Employee share plans in Russian Federation: regulatory overview

A Q&A guide to employee share plans law in Russian Federation.

The Q&A gives a high level overview of the key practical issues including, whether share plans are common and can be offered by foreign parent companies, the structure and rules relating to the different types of share option plan, share purchase plan and phantom share plan, taxation, corporate governance guidelines, consultation duties, exchange control regulations, taxation of internationally mobile employees, prospectus requirements, and necessary regulatory consents and filings.

To compare answers across multiple jurisdictions, visit the Employee share plans Country Q&A tool.

This Q&A is part of the multi-jurisdictional guide to employee share plans law. For a full list of jurisdictional Q&As visit www.practicallaw.com/employeeshareplans-mjg.

Irina Anyukhina and Olga Pimanova, ALRUD Law Firm
Contents

Employee participation

1. Is it common for employees to be offered participation in an employee share plan?

In Russia, the popularity of employee share plans as an incentive is now decreasing. However, due to the economic downturn, employers still consider employee share plans to be effective long-term financial incentive instruments for employees.

 
2. Can employees be offered a share plan where the shares to be acquired are in a foreign parent company?

Federal Law No. 39-FZ dated 22 April 1996 (Securities Market Law), limits the circumstances in which a foreign issuers' shares can be offered and granted (see Question 29, Foreign shares).

The limitations set by the Securities Market Law apply to all employee share plans which involve the offer and grant of foreign shares, but do not apply to phantom share plans that grant cash only (see Question 29, Foreign shares).

If the financial instrument cannot be traded on the Russian market, it can only be circulated amongst qualified investors such as:

  • Professional participants in the securities market.

  • Clearing institutions.

  • Credit institutions.

  • Investment funds.

  • Insurance companies.

  • Pension funds.

  • Other persons that are recognised as qualified investors under federal law.

Individuals are recognised as qualified investors if they either:

  • Own securities of more than RUB3 million.

  • Have at least three months' relevant work experience in a qualified investor company.

  • Have concluded at least ten transactions valuing more than RUB300 000 in the last recent four quarters or at least five transactions valuing more than RUB10 million in the last three years.

Foreign financial instruments not admitted to public placement and/or public circulation in Russia as well as foreign financial instruments not classified as securities can only be offered to qualified investors (see Question 29, Russian shares) and must not be offered in any form or by any means to an unlimited circle of persons.

There are no clear exemptions to the general prohibition on offering foreign shares not admitted to public placement or public circulation in Russia to an unlimited circle of persons.

On 5 April 2011, the Russian Federal Financial Markets Service (FFMS) issued a separate regulation on special rules of circulation and accounting of the rights to the securities intended for qualified investors and to foreign securities. This document stipulates that foreign securities not admitted to placement and/or public circulation in Russia may be acquired without the participation of a broker if the acquirer is either a:

  • Non-Russian citizen (this may apply to non-Russian employees of a company in Russia).

  • Russian citizen who acquires the foreign securities on the basis of the terms of his employment or in connection with his employment or as a director.

To acquire foreign securities under these circumstances, the foreign financial instruments must be qualified as securities (that is, a special procedure of qualification of foreign financial instruments as securities must be carried out) in accordance with the procedure provided by the FFMS and assigned both an International Securities Identification Number (ISIN) and a Classification of Financial Instruments (CFI) code.

 

Share option plans

3. What types of share option plan are operated in your jurisdiction?

Russian companies

Russian companies can implement various share option plans. These plans are not subject to specific legislation.

Open joint stock company. This type of company offers real share option plans over its shares (see below, Real share option plan). An open joint stock company is a company with an unlimited number of shareholders and a minimum registered share capital of 1,000 minimum monthly wages (for these purposes one minimum monthly wage is equal to RUB100).

Closed joint stock company. This type of company must have no more than 50 shareholders and have a registered share capital of at least 100 minimum monthly wages. Shareholders' pre-emption rights generally make the operation of share plans in a closed joint stock company excessively difficult. Due to these restrictions, it is very rare for closed joint stock companies to offer employee share plans.

