Equity compensation is one of the most powerful tools a startup has to attract and retain talent. For an Australian company hiring its first engineer in the Philippines, a product lead in the UK, or a sales director in the US, offering a stake in the business can be the difference between landing the hire and losing them to a better-funded competitor.
The problem is that the moment you grant equity to someone outside Australia, you step into a compliance landscape that is significantly more complex than the domestic one. You are no longer dealing with a single tax regime, a single securities law framework, or a single set of employment rules. You are dealing with at least two of each — and they don’t always agree on how equity should be treated.
This article sets out the key issues Australian startups need to understand before issuing options or shares to overseas employees.
The Australian Side: Division 83A and ESS Reporting
The starting point for any equity grant by an Australian company is Division 83A of the Income Tax Assessment Act 1997 (Cth), which governs the taxation of employee share schemes (ESS). The rules apply to shares and rights (including options) provided to employees — and the definition of “employee” is broad enough to capture common law employees and certain contractor-like arrangements.
Under Division 83A, the default position is that the employee is taxed upfront on the “discount” — the difference between the market value of the interest and any consideration paid. However, if certain conditions are met, taxation can be deferred until a later “deferred taxing point,” which is typically the earlier of the restrictions lifting, employment ceasing, or the fifteenth anniversary of the grant.
For eligible startups — broadly, companies that have been incorporated for less than 10 years, are unlisted, and have aggregated turnover of less than $50 million — the Start-Up Concession under Subdivision 83A-E offers the most favourable treatment. If the concession applies, there is no tax at grant, no tax at vesting or exercise, and the employee is only taxed on capital gains when they eventually sell the shares. The options must be issued at or above market value, and the employee must face a real risk of forfeiture.
Here is the critical point for cross-border grants: Division 83A applies to discounts with an Australian source. The source of the discount is determined by reference to where the employment services were performed during the period between grant and the taxing point. If the employee performed all of their services overseas, the discount has a foreign source and is generally not assessable in Australia — unless the employee is, or becomes, an Australian tax resident.
This means that for a purely overseas employee who never works in Australia and is not an Australian tax resident, the Australian ESS tax rules may have limited direct application. But the company still has reporting obligations. Employers must lodge an ESS Annual Report with the ATO for each financial year in which ESS interests are granted, and must provide ESS statements to participating employees. These obligations apply regardless of where the employee is located.
The Foreign Side: Tax in the Employee’s Jurisdiction
While the Australian tax exposure may be limited for a non-resident employee working entirely overseas, the employee’s home country will almost certainly tax the equity. This is where it gets complicated, because each country has its own rules about when equity income is recognised, how it is characterised, and what the employer’s obligations are.
Timing of the taxable event. Some jurisdictions tax equity at grant. Others tax at vesting. Others at exercise. A few tax at sale. The US, for example, taxes non-qualified stock options at exercise, with the spread between fair market value and exercise price treated as ordinary income. The UK taxes employment-related securities at acquisition (which, for options, is typically exercise), subject to various statutory exemptions. Singapore generally taxes stock options when they are exercised. Each jurisdiction’s timing rules can create a mismatch with Australia’s ESS framework.
Characterisation of income. The employee’s country may treat the equity gain as employment income (subject to income tax and social security contributions), capital gains (potentially at a lower rate), or a combination. This characterisation affects not only how much the employee pays, but what the employer is required to withhold. In many jurisdictions, the employer has an obligation to withhold income tax and social security contributions on equity compensation treated as employment income — even if the employer has no local entity in that country.
Withholding obligations. This is often the most operationally burdensome issue. If the foreign country requires the employer to withhold tax on the equity gain, the Australian company needs a mechanism to collect and remit that tax. Common approaches include “sell-to-cover” arrangements (where shares are sold at exercise to cover the tax), cash payments from the employee, or netting arrangements. Without a local payroll presence, these can be difficult to administer.
Social security contributions. In some countries, equity gains are also subject to employer and employee social security contributions, which can add materially to the cost. Australia has bilateral social security agreements (known as Totalization Agreements) with a limited number of countries, but these primarily address situations where employees are seconded between countries, not where an employee has always been based overseas.
Securities Law: It’s an Offer of Securities
Granting an option or issuing shares to an employee is, in legal terms, an offer of securities. In Australia, the ESS provisions in Division 1A of Part 7.12 of the Corporations Act 2001 (Cth) — which replaced the former ASIC class order regime from 1 October 2022 — provide relief from the fundraising and financial services requirements for offers made under an employee share scheme, subject to conditions including caps on the value of interests that can be offered and requirements around disclosure documents.
