For Australian companies, an ESOP, employee share scheme or share plan can be a great way to attract and retain staff by giving them a future stake in the business. But the position becomes much more complicated when the company wants to offer options to employees based overseas.
What looks like a simple extension of an Australian employee share option plan can quickly become an expensive and time-consuming compliance exercise. Once you move into the world of multi-national share plans or global share plans, you are no longer just dealing with Australian rules. You may also need to navigate foreign tax laws, local securities laws, valuation issues, reporting obligations and market practice in the employee’s home country.
That is why overseas option grants often end up being less about the options themselves and more about the cost and complexity of implementing them properly.
Why an Australian ESOP usually does not work overseas without changes
Most Australian share plans are drafted with Australian tax outcomes, Australian reporting rules and Australian market practice in mind. They are not usually built for employees based in the US, the UK or other overseas jurisdictions.
Once an employee is located overseas, those assumptions can fall away. The company may then need a country-specific subplan that sits under the main ESOP and adjusts the rules for local requirements. That subplan might deal with how the options are taxed, how they vest, how they can be exercised, what happens when employment ends, and what disclosures must be given to the employee.
In practice, preparing an overseas subplan is rarely a cheap box-ticking exercise. It usually requires input from local lawyers and tax advisers in the relevant country, as well as coordination with Australian advisers so the documents still fit within the company’s overall employee share scheme.
For a single employee grant, those setup costs can be hard to justify.
Tax rules for overseas employee share plans can differ dramatically
One of the main reasons Australian companies need overseas subplans is tax. The way options are taxed in Australia is not necessarily how they will be taxed in another country.
The taxing point may differ. Payroll withholding obligations may differ. Employer reporting obligations may differ. The employee may also face a different tax result than the company originally expected.
Take the UK as an example. The tax treatment of options will often depend on how the plan is structured and whether it fits within recognised local rules or accepted market approaches. If it does not, both the employee and employer may end up with a less favourable result.
The US is even more demanding. US option grants often require specialist structuring to deal with local tax rules, exercise pricing rules and post-termination treatment. For Australian companies, that means a US hire under an ESOP can involve significantly more upfront work than an equivalent grant to an Australian employee.
Valuation rules can force different exercise prices
Another issue that catches companies off guard is valuation.
A private company may have a valuation methodology that works perfectly well in Australia for its employee share option plan. But that does not mean the same methodology will be accepted overseas. In the US, for example, companies often need a more formal and defensible valuation process, commonly referred to as a 409A valuation, and that can produce a different fair market value from the one used in Australia.
That can mean different exercise prices for participants in different countries, even though they are all receiving options over the same company. Legally, there may be a sound reason for that. Commercially, though, it can create awkward internal optics and lead to confusion among employees.
Local securities laws still matter
A lot of founders focus on tax first, but local securities laws can be just as important.
Offering options to an employee in another country can still amount to offering securities in that jurisdiction. That means the company needs to work out whether an exemption applies, whether extra disclosure is required, and whether any local filings need to be made.
In the UK, that analysis may be relatively manageable, but it still needs to be done properly. In the US, the position can be more complex because both federal and state-level securities rules may need to be considered.
This is one of the reasons cross-border equity compensation becomes expensive. Even where a local exemption is available, someone still needs to review the offer and confirm that the exemption actually applies.
Reporting obligations can continue long after the options are granted
The cost of an overseas ESOP is not limited to document drafting.
Depending on the jurisdiction, the company may also need to deal with payroll reporting, withholding, annual tax statements, securities filings or employee disclosure requirements. The employee may also need local tax advice or support in understanding how the options are reported.
For companies with only one or two overseas participants, these ongoing compliance costs can feel completely out of proportion to the size of the grant.
That is often the hidden cost in multi-national share plans. The upfront legal advice is only the start. The admin burden can continue for years.
Employee share trusts do not always translate well overseas
Australian companies sometimes use employee share trusts as part of their broader share plan structure. While that may work neatly for Australian participants, it can become more complicated when overseas employees are involved.
The trust may not be treated the same way in another country. That can affect tax, reporting and the overall efficiency of the structure. A trust arrangement that makes sense in Australia can create a much less attractive outcome once another jurisdiction looks at it through its own rules.
That does not mean overseas employees can never be included in an employee share trust structure. It simply means the Australian position should not be assumed to carry across automatically.
US employees often expect a post-employment exercise period
A particularly important issue in the US is what happens after employment ends.
Australian option plans often contain fairly strict leaver provisions. By contrast, US employees commonly expect that vested options they retain can still be exercised for a period after they leave employment. In some cases, that is not just a commercial preference. It is part of local market expectation and can also interact with the tax design of the option grant.
That means an Australian company may need to relax its usual leaver rules for US participants if it wants the grant to remain commercially competitive.
The real takeaway: only set up overseas subplans when it is worth the cost
None of this means Australian companies should never offer options overseas. Sometimes a global share plan or multinational share plan is absolutely worth it, particularly where the company is hiring a key executive, building out a team in a new market, or making grants to multiple employees in the same country.
But as a practical matter, setting up an overseas subplan is often only worth the cost where the hire is strategically important, multiple recipients in the same country will receive options, or the company is building a genuine long-term offshore equity program.
Where there is only one proposed overseas participant, and the role is not especially critical, the legal and compliance costs can easily outweigh the benefit.
For Australian companies, that is the commercial reality of cross-border ESOPs. They can be powerful recruitment and retention tools, but they are rarely simple and almost never cheap. In most cases, the sensible approach is to reserve overseas subplans for important hires or repeat use cases, rather than turning every one-off offshore grant into a separate international compliance project.
Our firm has been involved in a large number of multi-jurisdictional share plans. Please get in touch if you would like to know more.