Limited liability company. The registered capital of a limited liability company is not divided into shares but is divided between participants as participatory interests. A limited liability company must have no more than 50 participants, and a registered capital of at least RUB10,000. Limited liability companies do not offer share option plans as they have participatory interests rather than securities. Although it is formally possible to make an equivalent type of option to acquire rights in a limited liability company, these instruments are not usually the basis for an employee incentive, and the pre-emption rights in a limited liability company would make implementation of this option difficult.

The following types of plans are operated in Russia:

  • Real share option plans.

  • Restricted share option plans. In this context, "restricted" means that the right to exercise the option is dependant on certain conditions.

Real share option plan

Share option plans over Russian shares in the Russian market. In this context, Russian companies use a special purpose vehicle, known as a programme operator (Operator). The Operator purchases the shares of the company and enters into option agreements with the employees. Tax considerations usually determine the Operator's jurisdiction of incorporation and legal form.

While it is possible for a company to issue shares as part of an employee share option plan without using an Operator, the legal difficulties of the issuing company offering options directly mean that this approach is never used in Russia. Therefore, this alternative is not discussed in this article.

Real share option plans begin with the Russian subsidiary or foreign parent company establishing an Operator which:

  • Purchases the company's shares at market price (or acquires them in another way).

  • Enters into option agreements with the employees, entitling them to purchase a block of the company's shares after a certain period of time at a fixed price (usually the market price at the beginning of the plan).

As Russian civil law does not distinguish options (except for issuer's options) as an independent form of agreement, the option usually takes the form of a share purchase agreement, although the plan and the share purchase agreement can both be used if required: with the plan setting out general terms and conditions of the incentive plan and the share purchase agreement being entered into with each individual participant (it is also permissible to use simply the share purchase agreement, without a plan as a separate document). The share purchase agreement is subject to either:

  • Conditions precedent.

  • Delayed performance and other obligations for the employee.

The option agreement must be drafted very carefully, or it may be unenforceable.

If the terms of the plan are incorporated into the employee's employment contract, there is a risk that benefits under the plan may be included as a permanent part of the employment contract (for example, being recovered in an unfair dismissal claim).

There is no requirement to make a specific data protection filing or registration for the plan, though the general statutory rules on data protection can be applicable depending on the circumstances (see Question 32).

At the completion of the plan, the Operator either:

  • Sells the shares to the employees at the fixed price.

  • Sells the shares on the securities market and pays the gain above the fixed price to the employees.

Foreign shares. If the share option plan relates to foreign shares, the plan is usually operated by either:

  • The foreign company whose shares are acquired. This company issues rules setting out the plan's terms and conditions.

  • A plan operator (commonly an offshore company) that holds the shares for the purposes of the plan. Once the plan's conditions are met, the operator either:

    • sells the foreign shares to the eligible employees; or

    • transfers an equivalent cash amount.

Alternatively, a foreign broker acquires the foreign shares in the stock exchange to either:

  • Sell to the eligible employees (foreign shares sold to employees under the plans are usually kept by brokers for the employees on specialised accounts the brokers open within their systems).

  • Transfer the cash to the employees' bank accounts in Russia.

Companies offering participation in employee share plans relating to foreign shares must consider the Securities Market Law (see Questions 2 and 29).

Restricted share option plan

Open joint stock companies offer restricted share option plans and these have recently become more popular than real share option plans.

Restricted share option plans share the same general characteristics as real share option plans (see above, Real share option plan).

At the beginning of the plan the Russian subsidiary or the foreign parent company establishes an Operator that:

  • Purchases the shares of the company at the market price.

  • Enters into agreements with the employees which enable them to buy shares in the company after:

    • a certain period of time; and/or

    • the employees meet the established criteria or the company performance meets its established target.

After the conditions are met, the employees can buy the shares at the market price, and the Operator will pay them compensation in the amount of the difference between the market price at which the Operator purchased the shares and the market price at which the participants bought them (if the latter is greater).

Foreign share plans

Foreign companies offering share plans are usually public companies. In relation to foreign shares, the following plans are commonly used:

  • Share option plans.

  • Restricted share plans.

  • Cash unit plans.

Grant

4. What rules apply to the grant of employee share option plans?

Real share option plans

Discretionary/all-employee. There are no specific Russian regulations on this issue.

