How are share options or awards held by an internationally mobile employee taxed?
Employees relocating to the US may be taxed in full or in part on options or other awards previously made, as well as on options or awards made while present in the US.
Should a mobile employee acquire lawful permanent resident status in the US (a “green card”), he or she will be taxed by the US on his or her worldwide income just as would be the case for a US citizen. Thus, NQSOs and SARs are taxed at exercise, RSUs are taxed at settlement and restricted stock is taxed at vesting (unless a timely Section 83(b) election had previously been made).
Mobile employees who are “substantially present” in the US may be subject to US taxation on world-wide income as well. An individual will meet the substantial present test if the person is physically present in the US on at least:
(a) 31 days during the year in question (e.g., 2019) and
(b) 183 days during the 3-year period that includes the year in question (e.g., 2019) and the two years immediately before that (e.g., 2017 and 2018), counting:
(i) all the days present in the US in the year in question (e.g., 2019),
(ii) 1/3rd of the days present in the first year before the year in question (e.g., 2018), and
(iii) 1/6th of the days present in the second year before the year in question (e.g. 2017).
There are special rules to establish when a person’s residence begins and ends for someone subject to the substantial presence test.
There are potential work-arounds for the substantial presence test, but they generally require formally notifying the IRS of the individual’s tax filing position and they may be difficult to meet if the person has other contacts with the US (such as keeping an apartment in the US). These work-arounds are sometimes available under US tax treaties or they can be based upon a non-treaty exemption for someone who is present in the US for less than 183 days in the calendar year in question.
If the Mexican entity grants the option or award while the employee is rendering services in Mexico, the Mexican entity must withhold and pay tax on the income.
The tax treatment applicable to share options or awards granted to and held by internationally mobile employees depends on: (a) the tax residence of the employees; (b) the jurisdiction that has the right to tax the salary income (based on source taxation rules) and (c) whether the incentive scheme that the employee has adhered to qualifies as tax-exempt benefit.
In practice the situation usually depends on various factors - therefore a case-by-case analysis is always necessary.
For the situation of a truly internationally mobile employee - one that does not have a fixed location where he/ she carries out the activity - the most important factor is his/ her tax residence. Under provisions of Romanian tax legislation, a Romanian tax resident is taxed on his/ her worldwide income and the taxable basis is determined separately for each type of revenue.
If a mobile employee moves to Denmark after being granted with Shares and the Shares vest after the employee has become taxable as a resident in Denmark, generally, the full value of the awarded Shares will be taxable in Denmark as salary income.
If Shares awarded to a Danish resident employee vests after the employee exits Denmark, generally, a proportional part of the value will be taxable in Denmark.
If an employee has received a grant of Shares under the 7P scheme in Denmark, special rules on exit treatment applies after which the application of the 7P Scheme for mobile employees should be considered in relation to possible exit tax position.
This will depend on the tax domicile of the employee. If an employee’s domicile is Ecuador, the employee must file tax declarations, making the deductions permitted by local law.
Notwithstanding the foregoing, any applicable double taxation treaty would have to analyzed. This depends on the existing agreements between the tax domicile and the current residence.
Individuals who do not have a domicile in China may obtain wages and salaries in the form of subscribing securities such as stocks at a discount after they work in China or after leaving China. The above income should still be based on the principle of the place where the labor is incurred to determine its source of origin and tax liability. The above-mentioned individuals who obtain wages and salaries in the form of subscribing securities such as stocks at a discount after they come to china, anyone who can provide the wage system and the measures of subscribing securities at a discount in the employer and prove that a part of the above income comes from the work before the individual came to China, they can levy personal income tax only on income that is part of their work in China. Correspondingly, the income received after leaving China, by the above-mentioned individuals who have stopped performing or performing their duties in China, should also be determined to be derived from our country’s income. However, if the above-mentioned income is not borne by enterprises or institutions or places within the territory of China, the individual income tax may be exempted.
The stock option income obtained in China is subject to individual income tax as listed in question 7.
Share options and other share awards held by an internationally mobile employee will be taxed considering both national legislation and double taxation agreements. Resident taxpayers in principle owe income tax on their worldwide personal income irrespective of where it is earned or paid, while non-resident tax payers are only liable to pay income tax in the Netherlands on their income from certain Dutch sources (such as employment), resulting in limited tax liability.
