The Save As You Earn (SAYE) scheme differs from the SIP scheme in that the
employee may acquire options to buy shares rather than actual shares. It has
similar characteristics as the SIP plan but no risk for the employee: 'if the
share price doesn't exceed the exercise price of the options, the employee can
simply take the accumulated savings in cash'.[29]
1.23
Options are offered by the employer company at up to a 20 per cent
discount to the current share price.[30]
Employee savings accumulate in a special interest-bearing tax-free account.[31]
The employee contributes a monthly post-tax sum for an agreed period (3, 5 or 7
years) after which the government makes a co-contribution tax-free, based on
the duration of the saving. The funds can be used to exercise the options or
taken as cash. Upon exercising the options, the shares become liable to CGT.[32]
Employees must enter into a special savings contract with a financial
institution to buy the shares at the end of the fixed term. There is no income
tax on grant of the options, and no tax when employees use their savings to buy
shares.[33]
1.24
The employer may impose restrictions including that shares must be sold
upon cessation of employment. Savings-related schemes may also require that the
employees have been employed for up to 5 years to be eligible to participate in
the scheme. [34]
Company share option plans
1.25
Company share option plans (CSOP) allow companies to choose the employees
and directors to whom to grant options up to a maximum value of £30,000 at grant. No
income tax is payable at grant or if the option is exercised after three years
but before ten years after grant. On disposal, CGT is payable unless the gains
fall below the annual exempt amount. Participation excludes employees owning
more than 25 per cent of the company. Employers may place restrictions on the
disposal of shares.[35]
Enterprise management incentive scheme
1.26
Enterprise management incentive schemes are designed for small companies
and exclude businesses in banking, insurance and farming. Employees can be
granted options over shares up to £120,000
in value. There is no tax on the grant or exercise of the option unless the
exercise price is less than the market value, in which case the discount is
subject to income tax. When sold, shares are subject to CGT from the date of
grant.[36]
European Union
1.27
Employee ownership in European Union countries has grown in the last ten
years. Because of the late uptake, Europe is behind the United States in the
prevalence of the schemes.[37]
1.28
According to the 2008 European Union survey regarding employee ownership
in large European corporations, the equity of the 9.1 million employees working
in these corporations mounted to €240.2
billion, a decline of 15 per cent from the previous year.[38]
The average equity held by each of the 8.2 million European employee owners (excluding
top executive) is €15,933.[39]
Most of the shares are 'still held by top executive employees rather than
ordinary employees (39.5 per cent for executives compared to 60.5 per cent for
common employees).[40]
Only around 12 per cent of European employees 'receive income from some form of
profit sharing scheme'.[41]
1.29
On average 85.1 per cent of the European corporations provide some type
of employee ownership, with all large Finnish and Irish corporations having
these schemes. France has the highest number of companies with broad-based
schemes (86.5 per cent), with the European average being 51.9 per cent.[42]
The survey concluded that 'employee ownership is strongly involved in companies'
governance and strategy.[43]
European corporations renew or launch new schemes regularly, with a
3–4-year-old plan considered old.[44]
1.30
According to the study, employee ownership is going to double within the
next 5–10 years in Europe, from the current 9.1 million employee owners to 16 million,
or from the current 28.2 per cent of employees in large European companies to
40–50 per cent. Capitalisation is estimated to rise from 2.6 per cent now to 4–5
per cent.[45]
The study concluded that 'it seems highly probable that most European countries
will increase to 40 per cent or more employee owners within the next 5–10 years'.[46]
1.31
There is 'a growing disparity' between countries such as France and the
UK that have had schemes for a long time and countries 'with the least
developed financial participation policies and institutions'. It is said that
European countries need to share information and models and exchange
experiences on best practices. Remuneration Strategies Group explained:
The UK appears to be the country with substantial application
of share schemes. France appears to be a country with mandatory profit sharing schemes.
Spain appears to be a country with a tradition of co-operatives. Germany is a
country with established capital accumulation plans for employees, and the
Netherlands and Finland appear to be countries with a national wage saving
system. These country differences determine the existence of schemes to a large
extent. Most broad based employee financial participation appears to be a
result of the possible benefits provided by government policies in certain
European countries.[47]
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