Taxation of RSUs for International Companies
In order for companies to entice new employees to join their company — while motivating them to work as hard as they can — organizations will usually offer ownership opportunities that may come in several different forms. One of the most common forms is referred to as the Restricted Stock Unit or RSU. Many companies offer Restricted Stock Unit opportunities for new employees because in most situations it does not result in any tax implication when it is offered and does not vest for a while – in other words, the Taxpayer does not receive any actual stock at that time. As time passes, and the RSUs vest — this is when there is a tax implication. This is true, even if the RSU is coming from a foreign company such as Singapore, Australia, the United Kingdom, or any other country, there are still US tax implications for US persons. Let’s go through some of the basics of the Restricted Stock Units as it impacts international companies, using an example.
IRS Summary on RSU
First, a brief summary on RSUs as provided by the IRS:
Restricted Stock Units are unsecured, unfunded promises to pay cash or stock in the future and are considered nonqualified deferred compensation subject to IRC §§ 3121(v)(2), 451 and 409A. Typically, one Restricted Stock Unit represents one share of actual stock. Restricted Stock Units generally are not taxable at grant if they meet the requirements of, or otherwise are exempt from, IRC §§ 451 and 409A. Generally, a taxable event does not take place until the vesting of the Restricted Stock Unit. In addition, Restricted Stock Units are not considered property for purposes of IRC §83 since no actual property has been transferred, and therefore an IRC §83(b) election cannot be made with respect to the grant of a Restricted Stock Unit.
Restricted Stock Units Settled with Stock. A Restricted Stock Unit payable in stock is similar to a Restricted Stock Award, except that the employer does not transfer the stock to the employee until the Restricted Stock Unit vests. Restricted Stock Units settled in stock are subject to IRC §§ 451 and 409A (unless they satisfy an exception) but are not subject to IRC §83 at grant. Restricted Stock Units settled in stock are subject to IRC §83 only when the stock is actually transferred to the employee. Typically, the value of the stock transferred is includable in the income of the service provider and a corresponding deduction allowed to the service recipient.
Restricted Stock Units Settled With Cash. A Restricted Stock Unit payable in cash is an arrangement under which the employee has the right to receive the value of the unit on the date the unit vests. Restricted Stock Units payable in cash are never subject to IRC §83 because no property is ever transferred. The amount of cash received upon vesting of the Restricted Stock Unit is includible in income of the service provider and a corresponding deduction is allowed to the service recipient.
Michelle is a US person who is currently working overseas for a foreign company. When Michelle began working for this foreign company, they offered her RSUs, which she gladly accepted as part of her compensation package.
RSUs Do Not Automatically Vest
At the time Michelle is offered the RSU, she does not receive ownership of that stock at the time — these are not RSA (Restricted Stock Awards) but rather RSUs. An RSU is not the same as a stock grant. Rather, as time passes and Michelle remains at the company for a significant amount of time, the RSU use will vest. This is referred to as a vesting schedule and often times it will stagger over multiple years.
Vested RSUs Lead to Tax Implications
When an employee has an RSU that vests, that means that the employee now has ownership rights over the stock. Using the example above, a few years after the RSUs use was granted, some of them vested and so now Michelle has the ownership of that unit. The problem is that from a US tax perspective the RSU is treated as a form of compensation and generally reported on W-2 (with employee withholding). For foreign companies that do not issue W-2, this can become a problem – although oftentimes they will use companies such as Shareworks for assistance.
In other words, even if a foreign company does not properly withhold taxes, the employee must still pay tax on the income.
Liquidating Stock to Pay Taxes
Depending on the cash flow situation of the employee and the ability to pay the tax (as well as the value of the vested shares), sometimes companies will liquidate the employee’s shares in order to cover taxes. This is especially common with foreign companies that issue RSUs to US persons — because the rules involving RSUs for non-US persons are different — and liquidating shares for tax purposes is just easier for the foreign entity.
Section 83(b) Election?
A Restricted Stock Unit is not entitled to an 83(b) election, because at the time of the RSU, the person does not have ownership of the actual stock. While there may be certain tax minimization strategies, the 83(b) election is not one of them (some exceptions, exclusions, or limitations may apply).
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