Any taxable benefits from free/discounted shares or the exercise of share options are allocated for taxation under the double taxation agreements similar to regular pay of the internationally mobile employee. In accordance with the OECD commentary, such benefits are considered being accrued over the vesting period (unless facts and circumstances indicate differently). E.g., if the participant is a tax resident of the Netherlands, the exercise gain on share options must be disclosed in full in the personal income tax return, as a first step. If the participant exercised his employment in another jurisdiction during 50% of the vesting period, with his employment income being allocated for taxation to that other jurisdiction in accordance with the DTA, the same goes for 50% of the exercise gain, as a second step. In order to avoid double taxation, generally an exemption with progression is allowed (for board members sometimes only a tax credit is allowed).
A special wage tax facility applies for employees who have been recruited from abroad to work in the Netherlands and who meet certain conditions. For these employees, the so-called 30%-ruling may apply. This regime intends to cover the extra expenses that such person has because he works outside of his home country. If the application of the regime is granted (maximum period: five years), the employer may pay the employee a (fixed) tax-free allowance of up to 30% of the taxable employment income, i.e. inclusive of taxable benefits for share incentive plans generating employment income. The ruling may also have other benefits, such as the possibility for the employee to elect being taxed as a non-resident taxpayer for box 2 and box 3 income tax purposes. Under those circumstances box 2 is only applicable with respect to substantial share interests in a Netherlands-based company and box 3 only with respect to real estate located in the Netherlands (i.e. any other net wealth would not be subject to income tax).
According to the Accounting Pronouncements Committee (“CPC”) 10, the company that benefits directly from the services provided by the employee/executive is the one that must recognize the expenses related to share-based plans in its accounting books, if the plan has a compensation nature.
In this case, such entity will be the one responsible for including the related amounts in its payroll and taxing it, according to the legislation of its residence.
Therefore, no Brazilian taxation should be levied upon internationally mobile employee share options or awards.
- Resident and non-resident
There are two categories of individual taxpayers under the Japanese income tax law; resident and non-resident. A resident means an individual who has continuously lived in Japan for 1 year or more. A non-resident means an individual other than a resident.
“An internationally mobile employee” may be a non-resident, because she/he usually has not resided in Japan for a continuous period of 1 year or more. Thus, the issue in this question is taxation on non-resident.
- Taxation on non-resident
Japanese source income of non-residents is taxed. In other words, income corresponding to work in Japan is subject to Japanese taxation.
Taxation of share options or awards held by internationally mobile employees depends on domestic law and if the individual is resident abroad according to a Tax Treaty. In some cases, it is relevant for the tax situation in Norway if the individual is resident, has a limited tax liability for work performed in Norway or is considered as emigrated for tax purposes following departure.
It is recommended to consult with a tax adviser as taxation, social security and avoidance of double taxation may be complex in many situations.
Taxation of share options and similar create many different considerations:
Award before employment in Norway: Tax obligation and tax rate applicable depends on link to an employment in Norway
Exercise during employment in Norway: Taxation and method for avoidance of double taxation depends on tax status according to domestic law and tax treaty and if part of the benefit is considered to relate to work performed abroad.
Exercise after departure: May in some cases be non-taxable, but may also be subject to taxation of potential gain at departure depending on the value and tax status.
The UK tax treatment of share options or awards held by an internationally mobile employee is not straightforward. A tax charge in relation to the option or award is not triggered upon leaving the UK, but upon vesting or exercise of that award.
Broadly speaking, any option gain or growth in the value of shares during the vesting period that relates to UK duties of employment will be taxable in the UK.
In addition, there are specific provisions that protect internationally mobile employees against double taxation, and they may also be able to claim relief under double tax treaties.
The rules for national insurance contributions are similar.
If the employee is a German tax resident while exercising shares, the employee is subject to German income taxation. The requirements as to when an employee is deemed to be a German taxpayer depend on various circumstances, e.g. duration of stay in Germany.
The taxation of share options or awards held by internationally mobile employee depends on his or her tax residence and tax treaty concluded between the countries concerned (if any).
If the employee's sole tax residence is France, share options and awards are taxed in accordance with French law (see question 7).
There are not specific provisions for shares options or awards held by an internationally mobile employee. As a general rule, if the employee is resident in Spain in the tax year in which the taxable income accrues, the relevant income is taxable in Spain. If the employee is not resident in Spain in the tax year in which the taxable income accrues, the relevant income would be taxable in Spain if derives from works performed in Spain.
As regards Spanish tax residents moving abroad, they could benefit from an annual exemption up to of €60,100.00 on employment income derived from works performed outside Spain provided that the following requirements are met:
- The employee is tax resident in Spain.
