Many US companies include equity-based compensation as part of the overall employee package. Regardless where the employees are based, they may be rewarded the same US company stocks listed on a US stock exchange. As employees become more globally mobile, increasingly they need to understand how to manage US RSUs and Stock Options awards when living overseas.
Recently I have come across more people who will be facing in this situation. Some are US Citizens choosing to move and work for a foreign subsidiary for their employer. Some are currently on work visa like H1b, L1, or O1 in the US but likely will leave when their visa expires. Some are foreigners working in their home country for a US company.
Having US equity compensation posts an interesting challenge, since you need to determine whether and when to keep / exercise it or sell it for cash from a pure economic perspective. If you don’t live in the US, this decision is further complicated by the fact that you need to comply with two governments’ tax regimes and sometimes special tax incentives that expire.
This post won’t be able cover every cross-border situation. However, I will attempt to point out all the major considerations so you can find the right information to make a decision for yourself.
What are RSUs and Stock Options?
I know many employees who receive RSUs and Stock Options don’t truly understand what they are and what they need to do, even in the normal circumstances. Here’s a quick recap of the difference of the two.
The only thing I’ll point out here is that vested RSU represents actual ownership of the company’s shares, while Stock Options just gives you “option” to purchase the company’s shares. The latter requires two action steps from you to receive the final economic value in cash; and therefore, two decision points. This means that there are more planning opportunities especially when consider cross-border taxation.
How to manage US RSUs and Stock Options awards when living overseas
Here are the three high level questions that may impact your decisions:
- What’s your US immigration status at each decision point?
As you know, US citizens and permanent residents pay taxes on their worldwide income regardless where they reside. On the other hand, current US tax residents on work visa may become nonresident at a later date, and vice versa.
- Where is your tax residency at each decision point?
I’m assuming if you live overseas, you may be subject to tax in a foreign jurisdiction. Of course this is not always the case.
- What are the actions you have control over?
For globally mobile professionals, the decisions you can make are beyond when to exercise and sell. You are also able to decide where to move to and when, which is what creates planning opportunities.
This graph summarizes my thought process behind this post. If you are interested in doing further research, you can follow this rough outline.
US Citizens and Permanent Residents
Vesting US RSUs while living overseas
If you receive vested US RSUs while working overseas, it’s likely that they count toward your current year earned income in your resident country and are subject to local tax.
Just like when you live in the US the RSU value at vest will be included on your paystub and W-2, they likely will be included in your resident country’s payroll system. Tax will be withheld according to your local payroll rule. The company will generally automatically sell some of the vesting RSUs to withhold tax payments for you.
As RSU is treated as part of your salary, there isn’t much you need to decide at this step. The only thing you could have considered was perhaps whether to negotiate for RSU or Stock Options as part of your compensation package, if both were offered.
If you are a US employee that will transfer to a higher tax rate jurisdiction like in the EU, don’t be surprised to see more of your RSUs sold to satisfy tax withholding. You may want to consider the difference in tax rate when you negotiate your transfer package to include tax equalization or support.
Selling US RSUs while living overseas
Since the RSUs are taxed at vest, there isn’t additional tax consequences if you sell at vest. However, if you are holding for the upside or dividend, you may want to consider the following when you decide whether to keep or sell while still overseas.
- Find out whether there is a tax treaty between US and your resident country. While most likely you will still need to pay short-term or long-term capital gains tax in the US due to the Saving Clause, you might be subject to a lower capital gains tax rate locally because of the treaty.
- The same applies to RSUs that pay dividends. If you keep the RSUs and receive dividends, you may need to declare that on your local tax return and determine whether you can claim treaty rate.
- Even when there is no income tax treaty, you are able to claim Foreign Tax Credit in the US on the same income that you’ve paid foreign taxes on.
- There are also jurisdictions that do not tax your investment income or gains if you never bring them into country, so you may not need to consider local tax liability at sale.
- After considering the above points, it’s possible that global tax liability to you is the same whether you sell while a foreign tax resident or not. Eventually, the economic value pre-tax and the level of concentration risk you are willing to take should still be the deciding factors. Just remember that cross-border tax may make reporting more complicated.
- However, if you are doing exit planning and decide you’ve hold too much wealth in one company stock, it’s also possible selling before you move to a higher tax jurisdiction is more beneficial.
Vesting US Stock Options while living overseas
Receiving the vested options generally does not require you to make decision. You do not pay taxes at this moment either since you have not economically benefited from such award.
However, one important thing to find out at this stage is whether the options are Incentive Stock Options (ISO) or Non-qualified Stock Options (NQSO). This will make a difference in the following step.
Exercising US Stock Options while living overseas
In the US, ISO receives more favorable treatment. When you exercise NQSO, the difference between strike price and fair market value is immediately taxable as ordinary income (like RSUs). However, when you exercise ISO, the same spread is not included in income (although it is included in AMT income.)
