In the current age of globalization, companies are increasingly setting up operations and employing people overseas to expand their reach. Often times, a lot of these companies have in place employee benefit and incentive schemes in their home-countries which are not extended to the foreign countries where they also have operations due to the extensive legal, regulatory, and administrative complexities of implementing the same outside their domain jurisdictions.

One such employee benefit is an Employee Share Ownership Plan [ESOP]. An ESOP, as described in our previous article Creating a Bigger Pie or Golden Handcuffs? Employee Share Ownership Plans in Kenya is a share incentive program offered by companies to their employees allowing them to acquire shares in the company. Having an ESOP is an added incentive to productivity and commitment of employees because it gives them an opportunity to play a part in the ownership and the decision making of the company

An international ESOP is an extension of the benefits of the ESOP offered by a company to its home-office employees. In this article, we will look at the types of international ESOPs and what to look out for when extending ESOP benefits to employees in Kenya.

Common international ESOPs

  1. Profit sharing schemes – this is a scheme by which employees share in the profits of a business through share ownership. It may be tailored so that the trustees receive payments from the company and apply these payments in acquiring the ESOP shares. These shares are then 'appropriated' by the trustees to eligible employees in accordance with the trust deed and rules of the scheme.
  2. Savings-related share option schemes – under this type of ESOP, employees enter into a save-as-you-earn contract to save a fixed amount each month over a specified number of years. An option is granted at the outset over the maximum number of shares which may be acquired with the total savings and the bonus which is payable at the maturity of the savings contract. The option usually gives the employee the opportunity to purchase the shares at a significantly discounted price compared to the market value at the time of the grant.
  3. Share option schemes – this is a scheme under which an employee is granted a right (known as an ‘option’) to buy a fixed number of shares at a fixed price at a set point in time. The subscription price, which is usually less than the market value of the shares, is fixed at the date of grant of the option and there may be provisions requiring exercise of the option within strict time limits.
  4. Phantom share schemes – this is a type of ESOP which gives selected employees, often senior management, many of the benefits of owning shares in the company without actually transferring any shares to them. It simulates share ownership without actually providing it. The employees are granted ‘units’ which correspond to a fixed number of ESOP shares in the company.

What to look out for when setting up an international ESOP

As stated above, one of the biggest challenges international companies face when planning to extend and align employee benefits provided in their home-countries to foreign jurisdictions is the extensive legal, regulatory, and administrative complexities of implementing the same outside their domain jurisdictions. Once the ESOP has met the legal requirements of its home-country, it should also conform to the legal provisions governing ESOPs in Kenya. We have highlighted some of the key considerations as follows: 

a) Taxation and registration of ESOPs with the CMA

An international company should be aware of the applicable taxes relating to the ESOP and when such tax is due. In a typical ESOP, the benefits vest in an employee over a staggered period or after a fixed period. The benefits will be calculated differently depending on whether the scheme is registered with the Commissioner of the Kenya Revenue Authority (KRA) as a Collective Investment Scheme (CIS) or not. For the ESOP to be registered with the Commissioner, it must have been approved by the Capital Markets Authority as a CIS.

Where the ESOP is registered with the Commissioner, the benefit will be deemed to accrue to the employee at the end of the vesting period, and will be based on the difference between the market value and the offer price., per share at the date the option is granted by the employer. As the Capital Markets Act governs listed companies, the Capital Markets Authority would only be in a position to approve ESOPs that have been created by listed companies.