- The works are effectively performed abroad for a non-resident entity. If the recipient is a related party of the employer, the works shall constitute an intra-group service, producing an advantage or utility to the recipient of those services.
- The territory in which the services are performed applies a tax similar or equivalent to the Spanish Personal Income Tax and is not regarded as a tax haven. This requirement will be satisfied when the foreign territory has signed with Spain a Double Tax Treaty with a Tax information exchange agreement.
As regards foreign employees taking up tax residence in Spain, they could benefit from a special tax regime in the tax year of acquisition of the Spanish tax residence and during the following five years provided that the following conditions are met:
- The employee has not been tax resident in Spain in the previous 10 tax years.
- The employee initiates a labour relationship with a Spanish company, render services to a Spanish company in the context of a secondment ordered by the foreign employer or become director of an unrelated Spanish entity (participation lower than 25%).
- The employee does not obtain income which qualifies as being obtained by a permanent establishment in Spain.
Under this special tax regime, the employee will be taxed on any income from employment at a 24% rate for annual income under €600,000.00 and 45% henceforth.
Under Colombian law, the concepts of source and residence govern the liability to Colombian tax, affecting specially the internationally mobile employee (hereinafter “IME”):
According to the tax law, it is considered as Colombian-source income the services rendered by any individual within Colombia, which include among others the employment income, as mentioned above.
In order to be consider as resident for tax purposes in Colombia, an individual must stay within the country for more than 183 continuous or discontinuous days during a consecutive 365-day period.
While Colombian tax residents are liable to Colombian tax on their global revenue, the non-Colombian residents are only liable to taxes in Colombia in respect of Colombian-source income.
2.1. IME non-resident: The share options or awards received by the IME from a Colombian company are deemed to withholding tax at a tax rate of 20%. This IME is not required to file any tax revenue as long as the company withheld the full amount; otherwise, the non-resident would require to file an individual income tax revenue, at a flat tax rate of 35% on gross Colombian income.
Net income is calculated by subtracting allowable deductions from total assessable income.
2.2. IME-resident: Employment income is taxed at progressive income tax rates up to 39%. An IME-resident might not file an income tax return if their only income consists of employment income from which tax has been withheld at source and their gross income is lower than COP $47,978,000 for 2019 (USD $1.5993 at a Fx. of $3.000). In any other case, the resident IME must file a tax return.
Double tax treaties (DTT)
Colombia has double tax treaties with 10 countries in force, 3 already approved and is negotiating 7 more DTTs, which are based on the OECD model; thus, most of them provide that IME´s income would be taxed only in their home country as long as they stay in Colombia less than 183 days in any period of 12 months.
(i) Stock Option: as it was mentioned before, the income would not be taxable until the rights to ownership of the equity awards on the employee's compliance with certain covenants and the option is exercised.
(ii) Awards: the income would be taxable at the time it is deliver/pay to the employee.
Employees that were resident in Portugal at grant but are not resident in this territory at exercise will not be subject to tax in Portugal to the extent that the cost of the award is not deducted by the former Portuguese employer for Portuguese corporate income tax purposes. If it does, the cost is deemed to be employment income paid by a domestic entity and will be subject to tax in Portugal (subject to a withholding tax at the rate of 25%).
If the employee is resident in Portugal on the date of exercise, the full amount of the employment income will be taxable in Portugal. This rule applies even if the employee was resident abroad on the date of the grant.
Resident employees will include the amount of the income from the exercise of the options in his/her gross income that will be subject to personal income tax in Portugal at the general rates (up to 51% on income in excess of approximately € 80,000). If the employer is a non-resident entity, no withholding taxes will apply to this income (assuming the cost will not be attributed to a Portuguese subsidiary).
Individuals that did not reside in Portugal in the previous five years are eligible to the “non-habitual residents” regime. Under this regime, the employee may benefit from a reduced individual income tax rate of 20%. This rate applies only to a limited number of listed activities.
Taxation depends on whether the individual is an Italian tax resident at the time the tax payment becomes due, as laid down in the answer to question #7. If an employee is an Italian tax resident at that time, the regulations governing Italian income taxation shall apply, also, as the case may be, taking into account any applicable bilateral agreements between Italy and the relevant foreign country.
An internationally mobile employee resident or non-resident will be subject to Turkish tax consequences and be liable to taxation which will depend on the type of income (e.g. employment income, capital gains or dividends) and whether there is a Double Taxation Agreement (DTA). Non-residents will only be taxed on their Turkish sourced income and treated as a limited taxpayer.