Are ESOPs of foreign companies covered under foreign assets?

By Archit Gupta

Taxation of ESOPs: It is a general practice in organizations to give employee stock options (ESOPs) — shares of the company at a lower price than their fair value. It’s common among the Indian subsidiaries of foreign companies as well.

Foreign assets are any assets that are owned or held by a person or entity outside of their country of residence. Some examples of foreign assets include Savings, deposit, and brokerage accounts held with a foreign financial institution and sock or securities issued by a foreign corporation or person.

Where an Indian employee is allotted shares of a foreign parent company, it is regarded as holding foreign assets and needs disclosures in Indian tax return filed by such an employee. Tax on global income is dependent on the residential status of the person. So, any income accrued from ESOPs of foreign entities will be taxed in India.

The tax treatment of ESOPs of foreign entities is not very different from the tax treatment of ESOPs of Indian entities.

The first instance of taxation is when the resident employee entitled to ESOPs of a foreign company exercises the ESOP. Here the difference between the fair market value of the stocks and the predetermined price paid by the employee is taxed as a perquisite in the hands of the resident employee.

The second instance is the capital gains made by the employee at the time of sale of such stocks in the open market. Such capital gains are taxed under Income from Capital Gains.

The period for holding foreign stocks for tax purposes is 24 months. The short-term capital gains are taxed at the slab rate whereas long-term gains are taxed at the rate of 20% along with the indexation benefit.

ESOPs from foreign companies may also be taxed in the country in which the shares are listed or the company is headquartered. In case the local rules of the foreign country tax it, you can claim benefits under DTAA (Double Taxation Avoidance Agreement).

Typically as per the DTAA, ESOPs would be taxable only in the country where employment is exercised. In this case, it would be India. Therefore, in most countries (DTAA countries), no tax should be levied on the ESOPs granted, provided the tax residency certificate is submitted. However, capital gains arising from the sale of the sales allotted would most probably be taxable in that foreign country.

ITR Filing

The ESOPs allotted by foreign parent companies to their Indian employees are considered foreign assets. Hence, these employees cannot fill up the regular ITR1 form. The ITR1 form is only for Indian taxpayers who have a salary-based income from an Indian company without any foreign asset in their possession.

If the Indian taxpayer is earning from any secondary source or has foreign assets, they must fill out the ITR 2 or ITR 3 form. They will also be required to disclose all their foreign assets, shares of foreign companies, and any other income source not based in India in Schedule FA.

According to the exchange control regulations of India, proceeds of the sale of stocks under ESOPs have to be repatriated back to India within a period of 90 days from the date the sale has been made.

(Author is Founder and CEO, Clear)