News Flash: Italian Fair Market Plan Exemption for Stock Options Eliminated, but Law Surprisingly Provides for Stock Options to be Exempt from Social Insurance Contributions - Baker and McKenzie, 8/11/2008
News Flash
Italian
Fair Market Plan Exemption for Stock Options Eliminated, but Law
Surprisingly Provides for Stock Options to be Exempt from Social
Insurance Contributions
Dear Clients and Friends,
As
we recently reported in our First and Second Quarter Clients and
Friends Newsletter, Law Decree no. 112 published June 25, 2008 provided
that the "fair market value" plan exemption, which provided favorable
tax treatment for stock options provided certain conditions were met,
would be repealed. On August 5, 2008, the Italian Parliament approved
this decree, but made a surprising beneficial change to the text of the
decree. Specifically, the "fair market value" plan exemption was
repealed so that income tax would normally be due on the spread at
exercise, but the decree was modified to provide that "employment
income deriving from the exercise of stock option plans" is not subject
to social insurance contributions.
We
understand that many companies were imposing cashless sell all exercise
restrictions on stock options granted to employees in Italy due to the
licensed financial intermediary requirements and if the shares are sold
immediately at exercise, the fair market value plan exemption (in its
most recent form) would not apply. So, for many companies, the
abolition of the "fair market value" plan exemption in Italy was not
going to be a big deal. However, the revised decree will have a
significant impact on all stock option grants in Italy (regardless of
whether they ever complied with the "fair market value" plan exemption)
because the spread at exercise will be exempt from social insurance
contributions for all options exercised on or after June 25, 2008.
This
"surprise" change is extremely beneficial to employees receiving stock
options and their employers and they can now avoid paying social
insurance contributions on the spread at exercise. Social insurance
contribution rates in Italy are about 9.19% for employees (with an
additional 1% due if income levels exceed a certain amount) and
approximately 30% for employers. (Certain contribution ceilings may
apply.)
If your
stock plan broker/administrator was withholding for employee social
insurance contributions on the exercise of stock options for employees
in Italy, you will want to adjust the withholding rate used going
forward to take into account that social insurance contributions are no
longer due. Further, to the extent that you withheld social insurance
contributions from employees in Italy who exercised options on or after
June 25, 2008, your local subsidiary in Italy may recover any amounts
overpaid to the Italian social security authorities through a setoff
against future social insurance contributions that become due. In
addition, you will need to refund to employees the social insurance
contributions that were withheld. Please contact your GES attorney if
you need assistance with calculating the setoffs and processing the
refunds.
Although
the decree did not specifically discuss other types of equity incentive
awards besides stock options, we think it may be possible to argue that
the exemption from social insurance contributions can apply to employee
stock purchase plans as such programs can be viewed as options to
purchase shares as well. However, we have not discussed this
argument with the tax authorities yet.
Please
note that there are no "grandfathering" provisions under the decree so
all option exercises taking place on or after June 25, 2008 will be
subject to income tax (unless the broad based plan exemption or newly
issued share exemption for options granted between January 1, 1998 and
January 15, 2000 applies), but not social insurance contributions.
Withholding for income tax is required.
We
are waiting for the provision in the decree approved by the Italian
Parliament to be published in the Italian Official Gazette, which will
make the changes in the law official, but do not expect any additional
changes in the decree prior to publication.
Please contact your GES attorney if you have questions regarding the application of this decree.
For more information
Narendra Acharya, Chicago
June Anne Burke, New York
Edward Burmeister, San Francisco
edward.d.burmeister@bakernet.com
Kate Clancy, New York
Valerie Diamond, San Francisco
David Ellis, Chicago
Jennifer George, San Francisco
Jennifer Kirk, San Francisco
Barbara Klementz, San Francisco
Brian Wydajewski, Chicago
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