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10.9 Awards to employees of non-US subsidiaries
Publication date: 30 Nov 2022
us Stock-based compensation guide
Stock-based compensation that is granted to the employees of a US company's non-US subsidiaries will generally not result in a US federal income tax deduction for the parent company. There are two specific considerations to address in this area:
- Under IRC Section 83(h), the tax deduction is granted only to the employer for whom the services were performed. If the non-US employee provides services only to the non-US subsidiary and such services benefit only the non-US subsidiary's business operations, the US parent company will not be entitled to a tax deduction for such awards.
- In certain countries, the non-US subsidiary may be entitled to a corporate tax deduction that can be calculated in the same manner as the US deduction. However, in many jurisdictions, the non-US subsidiary must bear the cost of the award to be eligible for a local corporate tax deduction. By charging the award's cost to the non-US subsidiary, the consolidated company may be able to lower its overall corporate tax expense and repatriate cash to the United States. If costs are recharged to the non-US subsidiary, the recharge of stock-based compensation costs to the non-US subsidiaries in return for cash (1) should be treated as the company's issuance of capital stock in exchange for cash or property and (2) should not result in the issuing company's recording a taxable gain or loss on the transaction. According to IRC Section 1032(a) and Treasury Regulation Section 1.1032-1(a), the US parent company would be allowed to receive cash payments from its non-US subsidiaries in exchange for its stock and would not be required to record for tax purposes any income, gain, or loss related to such arrangement. This “recharge” or “charge-back” process is separate and distinct from a company’s transfer pricing arrangements. Simply having a transfer pricing arrangement in place will not drive a local tax deduction where a local expense is required.
Before implementing a recharge agreement in a given jurisdiction for purposes of claiming a local corporate tax deduction, multinational companies should review the tax laws of each jurisdiction to ensure that foreign exchange, social tax, or treasury share issues will not limit or prohibit the recharge. Companies should also consider the impact of a recharge arrangement on the new global intangible low-taxed income (GILTI) and base erosion and anti-abuse (BEAT) taxes, which may be favorable or negative depending on each company's specific facts and circumstances. There may be a number of recordkeeping issues with such recharge agreements to ensure that costs are appropriately charged to the correct local entity and that employee income tax withholdings have been determined appropriately. Additionally, companies should consider whether statutory accounting requirements may impact the timing or amount of the deduction. For example, an amendment to IFRS 2 provides guidance on the accounting for stock-based compensation in subsidiary financial statements. This guidance may impact the timing and amount of a corporate tax deduction in certain jurisdictions. Companies should consider consultation with local accounting and tax advisors to determine how the different requirements interact.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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