Generally, shares in a Russian company can be offered at the discretion of the employer and non-discrimination rules do not apply (see Question 16, Phantom share plan: Discretionary/all-employee). There is no established court practice based on grounds of discrimination. Share plans can therefore be offered to any employee of the company.

Non-employee participation. There is no restriction in Russian law to grant share options to non-employees.

Maximum value of shares. Russian legislation does not provide for a maximum value of shares over which an option can be granted.

Market value. Russian legislation does not provide any restrictions on the exercise price. The plan usually sets the exercise price equal to the market price of the shares at the level of the market price of the shares at the beginning of the plan or another mechanism of the exercise price determination (such as an average market price for a certain period).

Restricted share option plan

Discretionary/all-employee. There is no Russian legislation on this issue. The employer can generally grant options on a discretionary basis. Share plans can therefore be offered to any employee of the company.

Non-employee participation. There is no restriction in the Russian law to grant restricted share options to non-employees.

Maximum value of shares. Russian legislation does not provide for a maximum value of shares over which an option can be granted.

Market value. Russian legislation does not provide any restrictions related to the exercise price, although the plan usually provides that the exercise price is equal to the market price of the shares at the time of exercise.

 
5. What are the tax/social security implications of the grant of the option?

Real share option plan

Generally, there are no tax or social security obligations arising from the grant of the option. However, there is remote risk that a grant of options may qualify as a financial instrument subject to special taxation, resulting in a potential obligation to pay tax on grant.

Restricted share option plan

There are no tax or social security obligations arising from the grant of the option.

Vesting

6. Can the company specify that the options are only exercisable if certain performance or time-based vesting conditions are met?

Real share option plan

The company can specify that the option is only exercisable if certain performance or time-based vesting conditions are met. However, these provisions should be drafted very carefully to avoid the agreement being considered unenforceable (see Question 3, Real share option plan). Both performance and time-based vesting conditions are common market practice in Russia.

Restricted share option plan

See above, Real share option plan.

 
7. What are the tax/social security implications when the performance or time-based vesting conditions are met?

Real share option plan

No tax or social security contributions are payable when the performance or time-based vesting conditions are met.

Restricted share option plan

See above, Real share option plan.

Exercise

8. What are the tax/social security implications of the exercise of the option?

Real share option plan

The tax and social security implications depend on whether the shares are in a foreign or domestic company.

Company incorporated in Russia. The same rules apply for both the calculation of taxable income and the rate of income tax for the employee on the material benefit or compensation received as for foreign companies (see below, Real share option plan: Foreign company).

If the employee purchases the shares directly from its employer, the employer must act as a tax agent (that is, withhold the tax from the employee's salary and pay it to the Russian treasury itself). The tax agent must file with the tax authorities:

  • Information on the employees' income.

  • The amount of personal income tax accrued and withheld.

If the shares are sold through a Russian-incorporated Operator, within one month after the end of the year in which the shares are sold the Operator informs the tax authorities and the employee in writing of:

  • Its inability to withhold the tax.

  • The amount of the income tax debt.

If an Operator is used, the employee must declare his taxable income and pay the tax himself.

If a premium is paid to the employee, the company paying the income must act as a tax agent (that is, withhold the tax from the amount paid to the employee, pay it to the Russian treasury and file with the tax authorities information on the employee's income and the amount of personal income tax accrued and withheld). This applies regardless of whether the company paying the premium is an Operator.

If the employer pays the premium to the employee under his employment contract, the employer must pay social security contributions as follows:

  • Insurance contributions. Insurance contributions are due on salaries, remunerations, bonuses and other income (under labour and civil law contracts), benefits in non-monetary form and other gratitude payments paid to each employee. The rate is 30% until amount of payment to the employee reaches the threshold of RUB624,000 (indexed) in a given year, a 10% rate is applied to payments over the threshold.

  • Accident insurance contributions. The applicable rate ranges from 0.2% to 8.5% of the employee's gross salary, depending on the class of professional risk that the employee's work involves. Payments to office employees are usually subject to a 0.2% rate.

