How to offer stock options (ESOP) to foreign employees

An employee stock ownership plan, or ESOP, is a powerful tool to attract and retain great workers for your business. But offering stock options to full-time employees in other countries is much more complicated than simply paying international contractors.

To realize the advantages of offering stock options to your international team, you have to plan and execute your ESOP strategy effectively. That means considering where your employees live, how to handle the taxes, and what your complete global benefits packages should look like.

This article will walk you through all the critical information you need to create an employee stock ownership plan that will help your company lock in the best global talent in your industry. We will cover important definitions and practical steps while answering all your most pressing questions about how to share equity in your business with your team.

How to offer stock options to foreign employees

To offer stock options to foreign employees, you must do the following:

• Understand the different types of equity awards

• Learn the common terminologies

• Plan for taxable events, both for employees and employer

• Remain compliant with securities laws in the country of issuance

• Incorporate your ESOP into a global benefits plan

Each of these steps includes multiple sub-steps. International tax and securities laws can be especially tricky, even for people who are familiar with offering stock options to domestic employees. Fortunately, we are here to help walk you through the process.

What is an international Employee Stock Ownership Plan (ESOP)?

An ESOP, or Employee Stock Ownership Plan, is a system used by companies to grant equity in the business to their employees. Employee Stock Options, or ESOs, are a type of equity granted by companies to employees through ESOPs. A stock option grant gives an employee the right to purchase a specific number of shares in the company at a set price.

The price the employee pays for the stock through an ESOP depends on the “strike price” or “exercise price.” This price is set when the stock options are offered to the employee. If the share price is higher than the exercise price, the employee can buy the stock for less than the current price of the shares.

Here’s an example. Say an employee receives a stock option grant of 1,000 shares with an exercise price of $10 per share. If the employee chooses to exercise the option, the employee must pay $10,000 to receive all 1,000 shares. If the stock is worth more than $10 per share, the employee profits on the difference.

Common terms to know regarding employee stock options

Here are a few terms you should know to understand the rest of this guide related to ESOPs:

• Stock options —The right to purchase a set number of shares for a fixed price, also known as the “exercise price” or “strike price.”

• Stock option agreement — Also called an “option grant,” a stock option agreement is an agreement between a company and an option holder containing the terms, conditions, and restrictions pertaining to the stock options in question. This agreement should include the type of stock options, the number of shares, the strike price, the vesting schedule, and the expiration date.

• Taxable event — An event that triggers taxation for the option holder. Taxable events may include granting vesting, exercising, selling, and holding stock. Taxable events vary by the type of the award and the country or state in question.

• Vesting — The process for earning an asset, like stock options, usually set as a period of time. Employees can only exercise options that have vested.

• Vesting schedule — Also called a “vesting period,” the vesting schedule determines when the option holder may exercise the options. A traditional vesting schedule (common among startups) is four years with a one-year cliff, meaning 25% of options vest after one year of employment, and the remaining options vest monthly throughout the next three years.

• Cliff — The time period after which the first portion of an option grant vests. A typical vesting schedule is four years with a one-year cliff.

• Strike price — Also called the “exercise price,” the strike price is the set price per share at which an option may be purchased at exercise.

• Fair market value (FMV) — The price for which the stock would sell if traded on the open market. For private companies, the fair market value is determined through a private audit process.

• Spread — The difference between the strike price and the fair market value.

• Liquidity event — An event such as an acquisition, merger, or IPO (initial public offering) providing a significant change in the ownership structure of the company. A liquidity event often means that employees who were only able to hold their stock options become able to sell their exercised options, either to investors or on the open market.

What does it mean to vest employee stock options?

Most companies offering stock options to employees through an ESOP require employees to work at the company for a certain period of time before they can exercise their shares. This period of time is commonly referred to as the “vesting schedule.” After the employee has worked at the company long enough, they earn the right to purchase their options.

Companies can structure their vesting schedules in different ways. Many startups, for example, choose to offer stock options on a four-year vesting schedule with a one-year cliff. This means the employee would not vest any stock for the first year, but after one year, the employee receives 25% of the total stock option grant. After that, the employee would vest 1/36th of the remaining stock each month. When four years have passed, the employee will be fully vested and can purchase the entirety of the stock option grant.

What are the benefits of offering stock options to foreign employees?

Including stock options as part of your total compensation package for foreign employees is a great way to attract and retain the best talent on the market. Many highly skilled employees expect to receive stock options as part of their benefits packages. Offering stock to employees incentivizes good performance, because when the company does well financially, the stock options gain value and the employee benefits.

