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As companies expand globally, they often face the challenge of attracting and retaining talented employees in foreign countries. Companies like our partner Remote have made it super easy for global teams to hire talent and manage payroll for overseas employees in countries where you don’t want to go through the administrative hassles of setting up a local presence.
However, one aspect of remuneration often falls through the cracks: equity awards.
In this article, we’ll focus on one of the equity incentives most often used by early stage companies: stock options. We’ll look at it from the perspective of a US private company that wants to incentivize employees employed via an Employer of Record.
Each country of course has its own rules, and it would be too long to cover them all here so we’ve decided to focus on 3 of them:
- United Kingdom
- Australia
- India
We’ll focus on the most frequently asked questions and/or the most important compliance items if you decide to grant stock options to an EoR employee based in one of those countries.
🌎 Whatever the country, easily grant and manage stock options to EoR employees via Easop
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United Kingdom 🇬🇧
💡 There are many different types of tax favored schemes in the UK (sometimes called “tax advantaged” or “approved” schemes). The most widely used by startups who have less than 250 full-time employees (and comply with other conditions) is EMI, which stands for Enterprise Management Incentives. When companies grow larger, they often use CSOP.
Can I grant options qualifying as EMI in the UK?
Unfortunately, it is not currently possible to offer EMI in the UK to an EoR employee so you’ll have to go for “Unapproved Options” which, contrary to EMI, are generally taxed already at the time of exercise rather than only at the time of sale of the shares.
Do I need to do anything at the time of grant of the options?
Yes, there are unfortunately a few formalities to follow when you grant stock options in the UK: 1️⃣ register a share scheme with HMRC, and 2️⃣ report the grants (and any exercises of options) in a yearly report of options called the ERS return.
ℹ️ Make sure you inform the EoR that you’re about to grant stock options so they can carry out the formalities on time. They can’t do it if you don’t inform them 😉
Or simply use Easop and this will be done automatically!
Who is responsible for reporting/withholding when the employee exercises the options?
Well, it depends on the qualification of the shares: are they “Readily Convertible Assets” (RCAs) or not. If they’re RCAs, then it’s the EoR who will be legally responsible. If the shares aren’t RCAs, then it’s the employee.
There will be additional contributions (under the form of national insurance contributions) if the shares are RCAs.
How do I know if shares are Readily Convertible Assets or not?
The shares will typically be considered as Readily Convertible Assets if the exercise takes place in the context of a liquidity event.
Typical example of RCA 👉 There’s an exit event (M&A) or a secondary sale, and the EoR employee decides to exercise through a cashless exercise arrangement, so he/she doesn’t pay an exercise price but uses the proceeds of the sale to cover the exercise price.
The shares won’t typically be considered as Readily Convertible Assets if the exercise takes place outside of a liquidity event (but this is not always the case).
Australia 🇦🇺
💡 Australia is one of the few countries where, as a general rule, stock options are taxed at the time of grant (and not at the time of exercise or sale). There are some exemptions that allow taxation to be deferred to a later stage, but they do not apply to EoR employees.
👉 It’s particularly important to make sure the employee and the employer understand there would potentially be a tax to pay at grant and that they would need to report something in their tax return.
There are also some securities laws considerations to take into account if there are multiple grants of equity awards over a certain period of time.
Can EoR employees benefit from the start-up concession?
The startup concession allows certain types of equity awards qualifying as “employee share schemes” granted by startups to be deferred to the time of sale of the shares.
Unfortunately, the startup concession does not apply to EoR employees.
What does the EoR employee need to report?
The EoR employee needs to include the value of the options in their tax return relating to the year in which the stock options have been granted.
India 🇮🇳
💡 Granting stock options as a foreign company to people in India without having a local presence through a branch or subsidiary comes with a few uncertainties and legal obstacles.
Alternatives to traditional stock options (such as phantom stock, VSOP or stock appreciation rights) can be recommended.
In any case, it’s recommended to inform the EoR at the time you grant the options.
Can I grant stock options to EoR employees in India?
Yes you can, but there are certain things to take into account when you do so. A new law of August 2022 makes it fairly difficult if you are offering stock options without an actual presence in India (such as when you have EoR employees). In that case and unless the law changes or its scope is clarified by the Indian authorities:
- Your holding company needs to be an operational company
- The EoR employee will not be able to sell their shares in the 12 month period that follows the exercise of their options
There are also formalities you need to take into account:
- There are restrictions on the amount that can be transferred by the EoR employee for exercising their options
- There’s a tax levied by the bank used for transferring the money to pay the exercise price if money wires in one year exceeds a certain amount
- Once the shares are sold, the proceeds from such sale need to be repatriated to India within 90 days
Is there a tax favoured scheme?
There is a tax deferral to the time of sale for startup companies. Unfortunately, it does not apply when the issuer of the stock options is based abroad.
When the shares are held for more than 2 years, there’s a long term capital gain taxation (which is lower than the usual rate).
Can we use the 409A valuation in order to determine the value of the shares to be taken into account for income tax purpose at the time of exercise of the options?
In India, the value of the shares needs to be determined by a Category 1 Merchant Banker registered with the Securities and Exchanges Bureau of India. A 409A valuation will most likely not be considered as a valid substitute.
It can result in additional paperwork, costs and administrative hassle in case the exercise takes place outside an exit event. Make sure you plan it ahead.
If you want to have a broader understanding of emerging benefits trends globally and insights into what benefits employees in different regions consider to be essential and innovative, check out Remote’s Global Benefits Report 2022!
Last words
We know there could be more questions you could ask yourself like:
- What is a s431 election in the UK, what’s its use and who should sign it?
- Can contractors benefit from any ESS exemption in Australia or are they also taxed at the time of grant?
Managing equity on a global scale is complex and can be tricky if you don’t pay attention.
Countries’ employment, securities and taxation rules are all different, and even within the same country one work relationship is not another.
As a result, some of the reporting/tax/legal obligations applicable to EoR employees may not apply if you have direct employees (e.g. of a subsidiary) or if you work with contractors. The other way around, some restrictions could apply to contractors or direct employees and not to EoR employees.
This is where Easop can help, as we’ve built a unique expertise in global equity compensation.