Where the premium is paid through an Operator and not under the employee's employment contract, no social security contributions apply. However, there is a risk that the authorities will consider the payment to be a bonus for the employee executing his responsibilities under his employment contract. In that case, the state social security funds impose social security contributions.

Foreign company. If the exercise price of the option is lower than the current market price, the employee receives taxable income on the material benefit (that is, the amount by which the current market price exceeds the exercise price). This income is not subject to social security contributions.

If, instead of acquiring the shares, the employees are paid a premium equal to the difference between the fixed price and the current market price of the shares, the employees pay income tax on the amount they actually receive from the foreign company. Social security contributions only apply to this remuneration if the employee has an employment contract with the foreign company.

The personal income tax rate is 13% for an employee that is Russian tax-resident (that is, the employee stays in Russia for a period of not less than 183 days within the year when the income was actually received). For other employees, the rate is 30%.

If the taxable income is received from abroad and the foreign company does not have a separate branch in Russia, the foreign company has no withholding obligations. The employee must declare his taxable income and pay the tax himself.

If the share option plan is implemented through a Russian-incorporated Operator see above, Real share option plan: Company incorporated in Russia.

Restricted share option plan

The tax and social security implications depend on whether the shares are in a foreign or domestic company.

Company incorporated in Russia. For Russian companies, the same rules apply for both the calculation of taxable income and rate of income tax for the employee on the payment of compensation as for foreign companies (see below, Restricted share option plan: Foreign company).

Profit that the Russian company receives from the sale of shares is subject to profit tax at 20%. There are special rules on the calculation of the profit tax base on sale of the shares when the shares are sold at a fixed price which is lower than the market price.

If compensation is paid to the employee, the company paying the income must act as a tax agent (that is, withhold the tax from the employee's income, pay it to the Russian treasury and file with the tax authorities information on the employee's income and the amount of personal income tax accrued and withheld). This applies regardless of whether the company paying the compensation is an Operator.

Social security contributions are payable on compensation paid under the employment contract at the same rates as for real share option plans (see above, Real share option plan).

Where the compensation is paid through an Operator and not under the employee's employment contract, then no social security contributions apply. However, there is a risk that the authorities will consider the payment to be a bonus for the employee executing his responsibilities under his employment contract. In that case, the state social security funds will impose social security contributions (see below, Restricted share option plan: Foreign company).

Foreign company. There are no tax implications when the employee purchases shares at their market price. Income tax is payable on compensation received by the employees as a difference between the fixed market price at the beginning of the plan and the market price at which the employee purchased them. This is at the usual income tax rates (see above, Real share option plan). Social security contributions only apply to this remuneration if the employee has an employment contract with the foreign company.

If this taxable income is received from another jurisdiction and the foreign company does not have a separate branch registered in Russia, the foreign company has no withholding obligations. The employee must declare his taxable income and pay the tax himself.

Income that the foreign company receives from the sale of shares of the foreign company is not taxable in Russia.

If the share option plan is implemented through a Russian-incorporated Operator, see above, Restricted share option plan: Company incorporated in Russia.

Sale

9. What are the tax and social security implications when shares acquired on exercise of the option are sold?

Real share option plan

Income received from the sale of shares (that is, the sale price of the shares less the documentarily supported costs of purchase, sale and holding of those shares) is taxed at:

  • 13% for tax-resident individuals.

  • 30% for individuals who are not tax resident.

This tax is paid by individuals themselves, except where the Russian source of income (such as a trustee or securities broker) withholds the tax. In these circumstances the employee may be exposed to double taxation, although if the tax on the material benefit was paid to the Russian treasury at the acquisition of the shares, the amount of the material benefit may be included in the documentarily supported costs reducing the employee's taxable income.

Employees must declare the taxable income and pay the tax themselves. The employer has no withholding obligations and no obligations to pay social security contributions.

Restricted share option plan

See above, Real share option plan.

 

Share acquisition or purchase plans

10. What types of share acquisition or purchase plan are operated in your jurisdiction?

Russian legislation does not provide specific regulations on share acquisition or purchase plans. Such plans are subject to the general legal regime but are underdeveloped in Russia. Therefore, there is no available information on these plans.

Acquisition or purchase

11. What rules apply to the initial acquisition or purchase of shares?

Not applicable (see Question 10).

