Cross-border taxation of employee share incentive schemes

Abstract

One way for employers to attract and retain the services of employees who are in a position to make a material contribution to the successful operation of the employer is to offer such selected employees the opportunity to participate in an employee share incentive scheme in terms of which they will receive certain benefits. Generally, a benefit derived from the participation in an employee share scheme is taxable as employment income where the granting of such benefit is linked to the employee’s employment or in respect of services rendered by that employee to his employer.

Countries often have a different basis for the taxation of benefits derived from participation in an employee share incentive scheme. In South Africa, the benefits from the participation in an employee share incentive scheme are taxed at the time such benefit vests (i.e when the employee becomes unconditionally entitled thereto). However, in Belgium, the benefits are taxed upfront at the time it is granted. While in India, the benefits are only taxed at the time of transfer or allotment (exercise). Where employees receive employee share incentive scheme benefits in respect of services rendered in more than one country, double taxation could occur as a result of each country taxing the benefits a different manner. If two or more countries seek tax the benefit or a portion thereof they often follow different approaches to the allocation, timing and characterisation of income derived from participation in an employee share incentive scheme. This could result in the measures which aim to prevent double taxation, in DTA’s as well as the South African domestic legislation, being ineffective.

This study compares the tax treatment of benefits derived from the participation in an employee share scheme in South Africa, Belgium and India which each follow a different approach to the taxation of benefits derived from the participation in an employee share scheme. It aims to illustrate the possibility of double taxation from a South African resident perspective where DTAs and the South African legislation are not effective in eliminating double taxation.