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Offering Shares to Overseas Employees: A Guide for Employers

Companies that employ workers overseas will contend with meeting the host country’s employment laws, and that includes the way that employees are compensated.  While some forms of compensation are fairly standard such as salary, bonuses, health benefits and allowances, other types may have unique rules that could prevent their use by foreign employers, or tax laws that reduce the advantages.

What is an Employee Share Program?

Employee share programs are one way that employers can increase compensation for their employees, without raising the salary.  There are two basic forms of share programs.  The first type of program is when a company offers an employee the chance to directly buy shares of its stock.  The second type is the outright grant of either equity or options as a form of compensation. 

1. Share Purchase Program

Programs that offer current stock purchases will often do so at a discount, and even provide some kind of funding loan to employees to make the purchases.  In that sense, it is more of an optional employee benefit than actual compensation (although the share price could increase in value over time, in addition to the original discount).

2. Equity/Option Grant

A company can also award equity shares or stock options in the current year as compensation.  But, the award of options that vest at a future date is a distinct form of that share program, that can have a higher compensation value for the employee (and more complications).  In some cases, they will have to remain in their role until the options ‘vest’ or become available for exercise to the employee.

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Benefits of Offering Options/Equity to Employees

There are benefits for both employee and employer, especially when granting options as compensation. The employee receives an equity stake that has the potential to appreciate in value, although they may have to wait for some time until the vesting period completes.  In that case, it is a form of deferred compensation unless a country’s tax laws count it as current year income.

This is also the advantage for the company, as it can enhance the compensation package for a low initial cost, and it does engage the employee more with company performance.  It also helps to secure the employee’s commitment until the end of the vesting period.

What to Consider When Offering Shares to Overseas Employees

The practice of share offering inside a given country will be regulated by both employment, tax and securities laws, which both employer and employee will understand.  But what happens when a company hires a foreign employee and attempts to offer the same type of equity grant across borders?

The answer to that question will depend on how a company is situated in the foreign country, and what labor and tax regulations will be applied.  There are no general rules against a foreign citizen owning equity, but there can be issues with how the shares are transferred, valued, registered and taxed.

Foreign Subsidiary vs. Third-Party Employer

There may be a difference if you are offering options/shares to employees of your own foreign subsidiary, or if you hired a remote employee through a third-party employer of record (EOR).  Option awards through a subsidiary may have tax implications for the employer in the home country, while a direct grant from a company using an EOR could imply an employment relationship between the employee and the EOR client.

Tax Laws

A simple grant of equity shares is taxable in the current year at the market price because the value is known (100 shares @ $10 per share market value = $1000 in income), but it becomes more complex with option awards.

Every country will tax option grants differently, for example in France and Belgium the award is taxable in the current year as an employee benefit, and in France, any gain from actual shares sold by the employee within a year is also taxable as income.  

Contrast this with other countries (the US and Australia), where option grants are not taxable until vesting and then exercise of options to acquire shares.  Regardless of the timing of exercise, there may be immediate tax withholding requirements in the host country.

Securities Laws

There are also potential restrictions on the types of shares that may be granted, for instance, Brazil does not impose securities regulations (i.e. reporting, submitting a prospectus) as long as the entity is incorporated abroad.  Other countries give exceptions for non-publicly traded companies or where there are fewer than 50 to 100 employees.

Foreign Exchange Regulations

There may be foreign exchange reporting requirements in the host country, for owners of shares of foreign companies, but many countries give exceptions to foreign options or impose a monetary threshold.

Labor Laws

Labor laws will primarily affect how unvested options are treated when an employee resigns or is terminated.  While the US considers them as expired on termination (no value/ownership rights), Argentina and Austria will include them as a part of the severance package for the employee.

Types of Options: Tax Favorable vs. Non-tax Favorable

In the US, when a company grants employees stock options, they have an election on the tax treatment, but tax favorable options are not always recognized in the host country with different tax structures.  However, countries like the UK have their own tax favored options laws that might apply to the local employee.

Alternatives to Offering Shares to Employees

Given these complexities, some companies that hire abroad might choose to forego traditional share programs and look for alternatives.  There are often ways to enhance employee pension or retirement plans, offer non-taxable allowances, increase employee benefits or simply raise the salary to offset the inability to participate in a shares program.

Summary

A company that considers offering shares to overseas employees will have to review all of the implications described in this guide to make sure of compliance both at home and in the host country.  On balance, host country laws will determine whether the shares program is legal, compliant or attractive to foreign employees. 

Shield GEO can assist you in evaluating all types of compensation for overseas employees.  We make international employment simple.

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