After discussing managing US company equity grants and US ESPP purchases, in this third installment around employee equity compensation for globally mobile employees, we’ll turn the table to how to manage foreign company equity compensation as a US taxpayer employee.
Note that this blog mainly covers cross-border personal finance issues from a US standpoint, so “foreign” means non-US. In this post, we are trying to cover equity compensation from a non-US company that is publicly listed outside of the US stock market exchange.
How to manage foreign company equity compensation as a US taxpayer employee
What situation will we address?
You may benefit from this post if you were awarded stocks, stock options, or opportunity to purchase employer stocks at a discount, and you
- Are a US citizen working for a foreign company on a local contract / on local payroll while living overseas.
- Are an employee living in the US and working in the US branch of a foreign company.
- Are a foreign employee preparing to move to or leave the US for the same foreign employer.
As mentioned in the US company equity compensation post, I’ll cover the considerations around private company equity in a separate post.
We have discussed extensively how US tax authority views the employee equity compensation from a US company in the previous posts. So the question is, are the stocks or stock options came from a foreign company of a US taxpayer treated differently?
The short answer is no. If you are granted stocks or stock options and they vest while you are a US tax resident, you receive US-taxable earned income when you receive the economic benefit of the vest. For publicly traded stocks, it’s when you have control over the sale of the stocks. For publicly traded stock options that are not Incentive Stock Options (ISO), it’s when you exercise.
The amount taxable also follow the grant to vest timeframe. If you are not a US citizen or green card holder, only the shares that vested while you are a US tax resident will be taxable when you receive the economic benefit. However, the US tax liability may arise after you have already left the US.
Foreign company stock options you receive are generally Non-qualified Stock Options (NQSO) for US income tax purpose, although it is possible for a foreign company to adopt a plan that meets ISO requirements for their US-based employees. In this post I’m going to ignore this class of employees unless I get requests in the future to add them in the discussion.
Similarly, I’m going to assume that the foreign employee stock purchase programs are not qualified under US regulations, and therefore you cannot claim qualifying disposition. Of course, that may not always be the case. You may want to double check your plan document if your foreign company employer has a sizable US branch.
Below I’ll discuss planning scenarios for four types of population that may receive foreign company equity compensation and need to consider US tax consequences in their actions.
US citizen and green card holder living overseas
Depending on the local law, your foreign company share or stock option awards may be taxed at different point of time, or receive different tax incentive, opposed to the US law. Just because you report or have paid local taxes in one way doesn’t mean it works the same when you file your US tax return.
For those on local contract, it can be extra confusing since your company may not have a dedicated team working with US taxpayers.
Do you have control of taxation timing and income type?
The good news is that if you are on local payroll, your employer is supposed to apply the local tax withholding rule correctly. For awards that you have no control over timing, you’ll simply fulfill the local tax obligation, and figure out how to report taxation correctly on the US tax return.
Nevertheless, I recommend always double checking the income from equity awards your employer reported as taxable in your residency country. In some cases, your employer may not have tracked your workdays in country or the award vested before you moved there correctly.
The bad news is that in some circumstances, the mismatch in timing and income category may result in you paying both local and US taxes on the same income, either temporarily or permanently.
For example, your local tax law may be that stocks are only taxed when you sell. In this case, you still need to declare US income as the shares vest and pay US taxes. If the income at sale is still considered earned income in foreign jurisdiction, you could carryback the foreign tax you pay then to get a US tax refund. However, you can only carryback the tax credit for one tax year. Therefore, it might impact when you wish to sell the foreign stocks.
On the other hand, your foreign stocks may receive special treatment in the local tax law that make the sale proceeds passive income instead of ordinary income. Under the income categories for foreign tax credit determination, you may have trouble applying foreign taxes paid on the same foreign source income to reduce US tax liability.
Of course, always check the tax treaty to see if you can avoid double taxation that way.
Lastly, you may also want to check whether you need to declare unvested or unexercised equity as income locally when you leave the country permanently. Countries that adjust your taxation base on entry or exit usually have some rules to prevent tax residents from permanently avoiding taxation on economic activities happened while they are in country.