 
12. What are the tax/social security implications of the acquisition or purchase of shares?

Not applicable (see Question 10).

Vesting

13. Can the company award the shares subject to restrictions that are only removed when performance or time-based vesting conditions are met?

Not applicable (see Question 10).

 
14. What are the tax and social security implications when the performance or time-based vesting conditions are met?

Not applicable (see Question 10).

Sale

15. What are the tax and social security implications when the shares are sold?

Not applicable (see Question 10).

 

Phantom or cash-settled share plans

16. What types of phantom or cash-settled share plan are operated in your jurisdiction?

Phantom share plans are the most popular type of incentive plans in Russia but are not subject to any specific Russian legislation (see also Question 17). A phantom share plan can take the form of either:

  • Incentive payments or bonuses regulated by Russian employment law, where the Russian employer grants the phantom shares directly or through a Russian-incorporated Operator.

  • Specific payments regulated by foreign law, where phantom shares are granted on the shares in a foreign company. In this case, the phantom shares can be granted directly by the foreign company itself or through an Operator.

Phantom share plan

Russian company plans. Where a Russian company grants the phantom shares directly to an employee, the payment is usually structured as a bonus.

The company introduces internal regulations (policy) which set the phantom share plan's terms and conditions. The company usually provides conditions under which an eligible employee is entitled to receive payments under the plan. Employment contracts with the eligible employees provide, or are amended to provide, the terms for participation.

At the completion of the plan, the company pays a bonus to the employee. This amounts to the margin between the current market price of a block of shares and its cost at the beginning of the plan.

Alternatively, the plan can be implemented through an Operator, set up by the employer at the beginning of the plan. The Operator:

  • Establishes the market price of the relevant shares at the beginning of the plan (without buying the shares).

  • Enters into agreements with the employees entitling them to receive, after a period of time, the margin between the market price of a block of shares and its cost at the beginning of the plan.

At the completion of the plan, the Operator pays the margin to the employees.

Foreign company plans. When a foreign parent company grants the phantom shares directly, the conditions of the phantom share plan differ depending on the applicable law. However, the principal characteristics may be similar to those described above (see above, Phantom share plan: Russian company plans).

There is a risk that these plans will be seen as an offer of derivatives, where the cash award is tied closely to the value of the shares. To avoid this, the company should make the payment through the company payroll, and wherever possible, ensure it is a right to cash only.

Grant

17. What rules apply to the grant of phantom or cash-settled awards?

Phantom share plan

Discretionary/all-employee. If a foreign company grants phantom share awards, it is not bound by Russian employment law and can therefore grant phantom share awards on a discretionary basis. However, Russian law may need to be considered, as the Russian authorities may consider the phantom share plan to be a form of bonus for work performed by the employee and therefore part of his salary. In that case, bonuses not granted to all employees that meet the same criteria may be considered discriminatory.

The situation does not usually differ when a foreign parent company grants phantom share awards through an Operator.

If a Russian company grants the awards to its employees directly (as a form of incentive payment), the company's internal regulations set out the conditions for the share plan (see Question 16, Phantom share plan). In these internal regulations the employer can, at its discretion:

  • Define the categories of employees that are entitled to receive phantom share awards.

  • Set out the conditions for receiving these awards.

All employees that belong to the same category must be offered the incentive on the same terms.

If the Russian company grants phantom share awards through an Operator, the discretionary principle applies.

Non-employee participation. There is no restriction in the Russian law to grant phantom shares to non-employees. However, for avoidance of the risks of recognition employment relations between the non-employee and the company it is recommendable to use different plan documents for employees and non-employees, at least where the employer implements the plan itself. It should be taken into account that these awards (if granted by the company for which the director serves) can be regarded as remuneration to the directors and as such the shareholders should approve them in advance.

Maximum value of awards. Russian legislation does not provide any restrictions on the maximum award value under the plan.

 
18. What are the tax/social security implications when the award is made?

Generally, there are no tax or social security obligations arising from grant of the award. However, there is remote risk that grant of the award may be regarded as a kind of option contract under Russian law and therefore subject to taxation on grant.

