Restricted Stock and Restricted Stock Units - Snapshot

There are many forms of equity compensation. Restricted Stock and Restricted Stock Units are one of the many ways of rewarding the employees. Restricted stock and restricted stock unit (RSU) awards, alternatives to stock options, are an increasingly popular form of employee compensation.

Reproduced below is a snapshot of the same:

Restricted  Stock	Restricted  Stock Unit
Actual stock issued at grant, subject to vesting restrictions	A unit has value equivalent to one share of common stock, but no shares are issued at time of grant
Upon issuance, stock typically held in escrow, custodial, book entry or electronic accounts until vested	At release the units are converted into common stock
Stock released to employees at vest	Shares are issued at release — providing opportunity to defer income taxation by deferring the release date and receipt of the underlying stock
Typically entitled to voting and dividend rights	No voting rights, No dividends, but company may elect to pay dividend Equivalents
Eligible for Section 83(b) elections	Not eligible for Section 83(b) election

Comparison of tax treatment of Restricted Stock to Units

Event	Restricted  Stock	Restricted  Stock Unit
Grant	Not taxable at grant unless Section 83(b) election is filed	A unit has value equivalent to one share of common stock, but no shares are issued at time of grant
Vest	Income and FICA taxation on current value	FIC A taxation on current value
Release	No taxable income	Income taxation on current value
Sale	Capital gain/loss	Capital gain/loss

I don't want to pay taxes

Query

I have short term capital gain on sale of stock options but i don't want to pay any taxes. Is there any tax planning possible (not tax evasion) within the parameter of Income Tax Act? Alternatively  can we plan for losses to avoid payment of taxes?

Solution

The answer may be No on the very first thought. How can any one plan for losses to set off short term capital gains. But when we dwell inside the Act, we find there is a possibility to do so if we take appropriate action. The same could be explained with the help of an example:

I purchased 100 shares of Reliance Industries Limited (RIL) @ INR 2000 on 5th January 2011 after the company announced bonus issue in the ratio of 1:1. The company has fixed the record date as 15th February 2011. I sold 100 shares of RIL on 20th February 2011 at 1100. No. of shares held after bonus issue is 200 shares

Capital Gain on sale of shares:

Sale Consideration          : 1,100,00 (100*1100)
Purchase Price                : 2,000,00
Short Term Capital Loss  : 90,000

If the bonus shares alloted is held for more than one year from the date of acquisition, and sold on a recognized stock exchange and securities transaction tax is paid, capital gains would be exempt. However if the same is sold before one year capital gains would be computed in the manner as indicated below:

Sale Consideration                     : Sale Price * 100 (no. of shares)
(-) Purchase Price                      : NIL
Short Term Capital Gain / Loss  :

The short term capital loss arising on sale of RIL could be used to set off short term gains arising on sale of stock options

Extended Business Travelers: Policy or No Policy?

Due to globalization, international business travel has increased significantly over the past five years. As a result, many companies are formalizing these business trips through their international assignment policy. So, what qualifies and why should you have a formal policy?

A typical extended business traveler (EBT) is defined as an employee working abroad for more than 30 days, but for less than 180 days. The number of days in the destination country within the previous 12 months and the timing of an assignment are important issues, as they may create tax and immigration compliance risks for the employer.

Typically, EBTs are used due to specific business needs that develop unexpectedly. A manager may decide to extend business trips for their employees and may be unaware of compliance risks that result. With no formal policy and tracking system in place, the employee goes unnoticed, until a problem arises. Problems that may arise from these “stealth” employees can include: immigration officials detaining employees, employee deportation or incarceration, unbudgeted business costs and a blemished company reputation.

Extensive pre-planning and due diligence can ensure compliance, while administering the program in the most cost effective manner. Revising the international assignment policy to formalize the EBT, as the company does with short-term and long term assignments, can manage the corporate risk in the areas of: tax compliance to the employee and company, reporting and withholding obligations, immigration requirements and employee tracking.

(Source: Relocation Journal)

Employment Structures for International Transfers

There are generally four structural ways of effectuating an international employee “transfer.” Either:

a) Assignment/Secondment - the employee is loaned or seconded, the difference often just being duration and semantics, from one entity to another for a period of time;

Documenting an assignment relationship usually involves a detailed agreement between the Home Company and Host Company to address treatment of payroll, tax and benefit obligations and reimbursement structure, as well as any potential mark ups. The details of this agreement will depend in large part on whether the

arrangement is between related companies (intra-company assignment) or not (inter-company assignment). In addition, the Home Company entity should provide a letter to the employee explaining the terms of the assignment. A “one off” of this arrangement may also be possible where the assignment is for a short period of time, such as a few months, and in which case there may not be a formal assignment agreement between the companies, but rather just an assignment letter to the employee.

Finally, if the employee was not originally hired by an international holding company, assignments are sometimes structured such that employment is first transferred to an international holding company

through termination and rehire, and then assigned to the Host Company. Among others, this is to shield the Home Company, particularly if it is the ultimate parent company, from tax and employment liability. At the same time, depending upon the location of the international holding company, the employees may still be able to enjoy the benefits they enjoyed in their original employment.

b) Transfer - the employee is terminated by the current employer and hired by the new employer in the host country;

In the transfer scenario, the employee’s employment with the Home Company is terminated and the employee is rehired by the Host Company. This is the preferred approach from a pure employment law perspective because it creates a “clean break” between employing entities, and thus clarity as to applicable laws. Since this option does involve a technical termination of employment, however, all e.g., the final paycheck and vacation payout, unless the employee agrees to transfer vacation and waive notice and severance, if any) associated termination obligations and benefits are triggered.

c) Transfer followed by assignment/secondment – the employee is terminated by the current employer and hired by the company’s global employment company and then seconded to the host company;

This alternative is something of a hybrid, combing elements from both secondment and transfer structures.

