Founders, executives and other employees of fast growing companies – if you received or are about to receive restricted stock in connection with the performances of services, you should consider making a timely § 83(b) election in the US, even if you are not currently taxed in the US.
Generally, if stock is transferred in connection with the performances of services, the person performing such services may elect, for US federal income tax purposes, to include in gross income the fair market value of the property (less the amount paid for the stock, if any) at the time of transfer as compensation for services. If this election is made, the rules in the US that generally would require recognition of income when vesting occurs, would not apply. As a result, subsequent appreciation in the value of the stock between the time of its grant and the time when it vests is not taxable as compensation to the person who performed the services.
This treatment could turn out to be extremely beneficial to many non-US founders, executives and other employees of fast growing companies that, in connection with the performance of services, received amounts of stock that have little or no value when granted (but may significantly appreciate in value), and that at a later point in time are taxed in the US (e.g., because they move to the US). However,failure to make a valid § 83(b) election could result in a significant tax hit to such persons after they become subject to US tax and their stock vests.
A valid § 83(b) election must be made not later than 30 days after the date of the transfer of the stock, and is to be made in a manner set forth in the regulations. There are no exceptions to this timely filing rule. Therefore, as further discussed below,careful consideration should be given to situations where non-US persons received restricted stock in connection with the performances of services, but failed to timely make a § 83(b) election, and become,or are about to become, US persons.
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Originally published in the Global Tax Weekly on May 22, 2014.
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.