Vesting

19. Can phantom or cash-settled awards be made to vest only where performance or time-based vesting conditions are met?

Under Russian law it is possible to specify that the award vests only when certain performance or time-based vesting conditions are met.

If the awards are formulated as bonuses, the conditions for vesting must be set out in the internal regulations of the Russian company that issues the plan (see Question 16, Phantom share plan). Both performance and time-based vesting conditions are commonly used in Russia.

 
20. What are the tax/social security implications when performance or time-based vesting conditions are met?

There are no tax or social security contributions payable when the performance or time-based vesting conditions are met.

Payment

21. What are the tax and social security implications when the phantom or cash-settled award is paid out?

Phantom share plan

The tax and social security implications depend on whether the payment is made by a foreign company or company incorporated in Russia.

Company incorporated in Russia. The employee's income (the amount of cash actually received) is taxed at the usual tax rates (see Question 8, Real share option plan: Company incorporated in Russia).

The Russian company that pays the award must act as a tax agent. It must calculate, withhold from the income payable to the employee and transfer to the Russian treasury the relevant amount of personal income tax no later than the day the income is actually paid.

The Russian company must also file the following with the tax authorities:

  • Information on the employee's income.

  • The amount of personal income tax accrued and withheld for the year.

If the payment is made to the employee under the employment contract, social security contributions are payable by the employer at the usual rates (see Question 7, Real share option plan).

If the payment is made through a Russian-incorporated Operator and not under the employee's employment contract, no social security contributions apply. However, there is a risk that the authorities will consider the payment to be a bonus for the employee executing his responsibilities under his employment contract. In that case, the state social security funds will impose social security contributions.

Employees must submit personal income tax returns reflecting income derived from exercise/sale, unless the tax was withheld by the employer or other organisation remitting the income to the employee. The employer submits quarterly reports on social security contributions paid.

Foreign company. The employee pays income tax on the amount that he actually receives, at the usual tax rates (see Question 8, Real share option plan: Foreign company). The employee must submit the tax declaration and pay the declared amount of tax himself. The foreign company has no income tax withholding obligations unless the income is paid through a separate branch of the foreign company registered in Russia.

Unless the employee has an employment contract with the company paying the remuneration (see above, Phantom share plan: Company incorporated in Russia) no social security obligations arise.

 

Corporate governance guidelines, market or other guidelines

22. Are there any corporate governance guidelines, market rules or other guidelines that apply to any of the above plans?

There are no specific corporate governance rules, market rules or other guidelines applicable to employee share plans in Russia.

 

Employment law

23. Is consultation or agreement with, or notification to, employee representative bodies required before an employee share plan can be launched?

Russian legislation does not require consultation with or notification to employee representatives before implementing an employee share plan unless the employer must do so under the terms of an industrial agreement or a collective bargaining arrangement.

However, when a Russian company directly grants phantom share plans to its employees without using an Operator, it will usually establish internal regulations that provide for the terms and conditions of remuneration. The employer must obtain the motivated opinion of the trade union before adopting these regulations. In this context, motivated opinion means the trade union's opinion of the draft of the internal regulation which sets out the terms of the phantom share plan, expressing approval or disapproval of it or its certain terms and supported by proper arguments and/or reasoning.

However, if the employer does not agree with the motivated opinion of the trade union, the employer can implement the phantom option plan on the conditions it defines, unless the plan is part of a collective agreement for the company.

 
24. Do participants in employee share plans have rights to compensation for loss of options or awards on termination of employment?

Compensation for loss of awards usually depends on the terms and conditions of each particular plan.

 

Exchange control

25. How do exchange control regulations affect employees sending money from your jurisdiction to another to purchase shares under an employee share plan?

Exchange control regulations regulate but do not prohibit resident employees sending money to another jurisdiction to purchase shares in a foreign company. In this content, "residents" include:

  • Russian citizens (except for those that have a continuous place of residence outside Russia in accordance with the laws of their state of residence).

  • Non-Russian citizens holding a residence permit and residing in Russia.

Under Russian law, the Russian resident's acquisition of shares in a non-Russian company is considered to be a "currency operation". If a Russian subsidiary of a foreign company (which is also a resident for the purposes of Russian currency regulations) grants the options over the foreign shares, the shares can be transferred to the employee, provided the:

  • Rights to the shares are recorded in a depository established in accordance with Russian law.

