Instructor: Carol Rutlen, CPA crutlen@rutlen.com 650-321-3999

1. Instructor: Carol Rutlen, CPA crutlen@rutlen.com 650-321-3999

2. Agenda for Class 10 • Review final • Equity compensation • Understanding different types of equity comp • International tax ramifications • Other issues (e.g., securities law, labor law, currency issues, etc.) • HP – tax effective structure

3. Equity Compensation • Non-qualified stock option • Incentive stock option (ISO) • Restricted stock • Restricted stock units (RSU) • Stock appreciation rights (SAR) • Stock purchase plans (§423) Goal – understand different equity vehicles and differences for US and non-US

4. Non-Qualified Stock Option • Offer to purchase a certain amount of stock from the company at a fixed price during a certain period • FMV • Vesting • Continued employment • Financial statement implications • Old rules: grant at FMV, no compensation • New rules: expense as compensation, effective for first fiscal year beginning after June 15, 2005

5. US Tax Consequences of NQ • §83 – property transferred in connection with performance of services • §83(e)(3) – excludes the transfer of an option without a readily ascertainable FMV – no tax at grant • Taxation at exercise • Sourcing

6. Non-US Tax Consequences • Taxed under local law • Taxation point at grant, vest, exercise, or sale • Belgium • Taxed at grant unless employee does not accept in writing within 60 days of “Offer Date” • France • Taxed at exercise • French qualified plan • Must hold 4 years from date of grant • Grant price = avg. trading price 20 trading days preceding grant

7. Collecting Payroll Tax • Sell to cover • Normally sell 100% of shares • May require employee authorization to sell shares • Blackout periods • Withhold to cover • Fewer shares issued • Payroll tax paid from company funds • Collect cash from employee • Administrative complications • Non-US tax consequences • Methods of collecting tax may be limited • Accounting issues associated with withhold to cover

8. Equity Compensation for Global Workforce • Impact on non-US employees • Complicated – do employees understand? • Options lapse unexercised • Impact on company • Securities law • Employment law • Acquired rights • Employment definitions vary • Currency controls • Corporate deductibility

9. Impact on Mobile Employees • Each country where employee worked may want to tax • How do you allocate gain? • Exit tax (deemed exercise) • Hong Kong • Israel • Singapore

10. Incentive Stock Options • §422 ISO • Taxable at exercise for AMT, not regular tax, if hold for 2 years from date of grant or 1 year from date of exercise • $100,000 limit per year • No corporate deduction • US qualified plan • Not applicable to global workforce

11. Restricted Stock • Give employee stock • Employee owns stock, but can’t dispose of • Vests at future date • Employee may pay -0- to x% for the stock (similar to discounted option) • US tax consequences • Taxable when substantial risk of forfeiture lapses §83(a)(1), i.e., vesting • Can make §83(b) election to include value in income • Taxable at grant, not vest • Starts the holding period

12. Restricted Stock • US tax consequences • Delay of release of shares causes administrative difficulties • Payroll tax deposit requirements • Non-US tax consequences • Normally taxed when granted, not at vest • Employee reaction • Performance awards

13. Restricted Stock Units (RSU) • Promise to give restricted stock • Can defer release of shares (potential 409A issue) • US tax consequences • Taxed as deferred compensation • Taxable for income taxes when shares released • Taxable for social tax when shares vest • Non-US tax consequences • Taxed when receive stock, not at vest • Form over substance • Performance awards

14. Stock Appreciation Rights (SAR) • Also known as phantom stock • Promise rather than grant of option • Form over substance • Settled in cash or stock • Usually taxed when receive cash or stock

15. Employee Stock Purchase Plans (ESPP) • §423 • Simple way to purchase company stock • Payroll withholding • 15% discount • Look back rules • Company match • US tax consequences – if meet holding period, 15% discount taxed at sale • Non-US tax consequences • Difference between FMV at purchase and purchase price taxed at purchase • Equivalent in other countries

16. Resources • Law firms and accounting firms • Baker & McKenzie country matrix • Updates • Groups • NASPP http://www.naspp.com • Global Equity Organization http://globalequity.org • Publications • GPS publications on internal controls, restricted stock, RSUs, and performance awards www.scu.edu/business/cepi/ • NCEO http://www.nceo.org/