But this Australian relief does not extend to the foreign jurisdiction. The employee’s home country may have its own securities laws that regulate the offer, and the Australian company will need to comply with those — or find an applicable exemption.
Many countries provide exemptions for offers made to employees under a bona fide employee benefit plan. The EU Prospectus Regulation, for example, exempts offers of securities to existing or former employees where the securities are of the same class as those already admitted to trading on a regulated market. The US provides an exemption under Rule 701 of the Securities Act for offers made under compensatory benefit plans by non-reporting companies, subject to dollar thresholds and disclosure requirements.
Other jurisdictions have narrower exemptions or impose filing requirements even where an exemption applies. Some countries require specific legends or disclaimers in the grant documentation. The consequence of getting this wrong can be serious: in some jurisdictions, non-compliant grants may be voidable at the employee’s election, and the company may face regulatory penalties.
In practice, most Australian startups issuing equity to a small number of overseas employees will qualify for available exemptions. But identifying the right exemption, meeting its conditions, and documenting compliance requires jurisdiction-specific legal advice.
Employment Law Considerations
Equity compensation intersects with local employment law in ways that can catch founders off guard. Key issues include:
Termination and forfeiture. If the employee’s options vest over time and they are terminated, the treatment of unvested options depends on both the plan rules and local employment law. In some jurisdictions, contractual forfeiture provisions in an option plan may be unenforceable or subject to mandatory employee protections. An Australian-style “leaver” clause that works under Division 83A may not survive scrutiny under the labour laws of France, Brazil, or India.
Consultation and notification. Some jurisdictions require employers to consult with works councils, employee representatives, or regulators before implementing equity compensation plans that apply to local employees.
Data privacy. Administering an equity plan requires collecting and processing personal and financial data about the employee. Cross-border transfers of this data — from the employee’s jurisdiction to Australia or to a third-party plan administrator — may trigger obligations under local data protection laws, including the EU’s General Data Protection Regulation (GDPR).
Employees vs Contractors
A threshold question for Australian startups with overseas team members is whether the person is an employee or an independent contractor. This distinction matters because Division 83A only applies to ESS interests provided to employees (and certain employee-like relationships). If the overseas person is a genuine independent contractor, the ESS rules may not apply — but the equity grant may instead be treated as assessable income under general principles, or as consideration for services under the foreign country’s tax rules.
The contractor-versus-employee classification also has implications for local employment law, tax withholding, and social security. Misclassification is a growing area of regulatory focus globally, and the consequences — including back-taxes, penalties, and deemed employment — can be significant.
If you are using an employer of record (EOR) to engage overseas team members, the EOR is typically the legal employer. This raises additional questions about how equity should be structured, since the ESS interest needs to relate to the employment relationship with the company (or a subsidiary) that operates the scheme.
Double Tax Agreements
Australia has an extensive network of double tax agreements (DTAs) that can affect how equity income is taxed when it has connections to more than one country. Under most of Australia’s DTAs, employment income — including income from the exercise of stock options — is generally taxable in the country where the employment is exercised. Where an employee has worked in multiple countries during the vesting period, the equity income may need to be apportioned based on the number of days worked in each jurisdiction.
DTAs also typically provide mechanisms to avoid double taxation, either through foreign tax credits (where Australia allows a credit for foreign tax paid on the same income) or through exemption (where one country agrees not to tax income that the other country has the primary right to tax). For Australian startups, the practical significance is that proper structuring and documentation can prevent the employee from being taxed twice on the same equity gain.
Practical Steps for Founders
If your startup is issuing equity to overseas employees or considering it, here is what you should do:
Get jurisdiction-specific advice early. Before granting equity to someone in a new country, understand the tax, securities, and employment law implications in that jurisdiction. The cost of advice upfront is modest compared to the cost of unwinding a non-compliant grant.
Design your plan with cross-border in mind. Your employee share option plan (ESOP) should include provisions that accommodate foreign participants — including flexibility around exercise mechanics, withholding, and termination treatment. A plan drafted solely for Australian participants may not work for overseas employees.
Document the source of employment services. For Division 83A purposes, the source of the discount depends on where services are performed. Maintaining clear records of each employee’s work location supports the correct tax treatment and protects both the company and the employee.
Understand your reporting obligations. Even if the Australian tax exposure is limited, the company still has ESS reporting obligations to the ATO. Ensure your equity administration processes capture overseas grants.
Consider the total cost. The cost of granting equity to an overseas employee is not just the equity itself. Factor in foreign tax withholding, social security contributions, securities law compliance, and the administrative burden of managing a multi-jurisdiction plan.
If you’re building a team across borders and want to get your equity structure right from the start, get in touch.
