Foreign stock options

I live in the U. S. How can I trade stocks in China and India?

Kluskowski, Paul.

This is a function of your brokerage. There are several that offer trading on foreign exchanges and many that do not. Google the phrase "brokerage foreign stock exchange" to get started. There are a few well-known American brokerages that offer trading on the foreign exchanges. Do bear in mind that there are unique risks to with trading on foreign exchanges, including currency exchange risks, liquidity risks, transparency risks, and so on. Ask for the disclosure document that outlines these risks so that you may make an informed decision as to how to invest/trade your funds.

Investopedia.

Foreign markets have always been an object of envy to domestic investors because the indexes in some foreign countries have produced double - to triple-digit returns in the past. For example, the SETI 100 in Bangkok rose 117% in 2003, and Russia's RTS Index gained 72% in the first nine months of 2005. The very high returns in foreign markets lead investors to look for ways to invest in them.

Clark, David.

ADR stands for "American Depository Receipt," and it's a way of making hard-to-trade foreign stocks available to investors in the United States. Buying and selling ADRs lets you participate in foreign markets without having to deal with unfamiliar currencies, foreign taxes, and inconvenient per-share prices.

Swanger, Rose.

The envy of rising Chinese & Indian stock markets has many people contemplating how to invest directly in those markets. First of all, it’s almost impossible because they have many layers of restrictions from both domestic and foreign markets regulations. Secondly, even if you find some brokers who have the platform to do the trade, the cost can be exorbitant. Every bit fees will eventually add up and erode your return. Thirdly, comparing to many other countries, the U. S. and other developed markets have tougher and stricter rules and regulations in place; whereas emerging markets are Wild West for financial regulations. If you recall, last July when Chinese official announced major restrictions on trading and halted IPOs, half of the entire stock market froze. The situation was so murky that no one knew what the Chinese market was doing since the suspensions of trading and made it impossible to determine stock price. On the other hand, on this side of the world, the U. S.-based Chinese ETFs were actively trading. Like many investors, no one likes to be in the dark to play your hard-earned money. Partner up with a professional who can learn your goals, risk tolerance, and find the funds from a vast investment mutual fund and ETF universe to suit your needs. Cheers!

Fingerman, Rick.

Trading individual stocks in these countries can be tricky. If you decide to go this route, I suggest using a good mutual fund or ETF (Exchange Traded Fund). This way, you are not putting all of your eggs in one basket as you would be owning more than one company.

As with any investment, be sure you understand the risks and costs involved before investing.

Abstracts.

The authors outline the tax consequences for US employees who have been granted stock options or other forms of equity compensation by non-US multinational companies. Topics include federal tax consequences upon sale, payment methods and reporting requirements, social security obligations, state and local taxes, and withholding obligations.

Publication Name: Journal of Corporate Taxation.

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Overview of foreign taxation of stock options.

The author discusses the U. S. and foreign taxation of incentive employee stock options when the benefits are provided by US businesses to their foreign employees. Issues including recognition and inclusion of income and availability of tax deductions for foreign subsidiaries are discussed.

Publication Name: Journal of Corporate Taxation.

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2002 international developments on the taxation of equity compensation.

Recent developments in the taxation of equity compensation, including stock options, in seven countries in Europe and Asia are reviewed.

Publication Name: Corporate Taxation.

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Understanding Taxation Of Foreign Investments.

For many of today’s investors, diversification goes beyond owning companies in a variety of industries - it means adding securities from different parts of the globe, too. In fact, many wealth management experts recommend diverting a third or more of one's stock allocation into foreign enterprises to create a more efficient portfolio.

But if you’re not aware of the tax treatment of international securities, you’re not maximizing your true earnings potential. When Americans buy stocks or bonds from a company based overseas, any interest, dividends and capital gains are subject to U. S. tax. Here’s the kicker: the government of the firm’s home country may also take a slice.

If this double taxation sounds draconian, take heart. The U. S. tax code offers something called the “Foreign Tax Credit.” Fortunately, this allows you to use all - or at least some - of those foreign taxes to offset your liability to Uncle Sam.

Basics of the Foreign Tax Credit.

Every country has its own tax laws, and they can vary dramatically from one government to the next. Many countries have no capital gains tax at all or waive it for foreign investors. But plenty do. Italy, for example, takes 20% of whatever proceeds a non-resident makes from selling his/her stock. Spain withholds slightly more, 21%, of such gains. The tax treatment of dividend and interest income runs the gamut as well.

While it doesn’t hurt to research tax rates prior to making an investment - especially if you’re buying individual stocks and bonds - the IRS offers a way to avoid double taxation anyway. For any “qualified foreign taxes” that you’ve paid - and this includes taxes on income, dividends and interest - you can claim either a credit or a deduction (if you itemize) on your tax return.

So how do you even know if you’ve paid foreign tax? If you have any holdings abroad, you should receive either a 1099-DIV or 1099-INT payee statement at year’s end. Box 6 will show how much of your earnings were withheld by a foreign government. (The official IRS web site offers a basic description of the foreign tax credit here.)

In most cases, you’re better off opting for the credit, which reduces your actual tax due. A $200 credit, for examples, translates into a $200 tax savings. A deduction, while simpler to calculate, offers a reduced benefit. If you’re in the 25% tax bracket, a $200 deduction means you’re only shaving $50 off your tax bill ($200 x 0.25).

The amount of foreign tax you can claim as a credit is based on how much you’d be taxed on the same proceeds under U. S. tax law, multiplied by a percentage. To figure that out, you’ll have to complete Form 1116 from the Internal Revenue Service (download the form here).

