Importance of compensation issues from the corporate
governance angle has increased over recent years, as a result
of which their regulation has gone from mere recommendations to
positive law, applicable to the compensation paid to the
executives and directors of, among others, credit institutions,
investment services and insurance companies, or collective
investment undertaking management companies.
Generally speaking, the objective of rules of this kind is
to align the design of variable compensation schemes with the
long-term sustainability of companies, by preventing excessive
risk-taking and the conflicts that can arise between the
interests of owners, or shareholders, and managers, or
executives.
The measures envisaged in these regulations include
mechanisms for the adjustment of short and long-term variable
compensation, once fulfilment of the objectives to which such
compensation was linked has been determined (ex post
adjustments). The most notable of such mechanisms are:
- Deferral of the payment of variable
compensation;
- Settlement through the transfer of equity
instruments;
- The establishing of "lock-up" periods;
and
- The possibility of the compensation
eventually going unpaid, or of its reimbursement being
requested, in the event of materialisation of certain
circumstances that could call into question the validity of
such payments.
This last category of adjustment mechanisms linked to the
reduction or recovery of variable compensation are known as
'malus' (reduction) and 'clawback' (refund) clauses.
Without prejudice to the juridical complexity associated
with the application of clauses of this kind, they give rise to
a variety of tax questions affecting employer companies,
employees and executives, and which are generally difficult to
answer. Some of these questions are the following:
- Timing of recognition of variable
compensation affected by malus or clawback clauses.
The impact in the case of
malus clauses is very different from that deriving from
clawback clauses. In the case
of the former, the variable compensation has been determined
but not yet paid (usually because there is a deferral
arrangement), and in most cases has therefore not yet fallen
due. In the case of clawback clauses, however, the
compensation has been paid, the employer has applied and paid
in the corresponding withholdings and prepayments, and the
employee or executive has filed his or her personal income
tax return.
- Variable compensation affected by the
application of clawback clauses.
In cases in which the variable compensation
has been paid through the transfer of shares of the employer
company, it is necessary to determine whether such clauses
affect the number of shares transferred or their economic
value. The reply to this
question could be affected by a possible fluctuation in the
value of the share between the transfer date and the date on
which the variable compensation is refunded.
- Effect of clawback clauses on the gross
amount of variable compensation.
None of the Spanish rules regulating the
application of clawback clauses stipulates clearly whether
the amount refunded should be the gross amount of the
compensation paid or its net amount.
It would seem reasonable to conclude that the
application of clawback clauses should entail the refund of
taxes incorrectly paid in, and this question is therefore
crucial when it comes to determining whether it is the
employer – as the party under an autonomous
obligation to withhold the tax – or the employer
themselves who is entitled to request a possible refund of
the taxes paid in.
Finally, from an international perspective, according to the
commentary on the OECD Model Convention of July 2014, earned
income deriving from deferred compensation arrangements is
considered to be among the types of income regulated by Article
15, meaning that it may relate to a previous job position held
in another country. The impact that malus and clawback clauses
would have in such cases would therefore need to be analysed in
order to determine, accordingly, the state from which a refund
of taxes incorrectly paid in should be claimed.
Therefore, the tax questions related to this matter mainly
derive from the absence of a tax specific regulation, and are
linked, among others, to determining:
- The fiscal year when the personal income
or corporate income taxes have been generated and
computed;
- The person entitled to claim the eventual
personal income tax refund (the employer or the
employee);
- The amount to be claimed (gross or net
income);
- The income affected by these rules when
variable compensation has been liquidated by delivering
shares; and
- The way these topics should be addressed
when the employee has been rendering services in different
jurisdictions (i.e. expatriates or international assignment
programmes).
|
Eduardo Gómez de Salazar |
|
|
Rafael García-Valdecasas |
Eduardo Gómez de Salazar (eduardo.gomez.de.salazar@garrigues.com)
and Rafael García-Valdecasas (rafael.garcia.valdecasas@garrigues.com),
Madrid
Garrigues
Website: www.garrigues.com