Mobility and Equity Awards: Timing Is Everything

One of the most frustrating mobile employee taxation scenarios is when an employee relocates to another jurisdiction (country or US state) and almost immediately thereafter exercises their stock options, leading to withholding and reporting obligations in both jurisdictions. Notwithstanding any differences in stock price, reversing the timing so that the exercise occurs just before the relocation could potentially reduce the employee’s tax liability and avoid unnecessary administrative headaches for everyone.

The timing of a relocation can have significant tax implications well beyond the scenario described above. Of course, tax is not the only consideration. The decision to move may be driven by business needs and personal or familial circumstances. Likewise, an employee’s decision to exercise stock options may be influenced by financial considerations such as stock price performance or trading windows. However, for purposes of this blog, we are going to assume these other factors are neutral. This blog also assumes the relocation (or move) involves a change of residency, as well as of employment and work location, and that the employee will become employed by a related entity in the new jurisdiction.

Relocation Just Prior to a Transaction

As described in the opening paragraph, relocating just before a transaction occurs (for example, a stock option exercise or an RSU vesting event) likely results in taxation in the new jurisdiction as well as trailing tax liability in the prior jurisdiction.

Many countries and US states require income reporting and tax withholding on the full income of residents, therefore delaying the move could reduce tax exposure and related administrative burdens. Although, in practice, employees will likely be able to claim credits for taxes paid in foreign/nonresident jurisdictions when they file their tax returns, planning ahead so that transactions are taxed only one jurisdiction eliminates this complication.

Even restricted stock units with periodic vesting, e.g., quarterly, can benefit from smarter timing of relocations. Although the subsequent vesting events will likely be subject to tax compliance in both jurisdictions, a short delay of the employee’s relocation is not likely to materially increase the trailing tax liability.

To illustrate this point, consider a participant who is granted an RSU on January 1 that vests and is released quarterly and who moves from Country A to Country B around the time of the first release. Country B requires reporting and withholding on the entire income of residents. The tables below illustrate how the tax burden shifts depending on the relocation date:

Relocation Date: March 31 (before the first release)

Percentage of each release subject to withholding and reporting in each country:

Relocation Date: April 2 (after the first release)

Percentage of each release subject to withholding and reporting in each country:

Delaying the move by just two days has a significant impact on the tax implications for the April 1 release, saving the employee from both double reporting and withholding on that transaction. Although, this benefit only applies to the April 1 release, the two-day delay does not materially increase the employee’s trailing tax liability in Country A for the subsequent releases (and this liability decreases over time, alleviating the need for tax mitigation).

Relocation Just After a Grant Date

If an employee moves just after a grant of a new award, that award has a trailing liability to the legacy jurisdiction and, therefore, allocations of income back to that jurisdiction should take place for the remaining life of that award. The amount of income allocated to the legacy jurisdiction might be relatively small, but the resulting administrative headaches could be significant. If at all possible, it is best to plan for relocations to occur before awards are granted to avoid this complexity.

Exit Taxes

Singapore is well known for requiring, with limited exceptions, that non-citizen employees pay exit tax on deemed transactions before they depart Singapore. The exit tax is applied on all income including year-to-date salary income. The exit tax for the equity awards is applied on the full value of the stock awards granted during or attributable to Singapore services, including unvested awards (using the share price thirty days prior to departure).

By departing in the first part of the year, when year-to-date income is low, the exit tax on equity may be taxed at a lower rate than when departing Singapore later in the year, when an employee’s accumulated year-to-date earnings may move the employee into a higher tax bracket.

Residency Matters

Because most jurisdictions tax residents differently than nonresidents, timing the start or end of residency can significantly impact taxes. For example, Ireland does not tax stock-settled RSUs that vest after residency has ended; the tax treatment for stock options differs.

Many countries and US states consider an individual to be a resident from the first day they arrive with the intent to stay.  For example, an employee who relocates to California on December 20, will be part-year resident: non-resident from January 1 to December 19 and resident from December 20 onward.

Residency for US federal tax purposes is determined differently. For individuals who are not US citizens or permanent resident (green card holders), residency depends on the number of days the individual is physically present in the United States, calculated as follows:

• Days present in the current year, plus
• One-third of days present in the prior year, plus
• One-sixth of days in the year before that.

If the sum is 183 days or more, the individual will be deemed resident (as long as there are a minimum of 31 days in the current year). Given the different approaches to determining residency, it is possible to be nonresident for federal purposes and resident for state purposes or vice versa.

For most jurisdictions, tax residency depends on several factors, many of which are personal, including availability of permanent housing, location of immediate family, jurisdiction of employment, voter registration, etc. As the rules differ across jurisdictions, it is possible to be resident in more than one jurisdiction at the same time. If there is a tax treaty between the two countries, there will likely be a tie-breaker clause in the treaty to determine the country of residence. However, not all US states recognize tax treaties the United States has with other countries.

If someone moves to the United States but does not have enough days to be deemed resident for federal purposes, they may still be considered a resident in the US state to which they have moved. In addition, they may be deemed resident in their former country as treaty tie-breaker rules often consider only the US federal status. This difference can lead to complexities in the application of payroll obligations for the company as well as confusion for the employee.

Conclusion

A feature of a well-developed mobility compliance program is working with participants to plan relocation date(s) around equity transaction dates to ease the administration for the employee as well as the company.