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Equity Plans and the Tax Man

Equity Plans and the Tax Man 

Given that our annual US “tax day” of April 15th has just passed, I thought it might be interesting to share some reflections on the impact of taxes on share plan design and administration. Since most types of equity plans can result in some form of compensation to the individual participant, they are typically subject to the tax rules governing income or capital gains in the jurisdictions where the plans may operate.

Equity Plans Tax Treatment

In most places where equity plans are used extensively, these tax rules are relatively well established and follow certain basic principles, i.e., gains realized from plans are usually treated as income (marginal or supplemental), or may be considered a capital gain (or loss) based on certain tax-qualified or other beneficial consideration of the award type and jurisdiction. In the more “emerging” markets or places where the granting of equity awards is a relatively new practice, tax protocols may not be as well defined or continue to evolve (e.g., China), and the impact to the individual participant may be more open to local interpretation, particularly for globally mobile employees.

One inexplicable fact though, is that tax regimes around the world are viewing equity compensation as an increasingly attractive source of incremental tax revenue, particularly during the economic downturn over the last several years. From a plan design standpoint, not much can be done to diminish the ultimate “bite” the tax man will take from the gains of an equity award, aside from changing the mix of awards types and/or cash compensation, as well as exploring creative avenues for deferring taxable gains to some future, or perhaps more attractive, tax treatment of the awards.

Interestingly, this phenomenon of increased scrutiny of taxation of equity is not limited to just sovereign entities and jurisdictions – many States here in the US are beginning to take a look at how Companies treat State-to-State taxation of awards for employees that may have business responsibilities in many different locales over the time that their equity awards are vesting and, in theory, generating potential taxable income for the States in which an employee may be working. As with tax compliance for international cross-border employees, these situations only promise to make life that much more complicated for the administration of equity awards.

As Benjamin Franklin once famously said in Advice to Young Tradesmen, “In this world nothing can be said to be certain, except death and taxes” – I would also include the certitude of cross-border taxation of equity awards!

John Bagdonas


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