Operating in a globalised marketplace often necessitates doing business overseas, which comes with unique challenges, particularly when it involves relocating employees. Establishing a physical presence abroad, often by sending employees, requires careful consideration of their rights under your Employee Share Option Scheme (ESOS).
This article will help business owners and HR professionals understand the issues and challenges of managing ESOS for employees working abroad, emphasising the importance of planning ahead. You'll learn about tax residence implications, considerations for benefits before and after relocation, and the practicalities of cross-border share schemes, including GDPR considerations.
Our skilled team of employee share scheme solicitors can help you navigate these complexities and capitalise on emerging opportunities.
Contents:
Tax residence and the location in which you carry out your duties
Once living and working full-time abroad your employee will likely become non-resident for UK tax purposes which means that your employer tax withholding and tax reporting obligations will need to be reviewed for this change in circumstances. As a general rule, the employee will become subject to the tax system and other laws of the new country.
However issues of tax residence are heavily fact dependent, so hard cases can (and do) arise: for example, where the employee works alternative weeks in the home and host territories and therefore it is critical to take advice in advance.
Benefits before and after relocation
For participants in current share plans, these are some of the relevant considerations for the ESOS:
- the rules of the plan will need to be checked to see what the plan says about employees moving abroad or becoming leavers if the employee will no longer be employed by the company or a group company (e.g. they will be employed by an employer of record). For example, can the employee exercise a tax-advantaged share option before they leave to preserve any UK tax benefits or would this be a new exercise right which might have additional implications;
- where employees are not obliged to pay UK tax as they are non-resident and have no UK duties, they will not benefit from tax-advantaged share plans in relation to the benefits attributable to their non-UK work;
- what are the implications of receiving equity or shares in the new territory and are there any red flags from a legal or tax perspective which can be a particular issue given the variety of arrangements for engaging workforce; and
- as a general rule for employees, the benefit relating to a share option or award will need to be time-apportioned over the period the benefit is earned and the country where the benefit is earned will have primary tax rights in relation to their portion of the benefit.
- where national insurance contributions (NIC) are payable in relation to share awards, the NIC implications can differ from the income tax implications.
How it works in practice
Suppose, your UK employee holding a tax-advantaged enterprise management incentive (EMI) option is going to relocate to the USA and become a US taxpayer.
They will become subject to US taxes when they enter the US tax net which will reduce the tax efficiency of the EMI option. In addition, the EMI option may be treated as a discounted option for US tax purposes which can have adverse tax consequences under US tax rules.
The company will need to take advice to determine whether the employee can exercise the share option before leaving the UK in order to preserve EMI tax benefits.
The company will also need to consider how to incentivise the individual in the US and what the relevant tax and legal considerations are.
GDPR
And a word of warning too: even after Brexit(1st February 2020), GDPR Regulations continue to apply to EU personal data processed by UK organisations, so local data sent to the UK by your employee and received by the employee while working abroad is still subject to GDPR restrictions.
Getting it right
You never want to find out, down the line, that UK tax benefits have been lost or unexpected liabilities incurred overseas, and that’s where careful forward planning becomes an essential part of any cross-border strategy.
Our skilled team of employee share scheme solicitors can help you manage these challenges and make the most of emerging opportunities. Contact us on 0800 689 1700 or fill out the short enquiry form below and a member of our team will be in contact.
