Restricted Stock Units (RSU) & Exit Tax
Restricted Stock Units (RSU) & Exit Tax: One common question Expatriates have when they are getting ready to expatriate from the United States, is what happens to Restricted Stock Units (RSU) — are they taxed at exit? Generally, whether or not Restricted Stock Units are taxable at exit is based on whether or not the RSU is considered eligible deferred compensation or ineligible deferred compensation. When it comes to RSUs, there is no mark-to-market tax implication. Rather, it is categorized as deferred compensation. When the Restricted Stock Unit is considered eligible deferred compensation — there is no deemed distribution at exit, and a 30% tax is withheld at the time payments are made. Conversely, when a restricted stock unit is ineligible deferred compensation (for example, if it stems from a foreign company), then the value is deemed distributed the day before expatriation — and the tax consequences will be immediate at the time of exit. Let’s take a brief look at restricted stock units and the exit tax.
Definition of a Restricted Stock Unit
When a person receives a Restricted Stock Unit, they are not actually receiving the stock. Rather, they are receiving a “unit,” which is not immediately taxable — since the person does not actually have full rights to the shares. At a future date, when the shares vest, the Taxpayer is entitled to the value of the share. At that time, it is considered income, and the question then becomes whether or not the taxpayer performed an IRC Section 83(b) Election previously at the time of receipt of the transfer (RSA but not RSUs) — to determine the basis going forward.
How is Deferred Compensation Treated for Exit Tax?
Deferred compensation is treated differently than most other types of assets/income at the time of exit. For example, when a person has stock, it is treated as mark-to-market. When a person has certain tax-deferred items — they generally lose their tax-deferred status at the time of calculating the exit tax and are deemed distributed. When it comes to deferred compensation such as Restricted Stock Units, the tax implications are determined by whether or not the income is considered eligible or ineligible deferred compensation.
Eligible Deferred RSU Compensation
When the compensation is considered deferred and eligible, the income is not taxed at exit. For example, when a person has a 401K, that is considered eligible deferred compensation — which is generally how restricted stock units would also be treated from a US employer. When the taxpayer exits, that amount is not deemed distributed on the day before expatriation.
Instead, once the taxpayer begins receiving income in the future (so it will not be deferred at that time since it is being realized), the US administrator withholds 30%. And, while certain withholding cannot be minimized — that does not mean certain tax consequences cannot be minimized — depending on applicable treaty rules.
Ineligible Deferred RSU Compensation
Alternatively, when a person has foreign deferred compensation such as a foreign pension plan or RSU’s from a foreign company — the general proposition is that the income is ineligible — and deemed distributed on the day before expatriation. While with a foreign retirement plan, this is relatively straightforward and the deemed distribution amount is equal to the amount earned by the US Person (taking into consideration step-up basis for years the foreign deferred income was accumulated before the person became a US person and while they were working outside of the United States) — as to the RSUs, it is more complicated.
The primary concern is of course that the shares may not have actually vested yet. If you are in a situation where you have RSU’s from a foreign employer that could be considered ineligible for deferred compensation purposes and exit tax, you should evaluate the situation very carefully to assess the tax implications.
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Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and expatriation.
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