Stock Compensation Planning for Foreign Executives Transferring to Work in the U.S.

Tax planning opportunities – and traps – exist for foreign executives transferred to work in the U.S., especially those foreign executives who do not become citizens or green card holders (whether or not the company is headquartered or incorporated in the U.S.). Significant tax planning opportunities – and traps – also exist for these foreign executives upon their departure from the U.S. Under U.S. income tax rules, taxpayers are generally subject to U.S. income tax on amounts receivedwhile they are resident aliens of the U.S. for U.S. income tax purposes (a "resident alien"), even if the income arose from activities completed before the taxpayer became a resident alien. Therefore, it is critical for a foreign national/executive moving to the U.S., who will become a resident alien, to plan the timing of his or her recognition of income and payment of deductible expenses.

It may be possible and advantageous for the non-resident alien employee to make a so-called §83(b) election as to certain equity-based compensation awards the employee recently has received, or will be receiving, in the year before becoming a U.S. income tax resident, including:

  • Restricted stock awards,
  • LLC profits interests, and
  • "West Coast" stock options

Code Section 83(b) allows a taxpayer to make an election (a "§83(b) election"), within 30 days after receiving a transfer of property, to recognize income, despite the fact that the transferred property remains subject to a substantial risk of forfeiture (and, thus, ordinarily would not be recognized as income). A grant of restricted stock or LLC profits interests, or the exercise of "West Coast" stock options and the receipt of restricted stock, generally would be deemed transfers of property under these rules.

For a non-resident alien employee who will soon become a resident alien, making a §83(b) election as to restricted stock should cause the employee to recognize income on the value of the restricted stock transferred to the employee while he or she is still an non-resident, rather than recognizing income (and paying U.S. income tax) on the full value of the stock when the employee is a U.S. income tax resident (including the value attributable to non-U.S. workdays) and the stock vests (the restrictions lapse). By making the §83(b) election, the non-U.S. source income portion of the compensation income attributable to non-U.S. workdays would not be subject to U.S. tax.

Similarly, if a non-resident alien employee who will soon become a resident alien makes a §83(b) election as to "West Coast" stock options, the employee would recognize income on the value of the restricted stock transferred to the employee while he or she is still a non-resident, rather than recognizing income (and paying U.S. income tax) on the difference between the exercise price and the fair market value of the stock when the employee is a U.S. income tax resident and exercises the stock option (the restrictions lapse).

For a foreign national who will soon be moving to the U.S. but is a non-resident alien for U.S. income tax purposes as of the date of the election, only the portion of the stock option or restricted stock grant that is U.S. source income is subject to U.S. income tax (generally the U.S. work-day related portion). The foreign source element of the award generally would not be subject to U.S. tax. When the foreign national eventually sells the stock acquired upon vesting of the award, any appreciation would be taxed as long-term capital gain (if the individual were still a U.S. resident). By contrast, if the foreign executive did not make a §83(b) election, when the stock vests after the employee has transferred to the U.S. and become a U.S. income tax resident alien, the entire taxable amount would be subject to U.S. income tax (not just the U.S.-source income portion of the income).

The risk with a §83(b) election is that the exercise cost and any tax paid would be lost if the individual later forfeits the restricted stock (e.g., because of early employment termination).

On December 16, 1944, at midnight, German forces launched the Ardennes Offensive (also known as the Von Rundstedt Offensive), their last major offensive of the Second World War, which eventually became known as the Battle of the Bulge, through the densely forested Ardennes mountain regions of Belgium and Luxembourg. The Germans achieved total surprise and made significant advances (the "bulge" being the initial incursion the Germans put into the Allies' line of advance, as seen on a map) toward their ultimate goal of Antwerp, before American forces, despite being completely surrounded in Bastogne, halted the advance. The battle ended January 25, 1945, with estimated casualties of 89,500 Americans, 1,400 British and 67,000 Germans. I visited Bastogne and the entire battlefield area in 2007 and it was well worth the trip.