Myths That Lead to Mobility Tax Mistakes

When I first began working with global equity plans, one of the most common misconceptions was that mobility taxation could be avoided simply by having the employee return to their original country, exercise their stock options, and return to the mobile location. After the Organization for Economic Co‑operation and Development (OECD) issued its recommendation on the taxation of cross‑border stock options, a new myth took hold: that tax liability is determined solely by the employee’s location at the time of vest. In reality, the OECD guidance—adopted by many tax authorities—is that the income should be sourced across the jurisdictions in which the employee worked between grant and vest.

Here are some more recent common myths that I come across:

Myth 1: Canceling and Regrant Awards Avoids Mobility Compliance

A company can avoid mobility compliance by canceling existing awards and granting replacement awards after the employee relocates.

In theory, this approach could work. In practice, it often does not. Many countries have anti-avoidance provisions in their tax code that allow a tax authority to disregard transactions taken primarily to avoid taxes. If the sole purpose of a cancellation and regrant is to avoid a trailing tax liability, especially where the new award follows the vesting schedule of the existing award, this action can fall squarely in these provisions.

A cancellation followed by a grant of a new award with a restart of the vesting schedule may mitigate some of the anti-avoidance concerns, but several practical questions remain.

• Will the employee agree to re-start vesting to avoid a trailing tax liability?
• Can the company unilaterally cancel awards?
• What will happen if the employee relocates again before the new award has settled? Will there be another cancellation and regrant?

If the company communicates that the new award is tied to the old one, tax authorities will have further evidence to assert a right to tax a portion of the new grant. In addition, several countries, such as Germany and the U.K., routinely request information on how a company handles equity compensation for former residents as part of a standard payroll audit. Organizations relying on cancellation and regrant strategies should be prepared to explain their approach.

Myth 2: You Just Need the Right Tech for Mobility Compliance

Technology will solve compliance challenges.

Technology can help, but only in specific parts of the process. Mobility compliance for equity awards generally involves four phases:

1. Establishing mobility policies and tax positions, including decisions on tax equalization and which award types will be subject to mobility rules, etc.
2. Collecting and maintaining accurate data, including identifying mobile employees and tracking their movements.
3. Performing the tax calculations.
4. Processing the calculations through each relevant payroll.

Equity income allocation technology primarily supports the third phase, although interfaces can streamline data flows from HRIS or into payroll systems. But technology cannot fix poor data or unclear policies. Strong governance, accurate movement tracking, and disciplined data maintenance remain essential. Otherwise, the adage “garbage in, garbage out” applies.

Myth 3: Mobility Compliance Isn’t a Company Responsibility

It is the employee’s responsibility to correctly report the income and pay taxes.

While employees have personal tax obligations, this does not eliminate the employer’s compliance responsibilities. Many jurisdictions (countries and U.S. states) require the employer, or payor, to report income and remit taxes even for a location where the employee is no longer employed.

Myth 4: Reporting Income in Multiple Locations Disadvantages Employees

By implementing mobility compliance policies, the company is placing a financial strain on its employees.

This is the flip side of Myth 3 and it too, is incorrect. Companies do not create tax laws; however, failing to comply with them can create significant financial and administrative burdens for employers and employees. Rather than disadvantaging employees, robust mobility compliance policies protect employees and better enable them to meet their own obligations.

Bonus Myth 5: Relocated Employees Can’t Benefit from ISOs

ISOs lose their tax favorable status when the employee moves overseas.

I am including this as a bonus myth because I have written about this previously. When an employee with an ISO relocates from the United States to another country, all else being equal, the ISO does not lose its U.S. tax qualified status. The employee can still receive U.S. tax favorable treatment even though this treatment may not extend to the other country where they are now resident. However, care must be taken to avoid disqualifying dispositions on the sale or withholding of shares to pay taxes on the exercise in the employee’s new country. The applicable U.S. reporting of exercises and disqualifying dispositions still apply. See "How Employee Mobility Affects Taxation of ISOs and ESPPs."