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ESOPs by a Foreign Company to Indian Employees

  • When a foreign company issues ESOPs to its Indian subsidiary employees, it must comply with both Indian and foreign regulations. Here’s a breakdown of the process and steps involved:

1. Eligibility:

  • Only employees of the Indian subsidiary are eligible for ESOPs granted by the foreign company.
  • The employee must be a director or an employee of the Indian office, branch, or subsidiary.
  • The foreign company must have direct or indirect equity holding in the Indian subsidiary.

2. RBI compliances by the subsidiary company:

  1. In case ESOP issued by Holding company to the employees of subsidiary: Annual Return (in Annex B) to RBI through AD.
  2. In case, shares repurchased by Holding company, issued to residents in India under any ESOP Scheme provided: Annual Return (in Annex B) to RBI through AD.
  3. Details of said ESOP shareholding, issued to Directors/KMPs: entries with Register of Directors and KMP to be maintained.

3. ESOP Scheme Documentation:

  • A formal ESOP scheme document outlining the plan’s details, including:
    • Eligibility criteria
    • Grant date
    • Vesting schedule
    • Exercise price
    • Exercise period
    • Tax implications
    • Repurchase provisions

4. Share Allotment and Exercise:

  • The foreign company will issue the ESOPs to eligible employees.
  • Employees can exercise their vested options and acquire shares after the vesting period.
  • The exercise price is usually discounted from the market value of the shares.

5. Taxes and Compliances:

  • Income Tax:
    • The grant of ESOPs is not taxable for the employees.
    • However, the difference between the exercise price and the fair market value of the shares on the date of exercise is taxable as perquisite.
  • Goods and Services Tax (GST):
    • There is ambiguity regarding the applicability of GST on ESOPs granted by foreign companies.
    • Some authorities consider the grant as a service, thus subject to GST.
    • However, others argue it’s an employee benefit not liable for GST.

6. Regulatory Compliance:

  • The foreign company must comply with the Securities and Exchange Commission (SEC) regulations in its home country related to the issuance of shares.
  • The Indian subsidiary must comply with the Companies Act, 2013, and other applicable Indian laws.

Additional Points:

  • The ESOP scheme should be designed to incentivize employees and promote employee ownership.
  • The company should clearly communicate the terms and conditions of the ESOP scheme to all eligible employees.
 

7. Taxes on ESOPs:

When an employee exercises their ESOPs, the employee will pay the taxes on the difference between the exercise price and the fair market value of the shares. This difference is considered a perquisite and is taxable as part of the employee’s salary.

Here’s a breakdown of the tax implications:

Employee:

  • Income Tax: The difference between the exercise price and the fair market value of the shares on the date of exercise is taxable as perquisite in the hands of the employee.
  • Goods and Services Tax (GST): The applicability of GST on ESOPs in India is ambiguous. Some authorities consider it a service, while others view it as an employee benefit not liable for GST. 

Employer:

  • Tax Deducted at Source (TDS): The employer is responsible for deducting TDS on the perquisite amount and remitting it to the government.
  • Compliance: The employer must comply with certain regulations, including reporting the grant of ESOPs to the tax authorities.

Additional points:

  • The tax rate applicable to the perquisite depends on the employee’s income tax bracket.
  • The employee can claim deductions for certain expenses related to the ESOPs, such as brokerage charges and stamp duty.
  • The employee may be eligible for long-term capital gains tax benefits if they hold the shares for a certain period.

Resources:

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