Microsoft changed withholding on Stock Awards/Options for Global Employees

In June 2010, Microsoft Corporation announced a change in income tax withholding in the USA on stock options/awards of employees who have transferred or will transfer in the future out of Canada, Israel, the Netherlands, the United Kingdom China.

In a separate post I will describe the effect of these changes on tax planning and tax filing of the employees. 

Bellow is the notice sent to employees who transferred from Israel:

Summary of Change

As you are aware, Israel requires Israeli income tax to be paid on any gain made when a stock award is sold or a stock option is exercised and sold if that stock award or option was granted to an employee when they were working in Israel. This includes situations where the employee has subsequently transferred out of the Israel to work for another Microsoft entity. Microsoft is changing the method used to determine taxation on the portion of income earned outside of Israel. Since you currently have outstanding stock options and/or stock awards granted in Israel you are impacted by this change.

Effective July 1, 2010, Stock Services will pro-rate withholding (if applicable) on the non-Israel portion of taxes for stock options or stock awards granted in Israel but vested or exercised outside of Israel, rather than withholding on the full spread. This calculation will be based on the number of days worked outside of Israel following the award date. After deduction of these taxes, the remaining proceeds or shares will be transferred to the Israeli Trust account for funding of the Israeli withholding tax liability on the shares that were withheld. There is no change to the existing process by which shares and proceeds for Israel granted options and awards are managed through the Trustee.

Israel Reporting/Tax Withholding

Please note that the actual tax due on the Israeli portion of your gain at sale could be higher or lower than the amount withheld by the trust account as the final liability depends on your individual circumstances. You should file an Israeli tax return for the Israeli tax year when the gain occurs to report the corresponding gain and the amount subject to Israeli tax. Your final tax liability will be determined through the submission of your Israeli tax return.

Current Company Reporting/Tax Withholding

The country where you are currently working may also tax the gain at vest or exercise and the total gain should be reported on the tax return of your current country of residence. Any Israeli tax paid in respect of the option/award gain should be credited against tax payable in your current location so that you should not ultimately suffer any double taxation. You will need to notify your tax adviser of any tax withheld and/or paid to Israel on the option/award gain so that they may take this into account when preparing your tax return.

Resources:

 Additional details, including country-specific examples, have been posted on HRWeb for your reference.

 Please refer to the Haifa and Ra Anana SharePoint sites for details on the existing Trustee arrangement.

 Should you have questions about the non-Israeli tax withholding process, please email the Transfer Tax (Stock) alias.

 For any specific tax related inquiries, please contact your tax advisor.

Regards,

Global Stock Services