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What Are the Challenges for Cross-border Taxation of Share Options?

Summary: How to deal with cross-border taxation of share options when working remotely? Have a look at our overview and learn about the process in detail.

Elo Madiste

Elo Madiste

March 23, 2023

Having the remote work policy in place comes with many benefits. It allows employees to work from different locations while travelling around the world without having any connection to the physical office.

However, figuring out taxes while following the digital nomad lifestyle is challenging. More specifically, you need to know how much tax and where you should pay if you spend more than a year abroad.

If you work in a startup and get share options, you also need to figure out the exact tax implications of getting your share in the company as a remote worker.

In this article, we will walk you through the process and talk about everything you need to know about cross-border taxation when dealing with share options.

Salto X expert Elo Madiste

Elo Madiste, Global Tax Expert, Salto X

What Are the Things To Keep In Mind About Cross-border Taxation?

Whenever you talk to a tax lawyer, the first thing they would want to know is which countries would be interested in the taxation of your income. In this case, at least two countries would be relevant to look at:

  • Residence country – the country where you live officially and where you can get a tax residency certificate, and
  • Source country – the country where your income comes from, e.g. where the salaries are paid from or where the company is registered, which makes the payments.

Heads up – often, both countries are interested and also use their right to tax your income.

The source country may have rules to withhold income tax from the payment made from that country.

The residence country requires you to declare all your worldwide income and taxes paid in other countries in order to make a final assessment of your tax level.

As a rule, the residence country takes into account the taxes paid in other countries to avoid double taxation. The division of taxing rights is often agreed upon in bilateral agreements between countries, so-called double tax treaties that cover the taxation of income and capital.

Where Are You a Tax Resident?

Usually, you are a tax resident in the country where you have your permanent home. If you live in more than one country or have a home in one country and work in another, then there are more factors that may decide your tax residency.

It is quite a common understanding that a stay of over 183 days in a year in one country is the most important factor when considering your tax residency status. However, it is not the only indication of your possible residency status.

Normally, countries want to keep their tax residents, and, more often, it is in your interest to be able to prove that you are no longer a tax resident of a certain country.

On the other hand, when moving to a new location, the new country might consider you a tax resident from the day you settle down there.

This status mostly depends on your personal circumstances and the residency rules of that country. Some countries really count the days and hours. Some look at all the facts.

It is also important to note that citizenship of a country does not normally mean that you are a tax resident there. However, in some rare cases (e.g. the USA), countries may treat all their citizens as tax residents, regardless of where they actually live or for how long they have been away.

Therefore, living in more than one country or being involved with many different countries for different reasons (home, work, citizenship, long stay) can result in dual tax residency.

Double tax treaties generally resolve such cases. As most of the countries follow the OECD and UN models and rely on the commentaries added to the articles, these can give you a general idea of how it is done.

Change of the Tax Residency and Effects on the Share Options

How is this information relevant to share options? Well, it is relevant if your tax residency changes in the middle of the option program.

  • Some countries have advantageous tax rules for employee share option plans (ESOPs), while others don’t.
  • Some countries give tax advantages only to the residents of the country, so if the residency of an employee changes, the tax treatment of the option plan may also change.
  • Some countries may even want to tax back your received tax benefits when you leave the country.

Share options can trigger taxation in four stages. These are granting, vesting, exercising, and sales.

The problem is that if your tax residency changes from one country to another, it can end up in double taxation. It can also cause a lot of trouble with making sure which country and at which time it is appropriate to tax your income.

Double tax treaties include rules for the division of taxing rights for income from employment. Share options are just a part of it, and the timing and residency issues of taxation have been acknowledged decades ago.

It seems that the discussion to find a proper solution is still ongoing.

To Sum Up…

While a share option plan can be a good way to attract talent, cross-border situations prove to be difficult to manage since the tax result is unpredictable.

It is important to consult with the tax adviser to give more clarity on this topic, as the situation heavily depends on the countries that are involved in this process.

Feel free to reach out to us if you need any assistance with setting up incentive plans for your remote team. We would be happy to help.

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