Do ESOP benefits travel with you?

Homi Mistry Niji Arora | Updated on August 04, 2013 Published on August 04, 2013


For globally mobile employees, the taxability of their stock options needs to be examined in the home and host countries.

Many multinational companies are issuing benefits in the form of stock options to their employees, who are sent to different countries on deputation. Hence, the taxability of the employees’ stock options needs to be examined in the home country as well as host country.

According to Indian domestic tax law, stock options granted to an employee are to be taxed at the time of allotment/transfer of shares. The ‘fair market value’ (to be determined as prescribed) as on the date of exercise, as reduced by the exercise price, is to be considered as a perquisite in the hands of the employee. However, the law is silent in the context of taxability of stock options of globally mobile employees. Hence, the issue arises as to whether the employee should be taxable on the entire perquisite value arising, or only on the proportionate period for which he/ she exercised employment while he/ she was in India. Furthermore, there is a question as to whether the period of proportioning the gain should be grant to vest, or grant to exercise.

A recent Delhi Tribunal ruling in the case of Robert Arthur Keltz discussed this issue. Robert Keltz, from the US, was sent on deputation to the company’s liaison office in India. He qualified to be Not Ordinarily Resident (NOR) in India during the relevant assessment year. During the year, the employee exercised certain options. The relevant dates are as below:

Date of grant: January 9, 2004

India assignment start date: April 1, 2006

Date of vesting: January 9, 2007

Date of exercise: February 1, 2007

The employee offered to tax the proportionate gain for the period he was in India during the grant period and filed his return accordingly. The assessing officer completed the assessment by considering the entire gain arising on exercise of the stock option as taxable in India. The Commissioner of Income Tax (Appeals) [or CIT(A)], held that only proportionate benefit that pertains to services rendered in India during the grant period should be taxable here.

The CIT(A) relied on the Fringe Benefit Tax (FBT) Circular 9 of 2007, Organisation for Economic Co-operation and Development (OECD) guidelines on treatment of stock options, and rulings of the Delhi Tribunal in the cases of Eric Moroux and Ellis D. Rozario. In these rulings, it was held that only proportionate salary would be taxable in India if a part of the activity by the assessee is not related to any India-specific activity.

Under the earlier FBT regime, the Central Board of Direct Taxes had specifically prescribed the methodology for taxing fringe benefit when employees were present in India for only a part of the grant period. It provided that the taxable value of fringe benefit would be the proportionate amount that the employee was in India. The proportionate value would be determined by applying to the value of the fringe benefit, the proportion that the length of the period of stay in India by the employee during the grant period bears to the length of the grant period.

Furthermore, the OECD model commentary also recognises the principle of apportionment. It states that the stock option benefit derived from employment is to be attributed to each country where the employment is exercised. The Tribunal upheld the above view taken by the CIT(A) and held that only the proportionate amount of stock benefit that pertains to the period of services rendered in India should be taxable in India.

The above ruling seeks to bring some clarity to the issue of taxing stock benefits in the hands of a mobile NOR. However, lower level authorities may still seek to tax the entire stock gain arising to an employee, if he/ she is in India at the time of allotment.

Homi Mistry is Partner, and Niji Arora is Manager, Deloitte Haskins & Sells

Published on August 04, 2013
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