SESSION 9.3

Presto! Managing LTIPs in Italy

Sandra Sussman – Gilead SciencesOlivia Cattaneo – BNP Paribas Securities ServicesStefano Bondioli – BNP Paribas Securities Services

Sandra Sussman – Gilead Sciences Olivia Cattaneo – BNP Paribas Securities Services Stefano Bondioli – BNP Paribas Securities Services

Session 9.3 Presto! Managing LTIPs in Italy

Agenda

The Italian environment

•  Placement services

•  Tax implications for the employees

•  Tax obligations for the employers

Gilead Sciences experience

The Italian environment

•  Managing global LTIPs plans is always a challenge, in particular in a fast-changing environment like the Italian one

•  Our focus is the very specific Italian regulatory framework to answer to the following questions:

•  How to present and promote the plan in compliance with Italian rules?

•  How to help employees and employers avoid burdensome tax calculations and declarations?

Background

•  Italian rules prescribe measures to protect final potential investors and define specific procedures to follow when managing Share Purchase Plans

•  The promotion and placement of financial instruments outside the premises of the issuer and addressed to the public is considered in Italy “door-to-door selling”

•  The local rules state that the “door-to door selling” must be mandatorily managed by an accredited financial salesman (“Promotori Finanziari”) of an authorised financial intermediary

Who is the Financial Salesman “Promotore Finanziario”?

•  The Promotore Finanziario is an individual who is registered in a specific roll held by CONSOB (independent administrative authority responsible for regulating and supervising the Italian securities market; its activity is aimed at the protection of investors)

•  In order to become a Promotore Finanziario the individual must meet specific requirements in terms of professional experience and honorability

When is the “Promotore Finanziario” required?

•  It is not mandatory when the plan provides for free assignments, such as: •  RSUs •  Stock option plans which allow only for

“cashless/sell all” methodologies •  Preferred shares •  Stock awards

•  The Promotore Finanziario must intervene when the participation in a share compensation scheme implies disbursement of cash by the employee, e.g., •  ESPPs •  Stock option plans which allow for “exercise and hold” or “sell to cover”

methodologies

•  Local rules implementing MIFID require an authorised intermediary to enter into a placement agreement with each single beneficiary

•  The placement agreement must include pre-defined annexes, among which: •  A questionnaire for the evaluation of the

appropriateness of the investment •  A remote identification form for anti-money

laundering purposes

The impact of MIFID Directive

Focus on the appropriateness questionnaire

•  The aim of this test is to evaluate whether the investment is appropriate for the employee, i.e., if the employee has the knowledge and experience/competence to fully understand the consequences, fiscal implications included, of the investment

•  The answers are recorded and a grade is assigned to the employee

•  If the assigned grade is lower than a certain level, then the investment is not appropriate

Focus on Identification for Antimoney Laundering

•  Legislative decree n. 231/2007 obliges financial intermediaries to proceed with anti-money laundering identification

•  Alternatives for the employee: •  Direct identification by

meeting the PF •  Indirect identification (the

employee asks his/her bank to sign the remote identification form)

•  By a wire transfer including a code pre-agreed between the Bank and the Issuer

The Roadshow

•  It is not mandatory, and some companies decide not to promote the plan through a tour of presentations, but to inform the employees only through the information kit

•  Nonetheless, if the company decides to perform the roadshow, the plan must be presented by a Promotore Finanziario to explain the financial and fiscal aspects and to answer to potential questions raised by the beneficiaries

•  The presentations can be organised when the plan is launched or periodically when new employees are hired

•  During the whole life of the plan, the financial intermediary should establish and maintain a dedicated telephone number or e-mail adddress, available for the employees to ask for any clarification

How to match Italian rules and US habits?

•  Italian rules allow companies to inform the employees through their intranet site

•  Nonetheless, the enrollment/participation in the plan cannot be completed without the intervention of an Italian financial intermediary

•  Some phases of the standard process (e.g. online enrollment) must be adapted to be compliant with Italian regulations

•  A strict co-operation between the local HR department and the Italian financial intermediary is a key factor for success

Italian tax implications: the background

•  Financial instruments, and more specifically shares, are subject in Italy on taxes:

•  At sale (capital gain tax) •  At dividend payments

•  When foreign shares are subscribed and held abroad, the employee must declare his foreign holdings to the Italian tax administration and pay capital gain taxes presenting a complete tax return declaration

