Employee Benefits Trusts

The Employee Benefit Trust (EBT) concept has been used extensively by corporations for many years to provide benefits to their employees in a tax efficient manner. This form of employee incentive planning is commonly used by closely held private companies to reward, motivate and retain eligible employees. In most cases the primary benefits to the employees will be the mitigation of personal tax liability in the country in which they perform their services and the accumulation of tax deferred, or possibly tax exempt, wealth. For the employer corporation, the benefits may include lower aggregate remuneration costs and a greater ability to retain key employees.

There are various types of EBT and each EBT is unique to the circumstances of the specific employer corporation and its eligible employees. An employee may be rewarded through EBT structure in a number of ways including:

1. An award of shares in the employer corporation.
2. An award of a call option to purchase shares in the employer corporation at a discount.
3. Allocation of a cash bonus.
4. Granting of a loan facility.

The operational structure of an EBT usually comprises a Trustee, the Beneficiaries (being the employees and their family members), and a Remuneration Committee appointed by the employer corporation. The EBT is created by the employer corporation transferring the designated assets (usually cash, shares or stock options) to the trustee to be held for the benefit of the employees and their families pursuant to the terms of the trust instrument. From time to time the remuneration committee will direct the trustee to make remunerative awards to the employees. The trustee would then declare sub-trusts for each of the nominated employees and hold the remunerative awards in the relevant sub-trusts.

For internationally mobile employees the award of these benefits within an EBT can have significant long term tax benefits. If the trustee of the EBT is resident in a tax neutral country the income derived by the EBT may be tax exempt or taxed at concessionary rates under relevant double tax agreements. Again subject to the tax laws of the jurisdiction in which the employee or a family member is resident at the time, the distribution of the award from the EBT may be exempt from income tax or inheritance tax.

An EBT may not be appropriate in every case and each structure must be individually tailored for the particular client. It is imperative that independent tax and legal advice be taken to ensure that all relevant revenue and employment laws are complied with by the trustee, the employer corporation and the employees.

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