There are tax traps and opportunities for both employers and employees, particularly when more than one taxing jurisdiction is involved. Consequently, it is important for employers and employees to address the issues at the outset. Apart from income tax allocations for individuals, there are other often unexpected implications such as U.
A few of the key questions that should be considered follow. An employee needs to know how stock options will be characterized under U. Although all stock options are presumably intended as incentives, a special type of option is characterized as an incentive stock option "ISO" if it meets certain statutory requirements. An individual who receives such an option is not subject to tax on compensation income when the option is granted or exercised. When the recipient sells the shares, the recipient will be taxed at long-term capital gain rates on the gain, assuming a qualifying sale.
In contrast, the recipient of a nonstatutory stock option "NQSO" is taxed on compensation income in the year the option is exercised. The taxable compensation is an amount equal to the difference between the exercise price and the fair market value of the shares on the date of exercise. After an NQSO is exercised and the stock is acquired, the stock is treated for tax purposes as an investment by the employee.
If the stock appreciates after the date of exercise, the employee can sell the stock and will pay tax on the resulting capital gain. Nonresidents who hold NQSOs and move to the United States are taxable on the full amount of option income if the options are exercised while they are U. If an individual who is not a U. Such an individual may, however, be subject to U. Allocation of option income between United States and foreign sources may be based on the number of days the individual worked in the United States compared with the number of days that the individual worked outside of the United States during the relevant period.
It is important for an international executive to keep a careful record of where he or she is on a daily basis and whether each day is a working day or a non-working day. It is also important for employers to comply with the U. They apply to both foreign and U. The taxable event, and therefore the time of taxation, may not be the same or tax credits may not be available.
For example, if a U. If Foreign Country does not tax the option income until the U. The potential benefits of foreign tax credits could be lost. The fair market value of stock options in a U. If the individual is a U. An individual who is not a U. Options to acquire stock in a U. There may be mismatches of taxation for an individual and his or her estate as a result.
Before adopting a stock option plan, an employer should consider the tax implications for all employees. Plans can be designed to accommodate the needs of both international companies and their international executives.
Individuals who receive stock options should consider the possible U. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. To print this article, all you need is to be registered on Mondaq. Click to Login as an existing user or Register so you can print this article. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.
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