Cross Border ESOP dilemma
- Neha Lodaya
- Dec 5, 2024
- 2 min read
In a cross-border ESOP scenario, Indian resident employees are typically granted ESOPs by the foreign parent MNC which are taxable as perquisites in India (since employment services are rendered in India).
Due to the timing differences in the granting and taxing of ESOPs between the home country of the parent company and the resident country of the Indian employee, it is crucial to structure these grants to avoid double taxation for Indian employees. Additionally, complexities increase if employees are working across different jurisdictions during this period.
The Mumbai Tribunal has ruled that if an ESOP incentive pertains to services rendered in India, the ESOP will be taxable in India even if exercised while the employee is abroad. A separate analysis is required to determine if the non-resident employee can receive a tax credit for taxes paid on the perquisite in India under the relevant DTAA.
Disclosures under Schedule FA of the Income Tax Returns require appropriate reporting not only of shares granted under an ESOP plan but also of any beneficial interest (i.e. right to exercise options) in a foreign entity.
At the time of the sale of shares, the foreign country where the situs of the shares is located generally taxes the capital gains. Additionally, the sale of shares to meet withholding tax liabilities in a foreign jurisdiction should also be adequately disclosed in the ITR.
Moreover, dividend received on such shares, should also be reported in the ITR under schedule FA appropriately. The Indian employee should be eligible to claim the taxes paid in foreign country depending on the relevant clauses in the DTAA.
As per Indian exchange control regulations, the sale proceeds of ESOPs / dividends earned thereon should be repatriated to India within 90 days from the date of sale / dividend accrued, else penalties are applicable.
