Chile: Understanding the new employee stock option plans
The tax treatment of Employee Stock Options (ESOPS) will change from January 1 2017 when the Tax Reform Law No. 20.780 of September 2014, included in Article 17 No. 8 of the Chilean Income tax law, incorporates new rules in order to apply taxes to the different stages of an ESOP.
Under these new criteria, the taxation of an ESOP could be triggered when they are granted because the new law states that being "able to subscribe an ESOP" would generate a benefit for the employee, counselor or director. In this case, the difference between the valuation of the option and the price paid by the employee in order to subscribe to the ESOP, if any was paid, would be the taxable income.
Circular Letter No. 70 of 2015, which interprets the new ESOP rules, indicates that the benefit obtained at the time of the granting of an ESOP could be used at the time of the transfer of the ESOP to a third party as part of its cost, so the triggered taxation would amount to the difference between the benefit obtained on the day granted and the price of sale of the option.
Before the 2014 Tax Reform Law, the tax treatment of ESOPS was only addressed through rulings by the Chilean Internal Revenue Service because they were excluded from the Derivatives Law No. 20.544 of 2011.
The existing tax treatment of the ESOPS, which will be applicable until December 31 2016, depends on whether the ESOPS were given as part of employment remuneration or if they were acquired by the worker using their own income.
ESOPS are taxable at the exercise day, which means that the difference between the price of the shares at the day of the exercise of the ESOPS and its acquisition cost would be treated as a higher remuneration subject to employment income tax law.
If the shares were acquired by the employee with his own resources, the ESOPS would be only taxable at the point of sale of the exercised shares. This means that the granting, vesting and exercise of the ESOPS would not trigger any taxable event as long as no capital gain is generated due to the sale of shares.
Finally, the Chilean Income Tax Law permits the accruing of employment benefits for the lifespan of the corresponding benefit, in the case of benefits established in employment contracts and for a 12 month period since its granting, if it was a voluntary benefit.
New tax application
The applicable taxation to the exercise of an ESOP would amount to the difference between the book or market value of the shares included in the ESOP and the benefit originally obtained at the granting of the ESOP under the new rules entering into force.
Under these new rules, it is important for companies to examine the clauses and content of any ESOP plan carefully because tax could be applied at any given stage of an ESOP.
Existing legislation has not solved the tax treatment of the Option granted to the employees as deductible expenses for the company.
If the exercise price of the ESOP is inferior to the cost of the shares acquired by the company, the Chilean Internal Revenue Service has not indicated whether the company would be able to consider that amount as a deductible expense or if it would be considered as a rejected expense subject to a sole tax of 40% (from 2017 onwards). Furthermore, the valuation rules applicable in order to determine the cost of the shares for the company, are not clear enough in the existing legislation.
Also, under the new ESOP rules, the accruing of the benefits for the employee and how they are going to recognize it in their tax returns is still being discussed.
Once the Chilean Internal Revenue Service starts to audit ESOPS, we should be able to distinguish between ESOPS or any other kind of instruments that are preferable as employment benefits.
César Agliati (email@example.com) and Ignacio Núñez (firstname.lastname@example.org)
Tel: +56 2 2940 0000