Traditionally, only the largest corporate groups operated across multiple jurisdictions. However, the combined impact of:
- globalisation; and
- the digitalisation of the global economy,
has resulted in start-ups and small to medium enterprises (SMEs) operating in around the world.
Start-ups and SMEs often use an employee share scheme (ESS) or an employee share option plans (ESOP) to attract and retain key hires, particularly where those employees could command significantly higher salaries in more established businesses.
Where an Australian resident individual working in Australia (Australian Employee) participates in the ESS/ESOP of a foreign resident company (Foreign Plan), they are generally only taxed:
- in Australia; and, therefore
- under Australian tax law.
A Foreign Plan is generally tailored to the domestic tax laws of the relevant foreign country to deliver available tax concessions to local employees, however, this ‘one-size-fits-all’ approach can result in Australian Employees missing out on specific tax concessions potentially available under Australian tax law.
The general ESS/ESOP tax rules in Division 83A of the Income Tax Assessment Act 1997 (General ESS Tax Rules) define an ‘employee share scheme’ as a scheme under which ‘ESS interests in a company are provided to employees, or associates of employees, (including past of prospective employees) of:
- the company; or
- subsidiaries of the company,
in relation to the employee’s employment.
In turn, an ‘ESS interest’ in a company is a beneficial interest in a share in the company or a right to acquire a beneficial interest in a share in the company (e.g., options).
There is no requirement under the General ESS Tax Rules that the company issuing the ESS interests must be an Australian resident company. However, these General ESS Tax Rules are not particularly tax-effective for employees as they are taxed on any discount they receive in relation to their ESS interests either:
- upfront – in the income year of the grant; or
- subject to meeting certain conditions – at the earlier of various future events, for example:
- exercise; or
- the 15th anniversary of the or cessation of the employment to which the ESS interests relate (known as the deferred taxing point).
However, if the actual disposal date of the ESS interests occurs within 30 days of any of the above, the deferred taxing point is postponed until the actual disposal date (30 Day Rule).
Notwithstanding the General ESS Tax Rules, Australia has a concessional tax regime for eligible start-up companies (Start-Up ESS Tax Rules).
For more information on the General ESS Tax Rules and the Start-Up ESS Tax Rules – see here or check out our Start-Up ESOP Explainer Video here.
One of the eligibility conditions under the Start-Up ESS Tax Rules is that the issuing company (together with certain related companies) must have been incorporated, whether under Australian law or a foreign law, less than 10 years before the end of the issuing company’s most recent income year before the grant of the relevant interest.
Therefore, the Start-Up ESS Tax Rules specifically contemplate that the issuing company may be a foreign company.
Another eligibility condition under the Start-Up ESS Tax Rules is that the relevant employer is an Australian resident company and, therefore:
- the General ESS Tax Rules require that ESS interests must be issued in a company to the employees of:
- the company; or
- any subsidiaries of the company; and
- the Start-Up ESS Tax Rules:
- specifically contemplate foreign companies being the relevant issuing company; but
- require the relevant employer company is an Australian resident (Australian Employer Requirement).
Based on the above:
- a foreign resident company directly employing Australian Employees cannot satisfy Australian Employer Requirement and, therefore, cannot satisfy the Start-Up ESS Tax Rules (even if all other eligibility conditions are satisfied); however,
- a foreign resident company with an Australian resident subsidiary that employs Australian Employees can satisfy the Start-Up ESS Tax Rules (provided that all other eligibility conditions are satisfied).
These ESS/ESOPs are hybrid documents in that they must satisfy both:
- the corporate law requirements of the parent company jurisdiction; and
- the Start-Up ESS Tax Rules in Australia,
which requires a collaborative effort between the legal teams in the respective countries.
It is increasingly common for start-ups and SMEs to operate across multiple jurisdictions around the world. Australia has a concessional ESS/ESOP tax regime for eligible start-ups and SMEs and foreign companies should understand these rules in order to maximise their ability to attract and retain key hires in Australia.
If you would like to discuss this issue or how we can help with the design and implementation of your Australian ESS/ESOP, contact Mosaic Tax Legal at firstname.lastname@example.org or 1300 115 841.