EMI or Unapproved Share Option Scheme – which is best?
Tax advantaged EMI scheme, or a more flexible Unapproved scheme? We explain the differences and how to decide which is r...
Want to reward your overseas employees with share options but don’t know how? Good news – it’s possible and easy to do (other than for US employees, but more on that below). We’ll explain how.
UK companies usually set up EMI schemes to grant employees share options. The EMI scheme has great tax benefits, it’s designed for UK-based PAYE employees, and it’s quick and easy to set one up on SeedLegals.
But when it comes to granting options to employees or contractors based outside the UK, who are paying tax in a different country, EMI options won’t work.
For those overseas employees and contractors, you’ll want an unapproved option scheme, which you can also easily set up on SeedLegals. But, there are some things to think about first. Keep reading.
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An ‘unapproved’ scheme is so-named because, unlike an EMI scheme, you don’t register the scheme with HMRC or agree a valuation with them. This means they don’t need to approve the scheme, which is why it’s called ‘unapproved.’ It also means that, unlike an EMI scheme, it doesn’t come with any tax advantages for the option recipient.
If your overseas employees and contractors can’t use an EMI scheme, the unapproved scheme is the way to go for them. It allows you to grant options to any non-UK employees and also to people in the UK who aren’t on your PAYE payroll like advisors, consultants and contractors. You can design an unapproved scheme on your own terms, and set your own exercise price.
Only a handful of countries – like the UK, the US and France – have compelling tax-advantaged employee share option schemes. This means that in the UK and the US, employees can benefit from generous tax advantages when you grant them options. In the UK you’ll need to agree an EMI valuation with HMRC, and in the US the 409A valuation is the standard.
Most countries don’t have such schemes, so the employee’s local tax regime will determine when and at what rates they’ll be liable for local taxes. Depending on their local tax laws, there may be tax liabilities for them when they’re granted the options, when they exercise their options, and/or when they sell the shares later. For example, in the Netherlands employees pay tax on exercise. In India, there is additional tax on the proceeds of sale of those shares.
It’s likely that your UK company will still have some tax and national insurance contributions (NIC) to pay in the UK when the option is exercised, due to a rather complex set of rules around what the government call ‘remittance’ and ‘apportionment’ of your foreign employee’s income in the UK.
HMRC sets out some worked examples – but we recommend you ask your accountant about the tax implications of granting and exercising options under an unapproved scheme.
We also recommend checking that the employee understands the tax and NIC implications before you grant options.
Whether your UK company needs to report the scheme, the grant, and/or the exercise of the options depends on the local laws in the country where your option holder is based. There is no one-size-fits-all approach here – your overseas employee definitely needs to check with an accountant, and you may want to check with your company accountant (though realistically it’s unlikely they know anything about share option tax issues in other countries).
You can grant your overseas employees options easily on SeedLegals. To get started, set up an Unapproved Options Scheme – you can tailor your scheme so it’s perfect for your company.
When your Unapproved Option Scheme is set up, you can create option grant agreements for your team. The agreement is an English-language document, and the relationship between your company and the option holder will be covered by English law. The agreement covers scenarios where the employee is not a UK taxpayer so there’s no need to make any adjustments to the wording or the scheme rules.
If you’re looking to hire employees in the US (or even contractors) for your UK company, it’s a bit more complicated. We recommend reading this article from the reputable business law firm Wilson Sonsini, as it explains some of the nuances of US share option schemes, and the need for a 409A valuation for team members you’re giving options to in the US.
You can of course grant unapproved options to any French team members employed by your UK company. However, France has its own tax-advantageous equivalent of the EMI scheme called BSPCE, so if your company has a French subsidiary, BSPCE would be the way to go for your French employees. Contact us if you want to grant share options to employees in France and we’ll guide you in the right direction.
We can answer your questions and walk you through how to set up an Unapproved Options Scheme on Seedlegals. Book a free call with one of our Options experts – we’re always happy to help.