Exercising while living overseas, you may want to consider the following:
- Does your resident country tax option exercise the same way? Is there tax incentive for option exercise and what are the requirements?
- Would your ISO meet favorable tax treatment in both the US and host country? Or you will avoid US tax but end up with local tax at exercise?
- If exercising creates ordinary income in a high tax jurisdiction, does it make sense to delay exercise until after you exit?
Exercising option can create a great tax burden depending on the amount and personal tax situation. Even without cross-border complexity, it’s a good idea to do some tax projection before doing so.
Selling US Stocks after exercise while living overseas
Similar considerations in the RSU section apply. In addition,
- For US taxes, you need to hold the stocks from exercised ISO for at least 12 months (and 24 months after grant) before you receive the favorable long-term capital gains treatment on the difference between sale price and strike price.
- Find out what rules might apply to selling stocks from option exercise in general in your resident country before you sell. There might be different rules apply to foreign stocks purchased through options award vs. foreign stocks purchased on the open market. There may also be special tax incentives for selling shares exercised from stock options.
This section focuses on those acquiring equity compensation as US visa holder and foreign employee without US status.
Vesting US RSUs while living outside of the US
For US visa holder, the US tax treatment is the same as your US citizen colleagues living in the US at vest if you are still living in the US. Normally if you left the US employment, the RSUs will expire.
In cases where you transfer to a foreign subsidiary of US company, the RSU vesting while you are a nonresident alien will create US source effectively connected trade or business income. This is because you earned these RSUs while a US tax resident. Your company will likely issue you a W-2 and make appropriate withholding. It’s your responsibility to file 1040NR to report proper tax liability, and potentially receive refund.
US visa holders may also want to consider whether they still have home country tax liability.
For foreign employees, the local tax treatment is the same as discussed in the RSU section for US citizens that are foreign tax residents. They should not have US tax liability this stage.
Selling US RSUs as nonresident alien
US company stocks are US domicile assets. It means that without income tax treaty, the US source dividends nonresident alien receives are taxed and withheld at 30%, but the capital gains are tax free.
Here are some planning considerations:
- If you are currently a work visa holder with RSUs of large accumulated (or expect to accumulate) gains, you may want to consider selling after you become a nonresident alien if tax free capital gains apply.
- You may also want to consider the treaty rate of the country you might become resident next, especially if you are not returning to your home country. If you are going to higher tax country with treaty rate, selling while a US tax resident might be more beneficial. (However as stated in other sections, consider the economic benefit and concentration risk first.)
- If you have substantial gains from large amount of RSUs, you may even want to gain residency in a country that doesn’t tax capital gains for residents. That will allow you to reduce the concentrated stock holdings in a tax-free manner. This applies to both US and foreign employees. (I’ve never known anyone who make residency consideration purely on this benefit alone, but it might sway you in one direction or the other.)
Vesting US Stock Options while living outside of the US
Same considerations apply as in the RSU section.
Exercising US Stock Options as nonresident alien
When you exercise US Stock Options award as nonresident alien, the resulting includable income from NQSO (or disqualifying ISO disposition) is considered US-source effectively connected income. In addition,
- If you have worked for the US company as a foreign employee living outside the US, the US stock options award may not be US source. For those who have move around the world for the same employer, a multiyear compensation rule is applied to determine what share of the effectively connected income is considered US source, thus taxable in the US.
- In the year you exercise NQSO as a nonresident, you will create ordinary income as if you “worked” in the US. This will be taxed according to the graduated rate on 1040NR. If you have high salary income in the US, it might make sense to exercise after you become nonresident alien so you are taxed at a lower bracket.
- Income tax treaty may apply differently. The income will be sourced according to when the options were granted, not when you exercised.
- If you exercise ISO and meet qualifying disposition requirement, the resulting capital gain may be tax-free in the US. This means if you also live in a country without capital gains tax, the full economic value resulting from ISO may never be taxed.
- If you want an extremely detail discussion of exercising option as nonresident alien, read this.
Selling US stocks after exercise as nonresident alien
Same consideration as in RSU section. Plus consider the qualifying disposition of ISO exercise.
You may wonder how the decisions are different if you purchased the equity with a discount as an employee. That’s a good question that we address in another post.
Foreign Company Equity Compensation?
If you are a US expat, it’s also possible you will receive equity compensation from your foreign employer. This will be addressed in another post as well.
Lastly, what we’ve discussed so far assumes the company’s stocks are publicly traded. If you receive shares or options from privately held company as an employee, you have less to no control over the exercise or sale of your equity compensation. On the other hand, if the company goes public when you’ve moved overseas, you might be getting large amount of taxable compensation all at once. You may also have to consider your exercising timing and tax liability in both the US and your resident country more carefully.