For foreign workers specifically, offering stock options can be a great way to stand out from other potential employers. Many companies are not aware of how to offer stock to employees in other countries. If you offer options to employees in other countries, your company can immediately stand out as a serious potential landing spot for top candidates. In addition, having a small ownership percentage in the company can help employees to feel more like part of the team.

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What are the different types of equity incentives?

Not all employee equity incentives are the same. Stock options, for example, require employees to purchase their shares before they can own them. Employee Stock Purchase Plans, or ESPPs, allow employees to make regular investments in the company’s stock at a discounted price. Employees spend money from their salary, usually capped at a specific percentage, to purchase shares. Awards, meanwhile, are stock given to employees without requiring employees to pay for them — the stock is simply granted to the employee for free.

Here are a few different types of equity incentives companies can offer employees:

• Stock options, including ISOs (Incentive Stock Options) and NSOs (Non-Qualified Stock Options)

• RSUs (Restricted Stock Units)

• VSOs (Virtual Stock Options)

These are not the only forms of equity incentives, but they are some of the most popular. Let’s look at each one in more detail.

ISOs (Incentive Stock Options)

ISOs are a type of stock option in the US issued directly from the employer to the employee. These types of stock options can only be given to employees, not investors, and have a tax-advantaged status in the US. However, it is not possible to issue ISOs to employees in another country using an employer of record, or EOR, because the issuer of the ISO must be the worker’s direct employer.

Because your EOR employs workers in other countries on your behalf, you cannot legally offer ISOs to foreign employees using ANY employer of record service. You do have other options, however.

NSOs (Non-Qualified Stock Options)

NSOs have different tax treatment relative to ISOs in the US. However, unlike ISOs, you can offer NSOs to workers in other countries while you are using an employer of record. This allows your foreign employees to receive equity in your business legally, just like your domestic employees. Offering NSOs is the most common method of offering equity to international workers. NSOs may be offered to anyone providing services to a company, which can include advisors and contractors.

RSUs (Restricted Stock Units)

RSUs are a form of compensation in which the company provides its employees shares when certain conditions are met. RSUs are awarded on a vesting schedule and do not need to be exercised, which means employees do not have to pay to receive them, unlike options. Companies can also offer to pay RSUs in the form of cash instead of stock. However, RSUs can come with tax complications, as RSUs held for less than one year and RSUs granted as stock are treated as regular income and taxed accordingly in the US. RSUs received as stock and held for more than one year are subject to capital gains tax.

RSUs can be “single trigger” or “double trigger” options. A single trigger RSU requires only one condition be met to vest, usually time spent with the company. A double trigger RSU usually requires both time spent at the company and a liquidity event, like a secondary sale or IPO.

VSOs (Virtual Stock Options)

VSOs are not technically stock in the strictest sense. Think of them more as a right to a cash bonus that is tied to the price of the stock. A company may grant VSOs to reward employees for the company’s performance without actually granting equity, similar to RSUs granted as cash. However, unlike RSUs, which can be received as stock, VSOs are always received as cash and are therefore subject to taxation as income in the US. VSOs are common in European countries and usually payable after a liquidity event, such as an initial public offering (IPO) or the company’s acquisition. Companies use VSOs to give stock to employees without providing voting rights as well.

What is the difference between ISOs and NSOs?

Both ISOs and NSOs are stock options. The difference is in the tax treatment of the options by the United States government. While these are not technically different kinds of equity incentives, they do act as important classifications in how equity incentives are structured. It is important to understand this difference if you are offering stock options to a foreign employee through an employer of record.

Three equity incentives your company can consider for foreign employees

• Stock options: This type of equity is, well, optional. The employee has the right to buy the shares if they choose, as well as the right to refuse. Foreign employees are only eligible to receive NSOs, as ISOs cannot be granted to workers employed through an EOR service.

• Appreciation rights: This is the right to the value of the appreciated stock but not the stock itself. Appreciation rights do not actually grant employees equity in the company. VSOs are a type of appreciation rights.

• Awards: Awards are similar to options, but employees do not have to pay money to receive them. Many companies use stock awards as performance incentives. RSUs are a type of equity award that does not require an employee to pay.

Key considerations of offering an ESOP to foreign employees

Implementing a global equity plan raises multiple compliance questions. You must consider taxation, withholding, reporting, social insurance, and several other factors. Work with your legal counsel to ensure you fully understand the compliance requirements in each country where you wish to offer equity incentives so you can offer awards that are favorable under local laws. If you need help, you can always schedule a consultation with Remote to discuss your equity plan for your international team.

Broadly speaking, there are three things to consider when putting together an employee stock option plan:

1. Employer taxes: Tax withholding and reporting requirements for each country are important to understand. If you do not file correctly, it could lead to penalties or other consequences for your business.