  • Payment for shares by the eligible employee to the Russian company is made in Russian currency (RUB).

From May 2013 certain categories of employees are prohibited from possessing or using foreign financial instruments (including shares in foreign companies), as well as opening or having accounts (deposits) in foreign banks, situated outside Russia. Such individuals are employees holding official state positions of the Russian Federation and subjects of Russian Federation, some positions of Russian federal services and some other municipal and state officials, as well as their spouses and minor children.

 
26. Do exchange control regulations permit or require employees to repatriate proceeds derived from selling shares in another jurisdiction?

Russian exchange control regulations do not prohibit employees from repatriating proceeds derived from selling shares in another jurisdiction. However, the purchaser must make the payment directly to the employee's bank account, opened in a Russian bank (a bank, established in accordance with Russian laws and having a licence of the Central Bank of Russia). Failure to receive funds first to the Russian bank account of the resident participant is a ground for a fine for the participant from 75% to 100% of the amount of the transfer. The employee's bank (the bank receiving the funds from the non-Russian jurisdiction) can request documents from the employee demonstrating the legal grounds for the transfer of the funds. If the purchaser instructs another legal entity to transfer the relevant funds without any legal grounds, the employee may have difficulty demonstrating the grounds of payment to the bank.

 

Internationally mobile employees

27. What is the tax position when an employee who is tax resident in your jurisdiction at the time of grant of a share option or award leaves your jurisdiction before any taxable event affecting the option or award takes place?

The following income is subject to personal income tax, depending on the employee's tax-residency status (Russian Tax Code):

  • For tax residents: worldwide income received.

  • For individuals who are not tax-resident: Russian-source income.

Tax residency is determined by whether the individual spends a period of not less than 183 days within the calendar year in Russian territory (see Question 7).

Therefore, the tax implications for an employee depend not on his location when the option is exercised but on:

  • The source of his taxable income.

  • His tax residency at the moment when a tax event arises.

 
28. What is the tax position when an employee becomes tax resident in your jurisdiction while holding share options or awards granted abroad and a taxable event occurs?

If the employee is non-resident, only his Russian-sourced income is taxable in Russia. Therefore, the tax implications depend on whether the employee receives income from performing the activity in Russian territory. An employee with Russian tax resident status must pay Russian personal income tax on all his income worldwide.

 

Securities laws

29. What are the requirements under securities laws or regulations for the offer of and participation in an employee share plan?

Russian shares

If the plan relates to Russian shares a prospectus must be issued and registered where new shares are issued and placed by subscription unless there is an exemption provided by law. Exemptions from the prospectus requirement include, among other things:

  • Placement by closed subscription (private placement) among fewer than 500 acquirers (not including qualified investor acquirers).

  • Offers of shares to not more than 150 acquirers (not including qualified investors) and fewer than 500 person with pre-emption rights to acquire the shares.

Prospectus requirements apply when an issuer's option is implemented (although such plans are not often implemented in practice) (see Question 4, Real share option plans).

Foreign shares

Foreign shares can be placed on the Russian market if the prospectus is registered and conditions mentioned below are met.

In 2009 the Securities Market Law was amended by Federal Law No. 74-FZ dated 28 April 2009 which changed the procedure and rules for placement, circulation (that is, any transaction for the purposes of the sale or disposal of shares) and public circulation of foreign securities on Russian markets.

The amendments came into force on 16 May 2009. Under the amended Securities Market Law, foreign issuers' securities are eligible for circulation in the Russian market only if the respective foreign financial instrument both:

  • Has international ISIN and CFI codes assigned to it.

  • Is qualified as a security in accordance with the rules established by Central Bank of Russia. .

Foreign shares that satisfy the above criteria can be admitted to placement and public circulation on the Russian market if the issuer of foreign financial instrument is either:

  • Incorporated in a jurisdiction that is a member of the Organisation for Economic Co-operation and Development (OECD), a member or an observer of the Financial Task Force on Money Laundering (FATF), and/or a member of the CE Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL) or members of Common Economic Space.

