Among other changes introduced in the RA Law on Joint Stock Companies (hereinafter referred to as the "Law"), which we referred to in our previous publication, the amendments on the regulation of employees' stock ownership plan have been introduced as well.
Companies often use the Employee Stock Ownership Plan (ESOP) as a tool to attract, retain, motivate, and encourage qualified employees. Such programs or other profit-sharing mechanisms are implemented in many countries and are used to increase the long-term success and efficiency of organizations.
The concept of an ESOP can be defined as follows: It is a policy (regulation, plan, other internal act) adopted by the company (corporation), according to which the latter provides appropriate compensation for its employees (including those included in its management bodies) by the company’s (corporation’s) or the latter's parent company’s equity instruments (shares, options, other equity instruments).
According to the amendments to the legislation, the ESOP:
“Is an internal legal act of the company, which, at least, details the conditions and procedure of acquisition, use, alienation or repurchase of company shares or derivative financial instruments by the employee of the company. The company has the right to, according to its charter or the employee stock ownership plan approved by the general meeting of shareholders, provide shares or such derivative financial instruments (transactions) to its employees, which will enable to carry out the final settlement of liabilities with shares of the company (hereinafter referred to as the “Derivative Financial Instruments”). In the event of termination of employment relations between the company and the employee, the company has the right to buy back the shares at the market value of those shares (but not less than the nominal value of the shares).”
The amendments to the Law also introduce limitations to the total amount of shares issued under the ESOP, as well as certain limitations to the employees’ rights to dispose those shares.
However, we believe that certain essential issues remain uncovered which may hinder the application of this tool. Our understanding is that relevant amendments should have been introduced in the Tax Code of the Republic of Armenia, which would correspond to the application of the ESOP by the companies and failure to do so will have a negative impact on the introduction of ESOP by companies operating in Armenia.
We believe that the cases of application of ESOP by the Armenian companies would be significantly more numerous if, inter alia, the costs of compensation made to the employees in accordance with the ESOP were deducted from the gross income of the profit taxpayer used to determine the tax base, as well as from the point of view of income tax, the compensation received by the employees in accordance with the ESOP was qualified as a deductible income from the income tax base.
In this regard, we have sent letters to and contacted the representatives of competent authorities of the Republic of Armenia and have submitted our proposals of the amendments to the tax legislation of the Republic of Armenia, in order to promote the development of the application of ESOP in the commercial entities of the Republic of Armenia.