The tax implications of engaging cross-border executives

By Lisa Wootton, Director, Deals Tax and Ivan Lazorin, Director, Tax

Talent searches for top executives are increasingly crossing borders, thanks to the rise of hybrid working. It's now common for businesses to engage top level execs from outside their home territory. But engaging overseas workers in these roles has a number of tax implications - and in the case of transactions there are further pitfalls.

For example, executives’ general remuneration may be subject to income tax in multiple jurisdictions; and social security could apply outside home territories. In both cases, employers would be expected to ensure payroll withholding and reporting requirements have been complied with.

In the context of a transaction, there are two more particularly complex areas: the taxation of the executives’ management incentive plan (MIP), and the impact on the group’s global corporation tax presence and operating model.

Management incentive plan

In a typical MIP in Europe, an executive becomes an owner of a business by acquiring shares in the group for market value. They are then exposed to fluctuations in value, based on the performance of the business creating alignment of interests between the manager and the sponsor/investor. If the business performs well, they will share in the growth they have helped to create. From a tax perspective, they will generally expect Capital Gains Tax (CGT) treatment reflecting the commercial risk associated with their investment.

This tax treatment is well recognised in many jurisdictions, however not all are equal. A tax authorities’ view on a MIP can be nuanced.

Areas that commonly result in incongruence include:

• Use of tax advantaged plans.
• Reliance on local safe harbour provisions.
• Terms and conditions, such as leaver provisions and funding assistance.
• Restricted securities regimes where tax elections have not been made within the required time limits.
• Additional taxes applying, where there is a management holding vehicle in place.
• Different jurisdictions applying tax at different points in the holding period.
• Availability of tax credits to offset tax paid in one jurisdiction against tax borne in another.

For cross-border executives who have a footprint in more than one country, the rules in each place need to be considered carefully. They may be subject to tax in more than one country, plus countries may have different forms of tax - such as employment income in one and at the same time CGT in another.

This can result in a higher marginal tax rate or in some cases, double taxation with restrictions on the ability to claim tax credits. If these elements are not considered from the outset, there could be unwelcome surprises at the time of an exit which could severely disrupt the dynamics, timing and pricing of a transaction.

Corporation tax, transfer pricing and operating model

Owing to the seniority and substance of their role, top level executives may create a taxable “presence” for a corporate group where they live and work, and impact the global operating model. If this happens, the group needs to report and pay taxes on profits related to that presence, even if there are no other operations there except for the executive.

If this isn't done, penalties and interest are likely to be levied by local tax authorities. But perhaps more importantly, the business is at risk of serious reputational harm. Businesses need to be aware of the geographic footprint of their workers, and should have strong processes and governance in place to manage and track them.

With the increasing freedom for executives to carry out their duties from home, wherever that may be, comes a need for businesses to adopt robust processes to manage and track cross-border activity.

Getting tax advice early on can help to make sure the arrangements around global executives are considered and well understood by all parties.

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