An arm’s length assessment of the accurate delineation of employee stock option plans

Abstract

Employee stock option plans are increasingly common within multinational enterprises (MNE), used as tools to attract and retain talent. In many cases, the shares granted to the employees are not from the employer itself, but rather from another entity in the group, usually the parent. The paper aims to assess such employee stock option plans (ESOP) arm’s length nature (or rationale), as this is perceived by the authors to be a fundamental step towards determining if (and how) any intra-group compensation is due. This aim is explored through the accurate delineation of the transaction and through the subsequent impact of this exercise on the frame of an eventual separate or aggregated compensation for an employee stock option plan. The paper is based on a comparative law assessment and especially focuses on the OECD, particularly Latvian and Lithuanian perspectives, and contributes to increased tax and legal certainty to MNEs operating in the selected jurisdictions, and to the overall operators of the tax systems therein. The analysis carried out indicates that such an ESOP is likely to be framed either as a form of service provision (priceable condition) or as a mere shareholder activity (non-priceable circumstance).