•  in Italy employees normally are not required to present complete tax return forms to Italian tax authorities: Italian employees usually present simplified forms

•  this is perceived as a burden which spoils the value of the plan itself

Taxes to be paid by the employees

First solution: the custody of the shares in Italy

Issuer

Central Share Administrator

Italian employees

The central broker manages all the holdings except Italian employees

After the assignment/exercise

The Local Administrator is responsible for: •  The custody of the shares •  The sale/transfer of the shares •  The Italian tax application

•  Highlights: •  The beneficiary has a local contact and feels at ease •  The company cannot have a complete view of its plans •  Italian custody accounts are subject to an annual stamp duty of 32 € (43 USD)

Italian Share Administrator

•  Highlights •  The cost of Italian custody accounts is avoided •  Beneficiaries can benefit from services offered centrally for the world-wide plan •  The company can maintain a complete overview of its plans •  The co-ordination between the Central Share Administrator and the Italian Tax

agent is crucial

Second solution: the appointment of an Italian tax agent

Issuer

Central Share Administrator

Italian employees

The central broker manages all the holdings including Italian employees

At the sale / payment of dividends

The Italian tax agent is responsible for: •  The collection of financial revenues •  The Italian tax application

Italian Tax agent

Italian tax implications: the background

Taxes to be paid by the employer

•  Benefits connected to the incentive plans (e.g. the discount in case of ESPPs or the gain deriving from stock option exercise) are considered as salary

•  Employers often consider the benefit calculation as complex and time consuming

•  They need to cope with the “funding issue” in case of huge benefits (such as for stock options)

Focus on the obligations for the employer

•  At the assignment: the difference between the value of the shares at their attribution and the purchase price (net of a tax bonus amount, where applicable) represents employee income

•  the income taxable amount must be calculated •  sell-to-cover procedures could solve the funding issue

•  During the plan’s life: a minimum lock-up period of three years is required to benefit from the tax free amount

•  the minimum holding period should be monitored •  in case of sales before the end of the lock-up period, due taxes should be applied

on the tax free amount

Employee share purchase plans / RSU / Preferred shares

Stock option plans •  Taxation of exercise gains: the difference between the value of the shares at

their attribution and the strike price represents employee income

Highlights on US plans: Gilead Sciences

•  Began using financial intermediary in 2008 •  ESPP and stock options •  Placement/custody services; no tax services •  Participation rate fell from nearly 70% to 44% after first full year with

intermediary •  Banca Euromobiliare exited the financial intermediary business at

the end of 2009 •  Participation rate fell to 42% upon announcement •  Required speedy search for new intermediary •  Opportunity to revisit needs and value-added solutions for all

Highlights on US plans: Gilead Sciences

•  Rules clarified – custody in Italy not required! •  Opportunities for better employee experience •  Streamlined processes

•  Tax services introduced •  Mitigates risk of error •  Frees up internal resources •  Benefits both the employer and employees

•  Coordination with US provider •  Foreign disbursement account in US, cash account in Italy •  Monitor ESPP share sales

•  Coordination with former Italian provider •  Upload share positions from prior purchases •  Transfer shares to US accounts

Highlights on US plans: Gilead Sciences

Tax Authorities

Gross sale price / stock options gain Italian employees

Purchase dates

Sales

Empl 1 “tax acct” 1

“tax acct” 2

“tax acct” n Empl 2

Empl n

Tax prices

Income taxable amount

Empl 1 “tax acct” 1

“tax acct” 2

“tax acct” n Empl n

Empl 2 Income tax

Income taxable amount

CG Tax

Net proceeds

Information flows

Cash flows

Highlights on US plans: Gilead Sciences

• Challenges •  Coordinating with US provider for best solution to

transfer sale proceeds •  Obtaining employee authorization for movement of

cash •  Moving shares from former Italian provider to US

accounts •  Linking and communicating benefits of the new Italian

provider together with benefits of ESPP participation

Highlights on US plans: Gilead Sciences

•  Benefits – Employees •  One stock plan account for employees •  No additional account-maintenance costs •  Shares immediately sellable; no delay due to transfer from

US to Italy •  Holding periods monitored •  Income and capital gains tax assistance

•  Benefits – Gilead •  One stock plan account for employees •  No additional account-maintenance costs •  Holding periods monitored •  Income/social tax calculation and withholding assistance

Happy Endings

Work with an Italian partner to leverage available solutions and—presto!!—you can

manage your LTIPs in Italy