If the tax you paid to the foreign government is higher than your U. S. tax liability, then the maximum foreign tax credit you can claim will be the U. S. tax due, which is the lesser amount. If the tax you paid to the foreign government is lower than your tax liability in the U. S., you can claim the entire amount as your Foreign Tax Credit. Say you had $200 withheld by an outside government, but are subject to $300 of tax at home. You can use that entire $200 as a credit to trim your U. S. tax bill.

Now imagine just the opposite. You paid $300 in foreign taxes but would only owe $200 to the IRS for those same earnings. When your taxes abroad are higher, you can only claim the U. S. tax amount as your credit. Here, that means $200. But you can carry the remaining $100 over one year - if you completed Form 1116 and file an amended return - or forward up to 10 years.

The whole process is quite a bit easier, however, if you paid $300 or less in creditable foreign taxes ($600 if married and filing jointly). You can skip the Form 1116 and report the entire amount paid as a credit in your Form 1040.

Be Careful with Overseas Fund Companies.

Given the difficulty of researching foreign securities and the desire for diversification, mutual funds are a common way to gain exposure to global markets. But U. S. tax law treats American investment firms that offer international funds much differently than funds based offshore. It’s important to realize this distinction.

If a foreign-based mutual fund or partnership has at least one U. S. shareholder, it’s designated as a Passive Foreign Investment Company, or PFIC. The classification includes foreign entities that make at least 75% of their revenue from passive income or uses 50% or more of their assets to produce passive income.

The tax laws involving PFICs are complex, even by IRS standards. But overall, such investments are at a significant disadvantage to U. S.-based funds. For example, current distributions from a PFIC are generally treated as ordinary income, which is taxed at a higher rate than long-term capital gains. Of course, there’s a simple reason for this - to discourage Americans from parking their money outside the country.

In a lot of cases, American investors, including those living abroad, are better off sticking with investment firms based on U. S. soil.

For the most part, the Foreign Tax Credit protects American investors from having to pay investment-related taxes twice. Just watch out for foreign-based mutual fund companies, for which the tax code can be much less forgiving. When in doubt about your situation, it’s a good idea to consult a qualified tax expert who can guide you through the process.

United States : Cross-Border Taxation of Stock Options.

Stock options are increasingly a significant component of an international executive’s compensation package. There are tax traps and opportunities for both employers and employees, particularly when more than one taxing jurisdiction is involved. Consequently, it is important for employers and employees to address the issues at the outset. Apart from income tax allocations for individuals, there are other often unexpected implications such as U. S. employment tax withholding, even if the employer is a Canadian company, and potential U. S. estate tax for nonresidents. A few of the key questions that should be considered follow.

WHAT TYPE OF OPTION IS THIS?

An employee needs to know how stock options will be characterized under U. S. tax law. Although all stock options are presumably intended as incentives, a special type of option is characterized as an incentive stock option ("ISO") if it meets certain statutory requirements. An individual who receives such an option is not subject to tax on compensation income when the option is granted or exercised. When the recipient sells the shares, the recipient will be taxed at long-term capital gain rates on the gain, assuming a qualifying sale. In contrast, the recipient of a nonstatutory stock option ("NQSO") is taxed on compensation income in the year the option is exercised. The taxable compensation is an amount equal to the difference between the exercise price and the fair market value of the shares on the date of exercise. After an NQSO is exercised and the stock is acquired, the stock is treated for tax purposes as an investment by the employee. If the stock appreciates after the date of exercise, the employee can sell the stock and will pay tax on the resulting capital gain.

WHERE AM I SUBJECT TO TAX?

U. S. residents and citizens are taxed on their worldwide income. Nonresidents who hold NQSOs and move to the United States are taxable on the full amount of option income if the options are exercised while they are U. S. residents. If an individual who is not a U. S. citizen is a nonresident of the United States at the time of exercise of an NQSO, the nonresident will be exempt from U. S. tax on the portion of the option income attributable to services performed while physically outside of the United States. Such an individual may, however, be subject to U. S. tax on income attributable to services performed in the United States. Allocation of option income between United States and foreign sources may be based on the number of days the individual worked in the United States compared with the number of days that the individual worked outside of the United States during the relevant period. It is important for an international executive to keep a careful record of where he or she is on a daily basis and whether each day is a working day or a non-working day. It is also important for employers to comply with the U. S. employment tax requirements. They apply to both foreign and U. S. employers.

An individual who is subject to tax in more than one country or who relocates from one country to another could face double taxation if the countries’ tax laws do not harmonize taxation of options. The taxable event, and therefore the time of taxation, may not be the same or tax credits may not be available. For example, if a U. S. citizen residing and working in Foreign Country receives and exercises Foreign Company NQSOs, the U. S. would tax the option income (subject to foreign earned income exclusion). If Foreign Country does not tax the option income until the U. S. citizen sells the stock four years later, while still a resident of Foreign Country, there would be a mismatch of the timing and amounts, and types of income subject to tax. The potential benefits of foreign tax credits could be lost.

WILL U. S. ESTATE TAX APPLY?

The fair market value of stock options in a U. S. company is included in the taxable estate of a decedent. If the individual is a U. S. citizen, the fair market value of the individual’s worldwide estate is subject to the estate tax. An individual who is not a U. S. citizen or U. S. resident is subject to U. S. estate tax on only U. S. situs assets. Options to acquire stock in a U. S. company are considered by the Internal Revenue Service to be U. S. situs property subject to tax. There may be mismatches of taxation for an individual and his or her estate as a result.

Before adopting a stock option plan, an employer should consider the tax implications for all employees. Plans can be designed to accommodate the needs of both international companies and their international executives. Individuals who receive stock options should consider the possible U. S. and foreign tax implications in deciding when to exercise the options.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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