Dual taxation of ESOP or RSU or ESPP awarded by US company to USC ROR

nand · Post by **nand** » Sun Aug 22, 2010 10:05 pm

Could not find any other thread specifically dealing with this topic (which I think affects a lot of people), hence starting a new thread.

Situation:
X joins a US company in India and is awarded 1000 stock options for stock that is to be listed in the NASDAQ. X gets a indian salary of 10 lacs INR. let us say stock vests fully 2 years later and X can sell it for 10 USD and make a gain of (10-1)*1000 = 9000 USD. The stock is in a schwab or etrade account. Since X is a US citizen with a SSN, taxes are automatically withheld by the brokerage and sent to IRS. In addition on the same gain of 9000 USD GOI considers that as income and taxes it.

Typically income sourced in the respective country is taxed by the local tax authority first and then one can claim credit for taxes paid in the other jurisdiction. That is for indian salary we pay tax to GOI and show that in the US return wherein the same income is deemed taxable and tax computed on it but since we show that we have paid taxes to GOI we can claim credit from IRS. Vice verca applies for say US fund investments.

The challenge is that in the case of US stock options awarded by a US company for employment in India, is the gain on that considered US source income or India source income because it is US stock? Since it is US stock, if IRS taxes it first and it is considered india source income by GOI then GOI will not give credit for US tax paid and it will be double taxed.

This is the situation I am facing with both RSU as well as stock option granted by a US MNC in India (otherwise I get paid in INR). I sold 10 RSU, since it is in a schwab account, and I have a SSN, tax was automatically deducted and sent to IRS. The question in this unique case is what source income is this considered and who gets to tax it first and who do I claim credit from?

Neither my accountant nor the company is clear on this. I am sure there are many others in this situation. How is this treated from a tax perspective? Interested in hearing from others who have experience in this aspect?