For unregistered ESOPs, the taxable benefit is taken to be the difference between the market value at the time of vesting, and the offer price per share at the date the option is granted. Whereas in registered schemes the benefit is calculated using the difference between the market price on the date of the grant and the offer price on the date of the grant, in an unregistered scheme the benefit is calculated using the difference between the market price on vesting and the offer price on the date of grant. Since the share price is likely to have appreciated during the vesting period, the taxable benefit would be higher for members of an unregistered ESOP

Income tax, in the form of PAYE, is charged on the benefit arising in respect of any employment or services rendered and should be deducted by the employer. In instances where the shares are transferred to employees on vesting, the employees acquire investor status in relation to the shares and, consequently, any benefits arising in connection with the shares such as dividends or a subsequent sale of shares will not be considered employment benefits.

b) Foreign exchange control laws

Foreign exchange controls are various forms of controls imposed by a government on the purchase/sale of foreign currencies by residents, on the purchase/sale of local currency by nonresidents, or the transfers of any currency across national borders. Kenya repealed all exchange control laws in 1993. The Central Bank of Kenya Act [CBK] however provides that every payment made must be effected through an authorised bank licensed by the Central Bank of Kenya. Any contrary mechanism would require approval from the Central Bank.

Further, foreign currency is freely repatriable to/from Kenya provided there is written evidence of an underlying business transaction and the respective bank handling the repatriation is satisfied as to the genuineness of the transaction. For any amount above US$ 10,000 the CBK requires that a commercial bank inform it as to the amount and purpose of the remittance. For any amount below the equivalent of US$ 10,000, commercial banks are not required to obtain any documentary evidence to back the transaction, although in certain cases banks may nonetheless seek an explanation.

c) Data privacy concerns

The provisions of the Data Protection Act, which governs how data and information may be accessed, processed, stored, transmitted and used within legal parameters in Kenya, should be complied with. For international companies sharing the data of employees, they should be aware of the principle prohibiting the transfer of data outside of Kenya unless there is proof of adequate data protection safeguards or, consent from the data subject has been obtained.

d) Eligibility of employee

The company must be able to produce to the KRA and the bank through which payments relating to the ESOP will be made, documents in support of the transaction. In a typical ESOP, this includes documents such as: (1) a duly executed invitation for application of an award from the company’s board of directors (2) a duly executed application for award from the employee (3) an authority for the contributions to be deducted duly executed by the employee and (4) a notice of exercise of the award duly executed by the employee.

e) Resident employee

The company must ensure that the employee complies with the residency rules in Kenya. A person is resident in Kenya where: they have a permanent home in Kenya and are in Kenya even for a single day in the tax year (calendar year) or do not have a permanent home in Kenya but are in Kenya for 183 days or more in aggregate during the current tax year or are present in Kenya in that year of income and in each of the two preceding years of income for periods averaging more than 122 days per year.

f) Employee status

In accordance with the Employment Act, the international employer must also ensure that it has on record a written employment contract with the employee which must, among other requirements, state the remuneration, scale or rate of remuneration, the method of calculating that remuneration and details of any other benefits.

g) Stamp Duty

The trust deed and rules/governing document of the ESOP should be stamped within 30 days of execution or, if executed outside Kenya, within 30 days of first being introduced into Kenya.

h) Deductions

All payments deducted towards the ESOP by the Employer can be done so freely in accordance with the terms of the ESOP. The Employment Act however states that an employer may only deduct an amount in which they have no direct or indirect beneficial interest, and which the employee has requested the employer in writing to deduct from their wages. Further, the Act states that the total amount of all deductions which may be made by an employer from an employee’s wages at any one time shall not exceed two-thirds of such wages.

i) Governing Law

Kenyan courts generally recognize and give effect to governing law and jurisdiction provisions in a contract such as those contained in an ESOPs trust deed and rules. However, under the Constitution of Kenya, the High Court of Kenya has unlimited jurisdiction, and has such jurisdiction notwithstanding such provisions in a contract. Having said this, however, it is settled law that where parties reach agreement as to governing law and jurisdiction, the High Court has discretion whether or not to stay proceedings brought in contravention of such provisions and, in the absence of compelling reasons to do otherwise, is bound to exercise its discretion in favour of a stay.

Article by Jeff Kinuthia. Jeff is a lawyer at MMAN with a strong background in corporate and commercial law specializing in employment, pensions, corporate M&A, reorganizations, and projects

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