Global Tax Considerations for Employee Share Based Awards

Jan 4, 2023

Explore these considerations when planning to offer equity outside of the United States. Avoid common pitfalls in rolling out your equity plan globally.

Granting equity can be a powerful tool for attracting and retaining global talent. However, it comes with a unique set of challenges. In addition to accommodating different market practices, languages and currencies, it is necessary to understand the tax and regulatory landscape of each jurisdiction where you have participants.


Careful planning allows you to avoid common pitfalls in rolling out your equity plan globally and, in this regard, understanding the tax consequences for both employees and the company can be critical to a successful launch.


Below are tax-related diligence and compliance questions that you may consider answering before you decide to offer or grant equity outside of the United States.


1.      When Will Employees Be Taxed on Their Share Awards?

While many jurisdictions tax share awards in the same way as in the United States (for example, non-qualified options taxable at exercise, restricted share units taxable at vesting/delivery), jurisdictions around the world may have different rules for when employees have to pay tax on their share awards. There are countries that have taxation points that are different than what you may expect. For example, Israel taxes share awards at sale, with the entire gain subject to income and social tax at that time. In a rising market, this tax outcome is less advantageous to employees, and also requires employers to set up specific tracking processes to ensure taxes can be withheld at the time of sale.


Also note that some countries tax restricted stock awards at grant rather than at vesting. This can create a significant problem for collecting taxes as the shares can be subject to restriction/forfeiture and thus cannot be sold to fund the taxes due at grant.


With Morgan Stanley at Work’s Global Intelligence database, companies can perform a diligence review to see if a particular share award may create a non-advantageous or administratively difficult tax outcome, which can help companies to plan a cost-effective and economically attractive equity compensation strategy.


2.      What Taxes are Payable by the Employee?

The taxes payable by employees on share awards in a given jurisdiction can be reviewed using the Global Intelligence database to ascertain whether the overall tax result is fully understood. Some countries only impose income tax on equity awards, many also impose social tax, while others, rarely, provide for beneficial capital gains tax treatment by default. The overall tax burden in some jurisdictions can be quite high, which should be considered in any diligence review.


In addition to helping you understand the tax rules and applicable rates, the Global Intelligence database can also show if some types of equity awards enjoy more favorable tax treatment than others, all of which can help you create an optimal equity compensation strategy for your company.


3.      What Taxes are Payable by the Employer?

For countries that treat equity plan income like compensation income, employer social taxes will often be payable alongside taxes payable by employees. Companies can perform a diligence review using Global Intelligence to determine if and when employer social taxes are payable and the applicable rate(s) of tax. In some jurisdictions such as the United Kingdom, the employer can require the employee to pick up the employer’s social tax burden, although this is the exception rather than the rule.


4.      What Corporate Reporting and Withholding Obligations May Apply?

Typically, local equity-related tax compliance obligations fall to the local employer, even though the equity is being provided by the parent company. In many countries, the local company will be responsible for reporting equity plan income to the tax authorities, typically when the award becomes taxable to the employee. Annual reporting of share plan transactions is also common, and in some jurisdictions, the local employer will need to report the grant of all equity awards.


Similarly, tax withholding and remittance obligations may be imposed on the local employer in many jurisdictions, and proper planning can be critically important to avoid fines and penalties for non-compliance. Global Intelligence and Morgan Stanley at Work Equity Solutions work seamlessly together to help companies to understand their tax compliance obligations around the world.


5.      Does a recharge/transfer pricing arrangement have an impact on taxes and compliance?

A parent company may enter into a recharge or transfer pricing arrangement with its foreign subsidiaries in order to charge the subsidiary for the costs of the equity granted to its employees. Such an arrangement may be necessary to allow the subsidiary to take a local tax deduction, although rules vary widely across countries. In some countries, the implementation of a recharge arrangement will trigger tax withholding requirements and/or the application of social taxes that would not otherwise be payable.


Global Intelligence can help companies review whether a recharge arrangement will give rise to employee and employer social taxes and/or tax withholding and remittance obligations. Analyzing the costs and benefits of a recharge arrangement can assist companies in making decisions consistent with corporate priorities.


6.      Are There Tax Structuring Opportunities for Lowering the Tax Burden?

It is important to understand that exporting U.S. tax favorable arrangements such as incentive stock options or a Section 423 employee stock purchase plan will not ensure that favorable tax treatment applies to participants outside the U.S. because each country will tax equity awards based on its own tax laws. However, in many countries, tax structuring opportunities are available for certain types of equity awards to reduce the overall tax burden to participants and/or the company. Understanding different tax structuring opportunities using Global Intelligence can be an important part of equity compensation planning.


When it comes to managing a global equity plan, having an equity compensation provider with detailed knowledge of local tax rules and regulations can be critical. Morgan Stanley at Work offers a suite of solutions for administering your global equity program, including a comprehensive database with tax and regulatory information across 170+ jurisdictions updated regularly by a network of global law firms.