Internationally Mobile Employees
Internationally mobile employees (IMEs) who are granted share options or other share incentives (such as restricted shares) might be liable to taxes and social security (including payroll taxes) in more than one jurisdiction. The UK taxation rules applying to share options/share incentives granted/awarded to IMEs changed from 6 April 2015, with the aim of bringing the taxation of grants/awards in line with cash earnings. The taxation rules produce favourable tax outcomes for some employers/IMEs, but others will lose out. In other cases, relief might be available under a double tax treaty with the UK. Some examples are set out below.
Employee A works in Luxembourg and is granted, in 2012, a share option to acquire 10,000 shares by his UK parent company at an exercise price of £1.00. The option is exercisable in the event of a sale or listing of the parent company. In 2016, Employee A is seconded to work for the UK parent company; and he continues to work in the UK until 2020 when the parent company is sold on a per share basis of £10 a share.
Under the taxation rules applying before 6 April 2015, there would be no UK income tax payable on the share option gain on exercise (£90,000) in 2020 and when Employee A was UK tax resident. (In theory a charge to income tax could arise under Chapter 3C, Part 7 ITEPA 200, although HMRC’s practice was not to impose a charge).
However, from 6 April 2015, income tax (under PAYE with NICs) will be due on half of the gain on exercise of the option. (The relevant period for determining the UK taxable amount is the eight-year vesting period (2012 – 2020). Half of this period relates to UK taxable income and the other half unchargeable foreign securities income).
Employee B is granted a non-tax advantaged option subject to a five-year vesting period in 2015 by her UK employing company when she is UK resident. She is subsequently seconded in 2016 to work in a jurisdiction that exempts gains on exercise share options from taxation.
Formerly (before 6 April 2015), HMRC would seek income tax on the full gain. However, under the new taxation rules, UK taxation will only apply to 1/5 of the option gain.
Employers with IMEs who leave the UK to work overseas or to come to the UK from overseas (e.g. on secondment), should be (if they are not already) aware that the taxation rules have changed; and should review their existing share options and share incentives for UK payroll purposes. This will normally include maintaining records of IMEs movements and working time in the UK and overseas.
NB: This is a particularly complex area and you should seek advice relating to the tax position of any internationally mobile employees.