Business Laws

ESOPs by foreign parent to employees

Sandeep Jhunjhunwala | Updated on February 07, 2021

Often employees of a start-up that is headquatered abroad get ESOPs (employee stock ownership plan) of the parent company—because the parent company’s shares are typically higher in value. Now, the question is, in which country should the perk be taxed?

The jurisprudence in India is that benefits to employee of an Indian subsidiary from ESOPs granted by foreign parent is to be taxed as perquisites in the hands of such employee.

This is based on reasoning that employer-employee relationship is between Indian group company and Indian employee and ESOPs are an award to Indian employee for rendering services to Indian group company.

Disclosure in IT returns

Where an Indian employee is allotted shares of foreign parent company, it is be regarded as holding foreign assets and needs disclosures in India tax return filed by such an employee.

Where a resident Indian holds any foreign asset, ITR 1 is not the right return form as this is applicable only for taxpayers having salary income and not having any foreign assets. Based on sources of income other than salary earned by Indian taxpayers, ITR 2 or ITR 3 is required to be filed as a tax return and disclosure of shares of foreign companies needs to be made in Schedule FA – details of foreign assets and income from any source outside India.

Transfer of shares received under ESOP

Resident Indians are liable to income tax on worldwide income and therefore capital gains from transfer of shares of foreign companies would also be taxable in India. Such income could be taxed as short-term or long-term capital gains based on period of holding.

The foreign country may also tax such gains and tax implications needs to be evaluated based on local tax laws of domicile of foreign companies issuing shares and related tax treaty, (such as double taxation avoidance treaties). As per Indian exchange control regulations, where an Indian resident holds shares of a foreign company granted under ESOP and transfers such shares to a non-resident outside India, resulting sale proceeds from such transactions need to be repatriated into India within 90 days from date of sale. Where such repatriation timelines are not met, penal consequences may arise.

(The author is Partner at Nangia Andersen LLP)

Published on February 07, 2021

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