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Taxation of Employee Stock Options granted by foreign parent company
Employee stock options are a common form of compensation provided by companies to their employees. However, understanding the tax implications of such options can be complex. In this article, we will discuss the tax treatment of employee stock options issued by the foreign parent company.
A. Tax Treatment for employee at the Time of Exercise
According to Taxation Bureau Tax Ruling No. 09404527550, when a foreign company grants stock options to employees of its subsidiaries and branches registered in Taiwan, the income regarding the stock option is subject to tax. The income from stock options is considered ordinary income and is calculated as follows:
Employee Income on Stock Options = (Fair Market Value - Exercise Price) x (Proportion of Days in Taiwan)
The fair market value is the value of the shares on the date of exercise, and the exercise price is the price at which the shares can be purchased. The proportion of days in Taiwan is the number of days the employee resided in Taiwan during the period between the grant date and the vesting date.
If the employee does not reside in Taiwan during the grant date and the vesting date, they are not subject to tax on the income from the stock option. However, if the employee resides in Taiwan during that period, they are subject to tax on the income from the stock option.
B. Tax Treatment for employee at the Time of Selling Shares
When the employee sells the shares acquired through the stock option, any gain is considered overseas income and is subject to Basic Income tax. However, there is a 6.7 million NTD exclusion for overseas income.
C. Tax Treatment for the Taiwan Subsidiary
There are no tax implications for the Taiwan subsidiary which employs the employee. However, the company should report the income of the employee who was granted the stock options by the foreign parent company and exercised employee stock options in the previous year to the local taxation bureau in January and issue a tax statement to the employee in accordance with Article 89, Item 3 of the Income Tax Law.
Suppose John, a British working for a Taiwan company, was granted 500,000 stock options on July 1, 2020, with an exercise price of $10 per share. The vesting period is two years, and John can sell the shares on July 1, 2022. The market price is $18 per share, and John sold the shares for $22 on December 20, 2022.
John's income at the time of the exercise of the stock option is:
Employee Income on Stock Options = (18 - 10) x (3/4) x 500,000 = $300,000
John's income at the time of selling the shares is:
Gain = (22 - 18) x 50,000 = $200,000
Employee stock options are subject to tax in Taiwan, and it is important for both employees and employers to understand the tax implications of such options. By doing so, they can ensure compliance with the relevant tax laws and regulations.
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