Do "Grantor Trust" accounts at service providers present tax concerns?
We are switching equity service providers and the new provider will be establishing a Participant Trust (Grantor Trust) for our international employees who reside in approximately 30 countries. Since this is new for our participants, we are trying to assess any tax consequences of a trust to our participants as well as to the company. Some questions we have are:
1). What is the reason for the trust? Is it standard practice for all stock plan vendors for settling awards for international recipients to establisha trust?
2) Does the trust agreement need to be reviewed for legal and tax compliance in each country where we grants awards?
3) Should the service provider be able to confirm in writing that the trust structure does not result in any detrimental legal or US or foreign tax issues for the international recipients in any country in which we are granting and/or the company or its foreign affiliates?
Anyone who has been invovled with this type of arrangement with their service provider is encouraged to respond or contact me to discuss. We are less than 8 weeks away from the migration to this provider and need to understand this matter quickly.
Thank you.
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Peter,
I am an attorney specializing in global equity offering and have been helping U.S. multinationals with offering equity incentives to employees outside the U.S. for about 10 years. I think that the broker that you are switching to likely set up the participants outside the U.S. to facilitate the broker's compliance with foreign securities laws. I do know that there are a lot of very large U.S. multinationals that work with a broker that strucutures the non US employee plan participation through a participant trust and although I think from a technical point, you are correct that potentially there could be some odd tax and legal issues outside the U.S. in that the participants technically, don't own the shares, from a practical perspective, I have not heard of the authorities in any country outside the U.S. raising any issues (legal or tax) relating to this stucture and I do know that this structure has been in place for many years.
I don't think that you will be able to get the service provider to be able to confirm in writing (or otherwise) that the trust structure does not result in any detrimental tax or legal issues in the U.S. or outside the U.S. as the legal and tax rules in countries outside the U.S. are not always clear and certainly don't specifically address the use of a participant trust. So, I think they can probably assure you, that to the best of their knowledge, there have not been any significant tax or legal issues outside the U.S. with this strucutre to date, I don't think that they will be able to go a step further and provide the type of legal opinion that sounds like you would like.
I would suggest that you ask the service provider for references that you can speak to that are other U.S. multinationals that have been using the participant trust for a number of years to see what their experiences have been and/or whether there have been any issues with respect to the use of a participant trust for participants outside the U.S.
Hope this is helpful.
Best,
Jennifer George
Partner, Orrick, Herrington & Sutcliffe
415-773-5640
jennifer.george@orrick.com