US tax residents living in the US
In terms of taxation, this group of people perhaps have the least to consider. Unless you spend significant time traveling to your foreign employer’s headquarters, it’s likely your foreign stock compensation is considered taxable in the US only.
One potential consideration that comes up if your vested foreign stocks are not custodied in an US account. Executives that move around for multinational corporations may be on tax equalization package to the headquarters with stock compensation custodied in that country. Even if their assignments are only a few years long in the US, they may now have US foreign account reporting obligation (FBAR and FATCA).
I’ll also mention US citizen employees that go overseas under tax equalization package under this group. It’s possible that you were awarded foreign stocks when you were sent to the headquarters temporarily while under tax equalization to the US. The shares only vested after you’ve returned to the US as your duty station. You may want to double check your tax equalization agreement to confirm that it covers the equity compensation vest. If equity vest is not covered, you may end up owing taxes to the foreign country.
Foreign employees moving to the US
Entry in and exit from the US usually presents the greatest opportunity for planning. I’ll discuss them separately.
The US tax code doesn’t generally consider the tax and cost that you incurred prior to becoming a US tax resident. As soon as you become a US tax resident, the same rules that apply to everyone applies to you. The issue with mismatch tax timing exists for those transferring to the US.
For example, if you have paid taxes when the award was granted while you were still employee in the foreign country, the US IRS may tax you again when the US taxable event (vest or exercise) occurs. Therefore, you may want to exercise before entering the US so you don’t trigger an additional tax event in the US.
However, not 100% of the vest or exercise would be US source if you don’t end up being able to exercise until you’ve become US tax resident. Depending on the relative tax rate between the US and the foreign country, it might make sense to be taxed when more of the vest become US source.
Additionally, if you have company shares (vested or exercised) that you’ve held for a while, you may also want to evaluate whether to sell before or while you are in the US depending on the tax rate parity. If you sell in the US while a US tax resident, the original cost basis from when you were first taxed in the foreign jurisdiction applies. Many countries reset your basis based on FMV as of the date you became a resident. Not so in the US.
The same consideration of foreign account reporting applies if you decide to keep your foreign company stocks in a foreign account after becoming a US tax resident.
Foreign employees leaving the US
On the other hand, depending on where you are going next, there may be a benefit to incur tax while a US tax resident. For all the tax avoidance many US residents try to do, US isn’t considered a particularly high tax jurisdiction. While you may avoid US capital gains tax if you sell your foreign company stocks after becoming a non-resident for US tax purpose, your new destination may have an even higher tax rate. You should find out whether your cost basis will be reset in the new country before deciding whether to incur US capital gains tax first.
Importantly, if you have unvested RSUs or options that were granted while you were in the US, you will have trailing US source income even after you leave the US when they vest or when you exercise. Exercising after you already left the US does not reduce your US tax liability, since they were considered earned when the options vested in the US. The same warnings that I mentioned in the first group apply. Make sure you double check your payroll reporting so that US source income is reported, and US tax withheld correctly. You may file a US tax return as a nonresident alien to apply for refund if the tax withholding exceeds your liability.
What if I just want to keep / sell my stocks?
In this post I mostly only mention taxation as a trigger for you to consider whether to take actions. You likely have other reasons to exercise, sell, or hold your company stocks. Here are some options that you can consider in conjunction with tax consequences:
- If you want to keep your company stocks but it’s better to sell now to incur / avoid tax, you can always buy them back on open market. Remember here I’m only discussing publicly traded stocks. Selling now doesn’t mean you will never own them again. However, if you will reconsider whether to buy them back, perhaps you don’t really want to hold them in the first place.
- If you want to diversify from a concentrated position but it’s better to sell later due to large tax bill, you can always consider splitting the difference. It’s not an all or nothing proposition. Avoiding the risk of the stocks halving in value may be better than avoiding 100% of the taxes.
- If the tax avoidance is more tempting than the risk of stock price going down, you can look into hedging strategy on a concentrated stock position. Of course, that comes with a price too.