  • Incorporated in a jurisdiction whose securities market regulator has made an agreement with the Central Bank of Russia, which provides for a procedure for their interaction.

  • An international financial organisation included in the list endorsed by the Government of the Russian Federation or foreign states mentioned above, or central banks of such foreign states.

  • An international organisation, whose securities passed listing procedure at a foreign exchange, included in the list, approved by the Central Bank of Russia.

 
30. Are there any exemptions from securities laws or regulations for employee share plans? If so, what are the conditions for the exemption(s) to apply?

There are no specific exemptions. Conditions for exemptions are therefore not applicable.

 

Other regulatory consents or filings

31. Are there any other regulatory consents and filing requirements and/or other administrative obligations for an offer of and participation in an employee share plan?

If, for the purposes of implementing the share plan, personal data is transferred by the processing company by persons other than the employee himself to jurisdictions which do not provide adequate protection of personal data (and in certain other cases), the employee's written consent, obtained in accordance with the requirements of the Russian Federal Law On Personal Data, is required.

 
32. Are there any data protection requirements or obligations for an offer of and participation in an employee share plan?

See Question 31. Consent to the processing of the employee's personal data for the purposes of the plan may also be required if the personal data is obtained not from the employee, but from third parties.

If employee personal data are transferred to the issuer or operator by his/her employer, the data processing or data transfer agreement between the employer and the issuer/operator must be concluded or respective provisions on data transfer and processing may be implemented in another agreement between the parties.

 

Formalities

33. What are the applicable legal formalities?

Translation requirements

If the plan documents are formalised as the employer's internal regulations, they must be in Russian. Where the plan is operated by an Russian company all documentation must be in Russian.

In other cases, it is recommended that the documents be translated into Russian if payments are made to or from other jurisdictions. This is because the employee will need to provide his bank with the necessary documents in Russian, as this is a legal requirement for the funds to be transferred. In addition, employees may be requested to provide these documents to the tax authorities to demonstrate the origin of the income.

E-mail or online agreements

Employees can enter into binding agreements under share plans electronically. However, unless they use a special electronic signature, it may be disputable and harder to prove that the binding agreement was entered into.

Witnesses/notarisation requirements

There are no witness/notarisation requirements.

Employee consent

A deduction from the employee's wages requires consent from the employee.

 

Developments and reform

34. Are there any current trends, developments and reform proposals that have or will affect the operation of employee share plans?

Trends and developments

Phantom shares and cash-settled plans remain the most popular types of plans.

Employee share plans are becoming increasingly widespread among large companies on the Russian market (both listed companies and large unlisted companies). For the time being, it is expected that phantom shares will remain the most popular type of incentive for top management employees.

Reform proposals

There were no proposals to reform employee share plans during the last year. Regulation of share plans in Russia is seen as a positive trend.

 

Online resources

Systema

W www.systema.ru

Description. This website provides reference texts of the federal laws and Acts of the President and government of the Russian Federation. It is maintained by the Scientific and technical centre of the legal information (Systema) of the Federal Security Service. Information is expected to be official and up-to-date. Information is in Russian only.



Contributor details

Irina Anyukhina

ALRUD Law Firm

T +7 495 234 96 92
F +7 495 956 37 18
E ianyukhina@alrud.com
W www.alrud.com

Qualified. Russia, 1994

Areas of practice. Labour and employment, including dispute resolution; real estate and construction; intellectual property and media; brands and technology; international business and trade.

Recent transactions

  • Advised one of the largest international producers of computer processors on the Russian legal and tax implications of changes to its employee share plans, operated in a group of companies acquired as a result of a merger.
  • Advised a multinational financial services company on the specifics of implementing incentive plans for top executives.

Olga Pimanova

ALRUD Law Firm

T +7 495 234 96 92
F +7 495 956 37 18
E opimanova@alrud.com
W www.alrud.com

Qualified. Russia, 1999

Areas of practice. Labour and employment; corporate; commercial; investments and currency control regulation.

Recent transactions

  • Advised one of the largest international producers of computer processors on Russian legal and tax implications of changes in the employee share plans, operated in a group of companies acquired as a result of a merger.
  • Advised a multinational financial services company on the specifics of implementing incentive plans for top executives.

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