First, the employee is terminated by the Home Company.

Second, the employee is hired by the Home

Third, the employee is seconded to the Host Company.

d) Dual employment - the employee actively maintains more than one employment relationship simultaneously.

In the dual employment scenario, the employee has two active employment relationships.

Dual employment relationships often are favored by high-level executives for international tax planning reasons, although employers should be cognizant of the perceived use of such agreements to avoid local tax obligations and proceed carefully.

Documenting a dual employment relationship usually involves one employment agreement between the employee and one company within the group, and a second employment agreement between the employee and another company within the group. These agreements should be carefully drafted to appropriately dovetail and supplement each other.


(Source: Baker & McKenzie)

Social Security Agreement (SSA) - An overview

Country	Signing Date	Effective Date	Duration	Detachment	Exportability of Pensions	Totalization
BELGIUM	3-Nov-06	1-Sep-09	5 Years	Yes	Yes	Yes
CZECH REPUBLIC	9-June-10		5 Years	Yes	Yes	Yes
DENMARK	17-Feb-10		5 Years	Yes	Yes	Yes
FRANCE	30-Sep-08		60 months	Yes	Yes	Yes
GERMANY	8-Oct-08	1-Oct-09	48 months	Yes	No	No
HUNGARY	3-Feb-10		5 Years	Yes	Yes	Yes
KOREA	19-Oct-10		5 Years	Yes	Yes	Yes
LUXEMBOURG	30-Sep-09		60 months	Yes	Yes	Yes
NETHERLANDS	22-Oct-09		60 months	Yes	Yes	No
NORWAY	29-Oct-10		60 months	Yes	Yes	Yes
SWISS FEDERATION	3-Sep-09		72 months	Yes	Yes	No

Impact on International worker of the recent amendment in PF regulations: Some basics

Description	Provisions prior to amendment	Provisions Post amendment
Contribution	Employee contribution is restricted to 12% of salary*	No change
	Employer makes a matching contribution i.e. 12% of salary.  However 8.33% of INR 6,500 goes towards pension fund and the balance goes towards provident fund i.e. [ 12% of salary – (8.33% of INR 6,500)]	The restriction of contribution towards pension fund i.e. 8.33% of INR 6,500 seems to have been removed. We are seeking clarity on this from PF authorities
Interest	Interest is paid at 9.5% on total accumulated deposits	Interest is paid at 9.5% on total accumulated deposits. However, the government is planning to stop interest payments on accounts which are dormant for three years or more
Withdrawal of Provident fund	Withdrawal was permitted on cessation /termination of employment. Application for withdrawal could be made after two months from the date of termination. Expats were able to withdraw the contributions after two from the end of Indian assignment.	Withdrawals permitted on retirement from service after attainment of 58 years subject to some exceptions.
Withdrawal of Pension fund	Permissible if the employee works for more than 10 years before cessation of employment. As the amount of contribution was limited to INR 542 per month, it was not a major cost for companies	Not permitted unless the international worker is from a SSA country. Further the allocation it seems has been changed. i.e. 8.33% needs to be computed on the total salary and not restricted to INR 6,500. It would increase cost of assignment significantly.
Mode of payment of PF	The amount shall be payable only to the members bank account in India	Provision has not been changed but due to deferment of receipt, it becomes practically impossible to recover the amount from PF authorities.

Residential Status: Some Guidance

Under the income tax act a individual would be resident in India, if he is physically present in India for a period of:

(a) 182 days or more during  the financial year or

(b) 60* days or more during the financial year & for an aggregate period of 365 days or moreduring the immediately preceding four financial years

Note: A financial year is a  period of twelve months from April 1 to March 31

A person would be resident & not ordinarily resident if he satisfies the following additional conditions:

(1) he has been a non resident in India in 9 financial years out of the 10 financial years immediately preceding the relevant financial years

(2) his physical stay in India is less than or equal to 729 days during the seven financial years immediately preceding the relevant financial year

However if he does not satisfies both the additional conditions he will be treated as a Resident and Ordinarily resident in India

* The period of 60 days stands extended to 182 days in case of a citizen of India leaves
India for the purpose of employment outside India.

“For the purpose of employment” has been discussed in some judicial precedents.
The same is reproduced below:

ITO vs. Abbott Laboratories (P) Ltd, 31 ITD 183 (ITAT Bombay)

–        It would mean posting outside India either temporarily or for a long period, and when an employee working in India goes abroad for a few days, he cannot be said to have an “employment outside India”

Second ITO vs. K Y Patel, 33 ITD 714 (ITAT Bombay)]

–        Merely undertaking tours abroad in connection with one’s employment in India did not attract the application of 182 days rule so as to convert a resident into a non-resident

The case discussed the distinction between ‘for the purposes of’ and ‘in connection with’ employment outside India

British Gas India Private Limited (AAR 725 of 2006)

The AAR held that to qualify as a person who has left India “for the purposes of employment”:

•          A person need not be unemployed at the time of leaving India for providing services outside India

•          The fact that he was already employed at the time of leaving India was not relevant.

AAR concluded that there is a difference between the word ‘for employment” and “for the purposes of employment”