2. Employee taxes: Some countries offer tax-advantaged schemes for employees, but others don’t. For example, the UK has multiple tax-advantaged schemes: Enterprise Management Incentive (EMI Scheme), Company Share Ownership Plan (CSOP), Growth Shares, and the Share Incentive Plan (SIP), all of which have different requirements and taxation.

3. Tax reporting obligations: Understanding tax obligations for stock options in multiple countries can be difficult, and tax reporting obligations in those countries can be even more so. Employers need be aware of any specific tax reporting obligation applicable to themselves and understand how these can be met as foreign company.

When considering different types of equity awards for each country, be sure to understand the tax-qualified programs available and whether there will be any negative tax treatment for employees.

The difference between an employer of record and a foreign subsidiary

Employing full-time workers in other countries requires you to do one of two things. You can either open a foreign subsidiary by creating a local legal entity or you can work with an employer of record, or EOR.

A foreign subsidiary is your own business. You are responsible for understanding the laws and distributing equity accordingly. Opening your own legal entity may provide you with more flexibility in how you offer equity to your workers in a country, but opening entities all over the world is not feasible unless you plan to expand your business fully into every country where you hire.

Most businesses hiring international workers opt to use an EOR, or employer of record. An EOR employs local workers on your behalf, allowing you to work with talent all over the world without opening entities in new countries. Partnering with an EOR is significantly more affordable for businesses hiring in multiple countries and businesses only looking to hire a handful of employees in a single country.

Not all employers of record are the same, though. Some employers of record, like Remote, own and operate their own local legal entities in every country. Others outsource their employer of record services to other third parties, creating gaps in legal protections for your workers and your intellectual property. Learn more about the differences between owned-entity and partner-dependent EORs in our guide.

Local labor laws

You cannot offer stock options to employees in other countries without a firm grasp of the labor laws that govern equity awards in those countries. For example, some countries may prohibit certain performance metrics from being considered as part of an equity grant. Other countries may not allow performance to be considered at all. Some countries may allow companies to substitute cash for stock, while others may require all employees to receive the same types of assets.

With so many countries in the world and so many regulations to follow regarding employee stock option ownership plans, you cannot afford to get complacent or to assume that one country’s laws are like another’s. Your international ESOP strategy depends on your ability to stay compliant while still offering your foreign employees the equity they desire.

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Offer stock options to international employees with Remote

You asked for a way to offer and track stock options in the Remote platform for your employees in other countries — and we have delivered. Not only can you offer options through the Remote platform, but you can also include details like number and type of options, vesting periods, and vesting cliffs as you onboard new employees.

What regulatory requirements apply to stock options offered to an external employee?

Regulatory requirements for employee stock options vary dramatically depending on the country in question. In general, though, the laws of the country where the issuing company is incorporated govern how the stock options are handled. For example, some countries offer preferential tax treatment, while others offer none. The following overview addresses local requirements that apply to stock options.

Tax laws in the foreign employees’ country of residence

Employees are generally subject to taxes on their stock options, stock awards, and cash equivalents. What those taxes look like, however, and to which assets those taxes apply, can vary tremendously.

In the US, for example, RSUs held for less than one year are taxed as short-term capital gains, the same rate as the employee’s ordinary income. Stock options held for more than one year would be subject to long-term capital gains taxes. Other countries have similar laws employees must consider.

Favored vs. non-favored tax stock options

Tax-favored stock options refer to stock options that allow employees to pay less in taxes when receiving their equity in the company or when selling their shares. Certain types of equity, like ISOs or RSUs held for more than a year, can be considered tax-favored or tax-advantaged stock options. VSOs and cash RSUs, on the other hand, are delivered as cash and are therefore not considered to be tax-advantaged options. Again, tax advantages vary by country, so check with your local counsel.

Most preferential tax treatments for employee equity plans depend on the employment relationship. In some cases, offering employees equity while using an EOR may make employees ineligible to receive certain preferential tax treatments.

An overview of ESOP taxation for foreign employees

Employee stock option plan taxes for employees working outside the country where your company is headquartered can be tricky for both parties. Let’s take a look at some of the different factors to consider.

What is the local tax treatment of stock options for employees?

As always, tax treatment of stock options for employees in other countries depends on the country. Your foreign employees must pay taxes to their local governments, not the government where your company is located. Your company, on the other hand, may be responsible for taxes in both locations, or at least tax withholding. Again, this is dependent on the laws of the country in question, so check with your legal counsel before offering an ESOP to employees in another country.

