1. Granting stock options to foreign employees is increasingly an important compensation component for attracting the best overseas talent.
2. ‘Equity compensation’ covers various possibilities which relate to stock or shares in the company in question. Stock options is perhaps the most popular form of equity compensation.
3. It is possible to issue stock options to foreign employees, though there can be tax complications.
4. It may be possible to issue stock options through a PEO, Employer of Record, or outsourcing solution depending on which country’s laws are involved.
It is becoming increasingly common for businesses to attract new employees with equity compensation in the form of shares, stock, stock options and other financial securities.
Below, we explain the key things you need to know about granting stock options to foreign employees.
Horizons can make it simple to compliantly offer stock options and equity compensation to your employees.
What Are Stock Options and Equity Compensation?
Equity compensation, or ‘equity-based compensation’, is a form of remuneration for employees that relates to stock or shares, or some other form of security or financial product.
It can be a useful component of compensation in a variety of situations, including:
- Startup hiring. Often startups are low on liquidity which hampers their ability to provide generous cash compensation. Equity compensation (especially stock options) can be a useful mechanism for attracting new employees while keeping expenditure low in the early years;
- Executive or specialist hiring. Even with well-established companies, it can be important to have equity as part of the compensation package for attracting executives or technical talent such as software developers. By analogy, consider the way in which new partners in law firms receive/purchase an ownership interest in the firm;
- Workers co-operatives. In these cases, staff generally become equity holders as as the corporation is owned entirely by staff members.
Common forms of equity compensation include:
What Are the Benefits of Granting Stock Options to Foreign Employees?
When hiring employees overseas, it is reasonable to ask whether it is best to grant stock options to employees, or whether some other form of equity-related compensation may be more appropriate. Some of the benefits of granting stock options to foreign employees, compared to the other possibilities, include:
Granting Stock Options to Foreign Employees
Once you have decided that granting stock options to foreign employees is a good idea, how do you go about doing it?
Generally speaking (it depends on the country), an overseas employee of a US company will not receive the tax benefit of an ISO, as most countries tax stock options when exercised.
For this reason, US companies are more likely to issue NSOs to foreign employees. NSOs also have the benefit of being available for non-employees, such as consultants and contractors.
There is a tax complication for companies issuing NSOs overseas. Generally speaking, when the US parent company issues the NSO, the foreign subsidiary cannot deduct that cost as a cost of labor. The reason being that it is an expense of another company (the US parent, rather than the foreign subsidiary).
It is common to get around this issue with a ‘recharge agreement’. In this agreement, the subsidiary pays back the US parent for the cost of the stock option. This payment is then tax-deductible for the subsidiary.
As the payment received by the US parent is for equity, it is generally tax-free.
Method 1: Granting Stock Options to Foreign Employees with a Global PEO
A global Professional Employer Organization (global PEO), or international employer of record, hires employees on behalf of a client business in another country. This is a common mechanism for expanding overseas or hiring foreign employees in a cost-effective and compliant manner.
Where a US company is granting stock options to foreign employees, it is usually under rule 701 of the Securities Act 1983 (for privately held stock) or Form S-8 (for publicly listed stock). These regulatory provisions permit companies to issue options (a financial product) without being a registered security provider.
These provisions provide that the stock may be issued to ’employees’ or ‘consultants’. Depending on the employment contracts issued by the global PEO, there is an argument that the employees may be ‘common law employees’ of the client company, permitting them to receive equity under the plan.
Note, for some types of stock option this will not be permitted. For example, the Enterprise Management Incentive scheme in the UK is not eligible to employees of a PEO.
Method 2: Granting Stock Options to Foreign Employees by Outsourcing Payroll and Benefits Administration
As noted above, in some cases, issuing stock options to overseas employees via a PEO or employer of record can pose a compliance risk.
There is a viable workaround in many cases however. PEO agreements between global PEOs and client companies are flexible documents. It is often possible for the client company to outsource the processing of payroll, withholding of employee taxes and administration of stock options and other benefits, while still remaining the legal employer of staff. This is usually done by opening a foreign subsidiary in the country of expansion to be the formal employer of workers, while the PEO carries out the practical employer tasks delegated to it.
To read more about outsourcing benefits administration in general check out What is Benefits Administration?
Horizons Can Help With Granting Stock Options to Foreign Employees
Stock options can be a useful element of employee compensation, anywhere in the world. Horizons are experts in international benefits administration and can ensure your foreign employees receive this compensation in full compliance with local laws.
Get in touch with us today to find out how to grant stock options to your foreign employee through global PEO or outsourcing solutions.
Frequently Asked Questions
Yes, in some cases. However, depending on the tax laws of the country where the foreign employee is located, they may not receive any of the tax benefits of ISO. For this reason, NSO are sometimes a more sensible option for overseas employees.
Yes. However incentive stock options (ISOs) are generally only available to employees. For non-employees, such as directors and consultants, non-qualified stock options (NSO) are available.
Yes, as long as the individual is an employee of the qualifying US company. Note, however, that individuals based overseas will often lose out on many of the tax benefits of an incentive stock option (ISO).
The United States can tax any and all income on its citizens, regardless of whether the income come from local or foreign sources.
U.S. citizens must fill out IRS Form 8938 if they hold foreign stocks or securities that pass the reporting threshold (specified foreign assets valued at minimum USD $200,000 on the last day of the tax year OR USD $300,000 at any point of the year for unmarried taxpayers; specified foreign assets valued at minimum USD $400,000 on the last day of the tax year OR USD $600,000 at any point of the year for married taxpayers).
U.S. taxation on foreign stock options should be taken seriously. We recommend to consult a tax professional if there is any question of whether to report financial assets.