Foreign Parent ESOPs and RSUs for Indian Employees: Tax, FEMA and Cost Recharge Issues

Many foreign groups give their Indian employees shares or units of the foreign parent through an employee stock option plan or a restricted stock unit plan. Because the benefit is delivered by the parent and not by the Indian employer, three areas need care: income tax on the employee, foreign exchange compliance, and cost sharing between the companies.

Tax in the employee's hands

• On exercise or vesting, the difference between the fair market value of the share and the price paid is taxed as a perquisite under the head salary.
• The Indian employer is generally responsible for deducting tax at source on this perquisite, even though the shares are issued by the parent, so it needs the exercise data from the group.
• On a later sale, the gain is taxed as a capital gain, with the cost taken as the value already taxed as perquisite. Holding period and the rate depend on the type of asset and the rules in force at the time of sale.
• Foreign tax paid, if any, may be claimed as a credit, subject to the rules and the treaty.

Foreign exchange position

• An Indian resident employee who acquires foreign shares under a plan of the parent is covered by the overseas investment rules framed under FEMA, which allow such acquisition under a scheme offered by the foreign entity subject to conditions.
• Proceeds of sale must be brought back to India within the time prescribed.
• The employee may also have to disclose the foreign assets in the income tax return in the schedule for foreign assets, and compliance under the Black Money Act should be checked.

Cost recharge between group companies

• If the Indian subsidiary reimburses the parent for the cost of the plan, the payment should be supported by an agreement and by the plan documents.
• The deduction for the reimbursement, the withholding tax on the payment and the transfer pricing treatment should be reviewed together.
• A payment made without a written arrangement is often challenged.

Practical steps

1. Get the plan rules and grant letters from the parent.
2. Set up a feed of vesting and exercise data to the Indian payroll team.
3. Fix a policy for the exchange rate and valuation date used for the perquisite.
4. Brief employees on disclosure and repatriation duties before the first vesting date.

The author is an M.Com., FCS, LL.B., is a Partner at A2 Consultants, Hyderabad, which advises foreign companies on entering and operating in India. The views are personal and for general information only.