Employees who receive, exercise, and sell stock options may be taxed on each event. Employees typically pay taxes the year they exercise their stock and the year they sell. The former is most commonly treated as income tax, while the latter is capital gains. Paying taxes upon exercise can be difficult if the company is not yet public or if the shares are not being purchased privately after exercise, because employees are paying taxes based on the value of stock they have not sold yet.

For more information on localized taxes, see our guide on where remote workers pay taxes.

What is the capital gain of ESOP for foreign employees?

Capital gains taxes for foreign employees are calculated based on where the employees live. For example, employees in France might see a capital gains tax of a flat 30%, but that rate could change depending on whether the employee is an especially high or low earner. High earners pay more in France, while employees with lower salaries may be able to opt in to a different tax plan that could alter the capital gains tax rate for an ESOP.

Every country has laws related to capital gains: some simpler than the US, and some far more complicated. If you have questions about the specific capital gains tax laws in the countries where your workers reside, Remote can help.

ESOP international employee rights

What rights do employees in different countries have under ESOPs? Depending on where they live, employees typically have rights related to information, freedom to exercise, and in some cases, rights to certain levels of company ownership.

Rights related to information typically include many of the rights in India mentioned previously, such as information about vesting periods and fair market value of the stock. Regarding freedom of exercise, some countries may require employers to allow employees to exercise their shares after a certain period of time or may prohibit employers from enforcing certain vesting schedules.

Some countries, like Mexico, require companies to share profits with their employees. Navigating these laws can be tricky, but your company does not have to hand over a large percentage of its operating profits to a handful of employees simply because the local laws make it sound that way.

This is why it is essential to work with an employer of record that not only owns and operates its own local legal entities in every country where you have employees, but also to work with an EOR with deep expertise in the different types of entities and their associated rights and responsibilities. Different types of companies are classified differently, and these classifications are unique to every country. Don’t let the complications prevent you from offering stock options to attract international talent, though. Instead, find a trusted partner and let them help you expand your business in compliance with confidence.

How to set up a global Employee Stock Ownership Plan (ESOP)

Ready to offer stock to your international employees? There are a few steps to follow to make it happen:

1. Decide how much stock to set aside for your employees.

2. Work with your legal team to ensure you have an ironclad plan.

3. Identify the countries in which you will need to offer options.

4. Consult with your employer of record to understand your international ESOP opportunities.

5. Comply with the laws of the country where you are headquartered to establish the plan and the fair market value of the shares.

6. Determine what type of shares (RSUs, VSOs, etc.) to offer your international employees.

7. Manage your stock options plan and use it to attract the best international talent.

If you are ready to get started, Remote's integration with Easop can help you begin offering stock options to your international employees with ease.

How can Remote help with employee stock option plans?

Remote continuously monitors local tax and regulatory information for countries where we operate. Our legal experts can review your employee stock option agreement to make sure employees are eligible to receive and vest the options you want to offer. We can also help you construct agreements broad enough to cover any personnel that provide services to you while employed through Remote’s Employer of Record (EOR) service.

Can Remote customers offer stock options to their employees under their stock option plan?

Yes! Our clients are able to offer stock options directly to any employees who are employed through Remote’s EOR service. Stock options simply need to be offered (or converted to offer) in a compliant form, such as NSOs instead of ISOs. Remember, while you can offer ISOs to domestic employees in the US, you cannot use any EOR service to offer ISOs to foreign employees. Instead, you must offer NSOs, RSUs, VSOs, or similar.

Can Remote offer its customers' stock options as part of the benefit package to the employees?

Yes, Remote can support its customers in offering stock options to their employees. However, the customer must always give the stock options directly to the employee, as stock options are a financial instrument and only the issuing company (in this case, the Remote customer) may legally offer and hold the financial instrument.

There are many different types of option contracts (currencies, grain, loans, defaults, etc.). Most of these financial instruments are highly restricted, and you need certain licenses to offer, manage, or hold them. An exception to this is that you may offer certain financial instruments as a company (issue debt or option rights), but that doesn’t give the power to any third party to operate without a license.

Stock options must be separate from benefits packages for your foreign employees. If you do not own and operate your own local legal entity in the country in question, Remote can help you offer NSOs, RSUs, VSOs, and the like as separate offerings from your benefits plan. With Remote's help, you can offer stock options directly from your company to your employees.

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Offer an employee stock option plan to your global team

Need help navigating employee stock option plans for your international employees? Our tax and legal experts can make it happen.

We help you get it right so you can offer competitive and equitable compensation packages for all your employees — no matter where they live. Sign up now for a 30-minute global equity consultation!

Are you running a startup and looking to learn more about offering equity to your international employees? Remote’s has special advice for startup founders, as well as special pricing. Contact us today for more information.

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