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Tax on share options: Employee stock ownership plan in Croatia

22.09.2023

Employee stock ownership has become a magnet for hiring new employees in Croatia. It is likely to become even more popular and widespread if legislators make necessary changes to the tax treatment of giving employees a share in ownership.

What is employee stock ownership?

An employee stock ownership plan (ESOP) is the name given to a social plan in which employees participate in the ownership of the company. By participating in ownership, employees feel more valued by their employers, which further motivates them to do their best at work. Their better performance leads to greater success for the company, and as a reward for better performance, employees receive the right to financial compensation – the dividend.

Tax legislation in Croatia

Taxation of the transfer of ownership shares to employees in Croatia is regulated by the Income Tax Act, although there are differences in the taxation of the transfer of ownership shares in limited liability companies and joint stock companies, explain the Ecovis advisors.

Croatian tax legislation is very complex, but we can accompany the entire process for you.

Robert Špoljar, Tax advisory & Accounting Manager, ECOVIS FINUM, Zagreb, Croatia

In the case of a limited liability company, the transfer of ownership shares is treated as income from employment, which means that in addition to income tax, the owners must also pay contributions for pension and health insurance. This makes it a very expensive option for owners which is currently a major obstacle to increasing the number of ESOPs in Croatia.

Under the Croatian Personal Income Tax Act, the allocation of shares to employees of joint stock companies is considered capital income, which is a much more favourable option for companies.

In this case, the basis for taxation is the difference between the market price of the share and the contractual price of the share, and a capital gains tax is paid. However, there is no payment of contributions for pension and health insurance.

For further information please contact:

Robert Špoljar, Tax advisory & Accounting Manager, ECOVIS FINUM, Zagreb, Croatia
Email: robert.spoljar@ecovis.hr

China’s tax policy encourages new benefits

21.09.2023

The Chinese government has introduced new and very important tax policy measures. These include tax advantages for investment in office equipment, a new tax calculation method for annual bonus payments, and tax exemptions for foreigners. The new regulations are due to apply from 2024.

Notice No. 37/2023, issued by the Ministry of Finance and State Taxation Administration, focuses on encouraging companies to invest in equipment and devices to boost the domestic economy. Between 1 January 2024 and 31 December 2027, enterprises will be allowed to include the cost of equipment and devices valued at CNY 5 million or less in their current expenses on a lump-sum basis and deduct the full amount of such costs from their taxable income. The goal is to encourage companies to modernise their operations and become more competitive, while benefiting from tax incentives. The existing tax rules will continue to apply for equipment and devices valued at more than CNY 5 million, explain the Ecovis experts.

ECOVIS Ruide Shanghai and ECOVIS Heidelberg are available to answer all your tax questions in China.

Richard Hoffmann, Lawyer, ECOVIS Rechtsanwaltskanzlei Richard Hoffmann, Heidelberg, Germany

Additional tax breaks for foreigners in sight

A separate announcement from the Ministry of Finance and the State Taxation Administration confirms the expansion of tax incentives for foreigners in China. Aiming to enhance the country’s appeal to foreign investors, the changes will see an extension of the special tax calculation method for annual bonuses and exemptions for foreigners in areas such as rental income, childcare and language instruction.

Taxpayers can choose to use the traditional method for calculating bonus taxes or follow the new legislation, which incorporates the calculation of total annual income.

For further information please contact:

Richard Hoffmann, Lawyer, ECOVIS Rechtsanwaltskanzlei Richard Hoffmann, Heidelberg, Germany
Email: richard.hoffmann@ecovis.com

Transfer Pricing Malaysia: New Income Tax Rules in 2023

22.08.2023

The Inland Revenue Board of Malaysia (IRBM) has issued the latest Income Tax (Transfer Pricing) Rules 2023, which are effective from the 2023 assessment year and replace the Income Tax (Transfer Pricing Rules) 2012. The experts from ECOVIS MALAYSIA TAX SDN BHD explain what companies must pay attention to.

What the New Transfer Pricing Rules Bring

The rules apply to controlled transactions given in subsection 140A (2) of the Income Tax Act and are used in determining and applying the arm’s length price for the acquisition or supply of property or services in accordance with these rules. This article highlights some of the key changes which taxpayers making such transactions must be aware of.

The New Definition of Contemporaneous Transfer Pricing Documentation (CTPD)

Under the new rules, a person who enters into a controlled transaction must prepare a CTPD prior to the due date for furnishing a return in the basis period of an assessment year in which the controlled transaction takes place.

The CTPD must contain:

• Multinational enterprise group information (master file information).
• The individual’s business information (local file information).
• Information and documentation regarding the cost contribution arrangement.

Timeline: The CTPD must be prepared prior to the tax return lodgement due date and furnished within 14 days upon request by the IRBM.

Date: The CTPD completion date must be provided.

Non-applicable information: The CPTD must also include information, data or documents concerning non-applicability.

Taxpayers are obliged to prepare full transfer pricing documentation if the company has:

• gross income of more than MYR 25 million and
• total related party transactions of more than MYR 15 million or
• receives financial assistance of more than MYR 50 million (does not apply to transactions involving financial institutions).

We will show you the steps you must take to comply with the new transfer pricing rules.

Ang Heng Ann, Tax Partner, ECOVIS MALAYSIA TAX SDN BHD, Kuala Lumpur, Malaysia

Hierarchy of Transfer Pricing Methods No Longer Applies

According to the 2012 rules, the IRBM required transfer pricing methods to be selected on a hierarchy basis to assess applicability and reliability. However, the new 2023 rules remove this hierarchy of methods.

Director General’s Power

The director general of the IRBM has the right to:

• Make an adjustment to reflect the arm’s length price or arm’s length interest rate for a transaction by substituting or imputing the price or interest rate, as appropriate.
• Adjust the price of the controlled transaction to the median if the price is outside the arm’s length range, or to any point above the median if the price is within the arm’s length range. This applies when the uncontrolled transaction is of a lesser degree and any of the comparability defects cannot be quantified, identified or adjusted.
• Impose a surcharge in accordance with subsection 140A(3C) of the Income Tax Act.

Arm’s Length Range

Definition: The Income Tax (Transfer Pricing) Rules 2023 defines the “arm’s length range” as a range of figures or a single figure falling between the value of 37.5 percent and 62.5 percent of the data set and acceptable to the director general in determining whether the arm’s length price has been applied in a controlled transaction. This range is derived by either applying the same transfer pricing methodology to multiple comparable data or applying different methods, as determined under rule 6 of the Income Tax (Transfer Pricing) Rules 2023.

According to rule 6, the methods for determining the arm’s length price are:

• The traditional transactional method.
• The transactional profit method.
• Any other method allowed by the director general which provides the highest degree of comparability between the transactions.

The introduction of these enhancements to the transfer pricing rules aims to increase taxpayers’ transfer pricing compliance and make it easier for the IRBM to enforce. Taxpayers must ensure that they take the appropriate steps to ensure compliance, as the rules are becoming more stringent.

For further information please contact:

Ang Heng Ann, Tax Partner, ECOVIS MALAYSIA TAX SDN BHD, Kuala Lumpur, Malaysia
Email: hengann.ang@ecovis.com.my