Tax risk in global company’s RSU

Foreign capitalized companies often offer RSU (Restricted Stock Unit) as part of employee compensation. While RSU has many advantages for both company and employees, from employees’ perspective however, risk of missing tax filing obligation exists. Here is why.

When an employee earns RSU on granted date, he receives a unit of benefit linked to the underlying stock. Its disposition is restricted for certain period until the vested date. On the vested date restriction on stock is released and the employee can dispose of the stock. This is when employment income is recognized, and income tax is imposed.

As Japanese companies take care of employees’ tax payment for regular payroll, by local HR section through monthly salary deduction and year-end adjustment, the employees seldom file tax return on their own. However, as foreign capitalized company’s RSU is usually sponsored by its global HR section, support from local HR is seldom given and the employee is responsible to handle his tax duty on his own.

Administrative work of RSU is usually outsourced to an outside financial company and necessary information is available just on the website and usually no reminder on tax obligation is communicated individually. The employee only can find out that his stock unit has been vested through the website report, which is not easy to understand.

After the vesting, RSU holder will earn dividend income on the stock, but the website report is not necessary clear and here again, missing tax payment may occur. Dividend income is often taxed overseas via withholding tax, and the overseas tax can be deducted from tax in Japan, but this takes foreign tax credit calculation which is not familiar to non-tax professional. As a result, double tax on dividend is not clarified.

RSU is useful for both the company and employees. The company can enhance employees’ motivation and sense of engagement, and the employees can take advantage of higher compensation when the stock price goes up. In this respect, both the company and the employees should be aware of tax risks and follow necessary tax procedures. The company should support employees by giving opportunities of education such as a seminar. The employees sometimes need professional advice, and the company should secure such support for the employees.